By the end of 1970s, Western industrial countries all experienced the new phenomenon called stagflation, which was characterized by high inflation, slow growth, decline in corporate profit and real wages, and that came with the rising of unemployment. Stagflation hit the British economy especially hard, as it experienced the worst decline relative to other capitalist countries. Economic difficulties set the stage for the election of Margaret Thatcher as the prime minister, the rise of neo-liberalism and the initiation of Thatcher Revolution in Great Britain. Thatcherism, which was well known for its neo-liberal agendas of privatization and deregulation, soon became fashionable and was implemented throughout the English-speaking world. “For almost three decades, Anglo-American university economic faculties have turned to Thatcherite deregulation of financial markets as the ‘efficient way,’ in the process, undoing many of hard-fought gains secured for personal social security, public health care and pension security of the population.”2.
One of the key agenda of Thatcher Revolution is privatization. Consequently, much of British state-owned enterprises were sold off. This included public utilities such as gas and electricity, and water supplies together with British Railway. “She forced British Leyland to shrink drastically, privatized British Steel, British Telecom and Rolls-Royce, and dramatically downsized British Coal after a yearlong face-off with the miners union.”1.
Indeed, Thatcher used privatization to break the power of the trade unions, as “between 1979 and 1994, the number of jobs in the public sector in Britain was reduced from over 7 million to 5 million, a drop of 29 percent.”1. Thatcher carried out her neo-liberal agenda against labor to such an extreme that “virtually all the jobs eliminated were unionized jobs.”1. Once the enterprises were privatized, the managements, often consisting of the same people, were rewarded with huge increases in remunerations. Moreover, many of these state-owned enterprises were recapitalized with the infusion of billion dollars before selling off to the private investors. These privatized firms were soon passed from small individual investors to financial institutions and other large investors. Once these businesses were in private hands, maximizing profit came to be their sole operating objective, resulting in reduced services to the public and at higher service charges. The British treasury, on the other hand, suffered the loss of revenue to the tune of over $7 billion a year as a result of the state-owned enterprises being sold.1.
Consequently, sales taxes were increased and the low-income group bore a heavier tax burden, while business and upper income group benefited from tax cut. “The government also introduced an unpopular poll tax that provoked rioting and defiance. The poor and unemployed were harshly attacked by cuts in welfare spending and increased bureaucratic control.”3.
At the same time, one of the key agenda of Thatcher Revolution was financial deregulation known as Big Bang. Unfortunately, the deregulation of the City of London’s financial service paved the way for the domination of international banks and put the smaller London merchant banks out of business. Overnight, London became one of the major financial centers overflowing with mega banks, hedge funds and private equity firms. This brought wealth and prosperity for the time being to London. “By 2006, London was rivaling New York as a financial center, even though the base of British domestic business was a fraction of what is available from the giant U.S. economy.”1.
Consequently, finance dominated the British economy, but none of the major institutions that generated the real wealth were British. There were now 300 foreign banks with offices in London and more than 350 foreign companies listed on the London Stock Exchange. London became a Mecca for Russian mafia, Middle East oil sheiks and Indian steel billionaires, as London residents received favorable tax treatment for their non-British income. As a result, housing price rose to atmospheric level, well beyond the means of the ordinary British.1.
While opening her door to the international banks and placing great emphasis on promoting the financial service industry, the Thatcher government completely neglected the manufacturing base—“the life blood of the country.”4. As a result, Britain has been losing 100,000 jobs a year, and “the share of manufacturing in total UK output has almost halved since 1979.”4. Since Thatcher came to power in 1979, manufacturing jobs has fallen from 28% to 12% of total employment. The situation has increasingly deteriorated to the extent that 60% of manufactured goods sold in Britain are imported. What is even more disturbing is that all the new jobs created in Britain in the past decade “have been overwhelmingly low-paid, low-skilled, often part-time jobs in retail, catering, entertainment, and care service.”4.
The global financial crisis of 2008 fully exposes the inherent pitfall of over-reliance on service industry as one of the key drivers of the British economy, as started by Thatcher Revolution and carried out dutifully by Tony Blair and Gordon Brown. As a matter of fact, “Tony Blair set out to make Margaret Thatcher’s legacy ‘a permanent part of the landscape’.”5. More than a decade after Thatcher was thrown out of the office, “all the great hallmarks of the Thatcher counter-revolution—privatisation, marketisation, centralization, consumerism, a shrunken public domain and a growing gap between the superrich and the rest—are still in place.”5.
As a result, the 2008 global financial crisis has bought Britain to the edge of bankruptcy as the sterling sunk to the lowest level against major currency. Unfortunately, “Britain will not be able to reap much benefit from a lower pound for exports because, as part of the Thatcher Revolution, the national economy has out-sourced, de-industrialized and turned to a service economy where, as in the U.S.A., finance and banking became the motor of economic growth the past two decades. That motor has now broken.”2.
