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Public Sector Cuts hurt the Private Sector too!

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I am writing this in Ljubljana (pronounced Loobleeyana) in Slovenia, where I am addressing a Consumer Rights conference…..One of the speakers is from the British Bankers Association (BBA), and, although I have already had my morning espresso in the gorgeous market square by the river, and read the only FT on sale in the little kiosk, that is not why my blood pressure is up……The BBA just turns up at meetings like this, and then happily, and a little smugly, sails along, unable to say sorry, unable to acknowledge responsibility,  confident that it has total capture of the regulatory system.

So today’s speaker simply blamed policy-makers …for deregulation, for the policies implemented after the dot-com crash etc.

While agreeing with him that its politicians and their officials and central bankers that are responsible for financial deregulation…. and that therefore it is important to remind our politicians – in particular New Labour – of their culpability,  and not to just demonise bankers. Nevertheless bankers played a significant role in lobbying and pressuring politicians to deregulate. Do you know of any ordinary citizens organisations that campaigned for financial deregulation?

Anyway, I wanted to point readers of this blog to an excellent piece on the web today. It predicts wholly predictable consequences of the global Austerity Party’s policies, both here in the UK, but also in Europe. In short what the authors are arguing is that punishing Greece is going to hurt German consumers, perhaps even more than it will hurt Greeks:

It is an elementary fact of accounting that the private sector as a whole can only spend less than it earns if some other sector spends more than it earns. That sector has tended to be the government, usually as automatic stabilizers kicked in while recessions deepened. Indeed, most of the dramatic widening of government deficits is due to a collapse in tax revenues, not to discretionary stimulus.

Pursuing fiscal retrenchment in order to reduce government debt default risk will merely raise the odds of private sector debt defaults. Cash flow will be taken from households and firms attempting to rebuild their net saving positions, and private debt servicing will falter.

So those who voted for the Con-Dem coalition should be warned.

While most are probably not employed by the public sector, and may not use its most costly services – like mental health care or family social care – they may not be inclined to join in demonstrations/protests against public sector cuts.

But Kregel and Parenteau make a powerful point (one that I have been trying to make for months): public sector cuts are going to boomerang, and rebound on the private sector – and cause a great deal of personal and commercial pain.

Once again, the failure to grasp elementary economic theory – as outlined by Keynes back in the 1930s – means that the private sector cannot prepare for, and predict the next financial crisis that will be a consequence of the Austerity Party’s measures – around the world.

It seems they never learn, and like the BBA banker, sail along happily unaware that they are self-harming.

It’s obvious: they need help: psychological and economic. But do they know they need help?


  1. British Bankers’ Association. We really cannot allow your unfair characterisation of the BBA and its members to go unremarked.

    The UK’s banks have moved further and faster than any other country affected by this global economic crisis – doubling the amount of regulatory capital they hold, adopting special resolution measures to manage the winding-down of failing banks and – throughout – protecting their customers’ funds at all times. The banks which have received taxpayer support have promised to repay that support in full – and some have already started doing so.

    The banks recognise their responsibilities and their contributions to the economic crisis, and all have apologised publicly. The BBA did too – first in October 2008 and a number of times in the media since then.

    It is easy to dislike banks and banking if you caricature them. But then you forfeit any pretence of trying to understand them.

  2. Matthew Stiles says:

    To british bankers:
    The key part of the article that criticised bankers was this:
    “bankers played a significant role in lobbying and pressuring politicians to deregulate”
    This is a correct point to make isn’t it?

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