By the beginning of 2009, the financial service industry in Britain was teetering on the verge of collapse, with lay offs amounting to 85,000 alone in the City of London.5. Moreover, the securitization and derivatives trades, which London specialized in, are the most problematic businesses in today’s financial market place.
According to the EU latest estimates, for the year 2009, Britain’s economy will suffer a 2.8% decline, the worst recession among the major European countries. Unemployment in Britain will rise to over 8%, with a total of 2.55 million jobless.2.
In addition to massive job losses, another major problem confronting the British government is the insolvency of her banking system. On January 21, 2009, merely 3 months after the first 37 billion pounds bank bailout, the British prime minister announced the second bailout. What is most ominous is that British banks has $4.4 trillion liabilities in foreign currency, or twice the size of the country’s GDP, against only a measly foreign currency reserves of $61 billion. The currency market reacted to this with a massive selling of the pound, devaluating it to more than 6% against the dollar in two days.
This raises the question: Is Britain following the foot steps of Iceland, a country which followed Milton Friedman’s neo-liberal economic policy of deregulation by allowing her three big banks to accumulate foreign liabilities equal to nine times its GDP. “… as hedge funds, they borrowed in dollars, euros and pounds to speculate. However, the state lacked the foreign reserves to match this leverage.”6. Consequently, Iceland has no alternative but let their banks fail and refused to honor their obligations. However, Britain is not the tiny Iceland, as she is one of world’s major powers, a permanent member of the Security Council, and London is a major financial center in the world. “Indeed, if Britain walked away from UK banks’ $4.4 trillion of foreign liabilities—worth eight times Lehman Brothers—it would destroy the credibility of the City and take the whole world into deeper depression.”6.
Ultimately, the British government will have no alternative but to rescue its banks. Although the banks have $4.4 trillion foreign assets to match their foreign liabilities, no one can calculate the true value of these assets in time of asset deflation and economic depression. A 25% decline in value would place the British government in great financial jeopardy with great implications for the British people.
One of the most important implications for Britain in this economic crisis is the decline of housing prices. In her attempt to break the strong hold of Labour voters, many of whom lived in Britain’s public housing, or council estates, Margaret Thatcher “offered strong incentives to the residents of public housing to buy their flats at reduced rates.”7. This was the divide and rule strategy, as those who did not take up the offers was charged rents twice as much as before and some of them ended up homeless. This was a successful strategy for Thatcher, as polls showed that more than half of new homeowners did indeed switch to vote for her in the next election.7.
Consequently, more British became homeowners and many of them invested their life savings in their homes. As a result, the collapse of housing price “will have a further unpleasant effect on bank loan portfolios, pension and insurance assets and the British tax base, which will deepen the economic downturn.”1. Tragically, this economic downturn will push a broad segment of British population to impoverishment.
Most importantly, with economy in ruin, her currency weakened and the loss of trust in securitization and derivatives markets, Britain as a center of international finance may come into question. What is especially significant is that most international banks are controlled by foreigners, and there are no special reasons why they should stay in London on a long-term basis. Thus, hollowing out of Britain’s financial services, just like the hollowing of her manufacturing industry, would have nasty economic consequences for her for an indefinite period and discredit the neo-liberal economic philosophy of Milton Friedman, who inspired Margaret Thatcher’s reform in Great Britain.
Friedman, who was known as “Mrs. Thatcher’s favourite economist”, provided the intellectual foundation for the Thatcher Revolution. As a result, “market fundamentalism” was unleashed both in the United States and Great Britain with the elections of Ronald Reagan and Margaret Thatcher. Unfortunately, the neo-liberal restructuring such as privatization, resulted in polarization of British and American society. Financial deregulations, on the other hand, have transformed the financial market into a casino, and the casino style operation turned the financial system into a systemic risk, teetering Britain on the edge of bankruptcy.
Notes:
1. Hutchison Martin: “Great Britain—The ‘Rust Belt’ of Global Finance”, January 23, 2009, The Money Map Report
2. Engdahl William F.: “Death Agony of Thatcher Deregulation Financial Model” January 22, 2009, Global Research
3. Heller Henry: “The Cold War and the New Imperialism” P 262, Monthly Review Press 2006
4. Mencher Michael: “Labour Future” June 22, 2006 Permalink
5. Hughes David: “ Gordon Brown inherited a constitutional kaleidoscope from Tony Blair”, April 10, 2008 The Telegraph
6. Evans-Pritchard Ambrose: “UK cannot take Iceland’s soft option”, January 20, 2009, The Telegraph
7. Klein Nomi: “The Shock Doctrine”, P 135 Metropolitan Book 2007
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