The Bailout State

and Britain's new Labour government

I would like to draw your attention to Martijn Konings new book, The Bailout State - highly relevant now that bailing out capitalism is ‘the only game in town’ - in both, London, Brussels and Washington. That is the context for this comment on the election of a new government in London, and the future of both the economy and the ecosystem.

First… if I have been quieter on this site of late, that’s because I have finally found time for whole ‘book-writing days’. Whole, uninterrupted days of concentrated book-writing. Sheer bliss! As a result, work on the new book is proceeding apace, and I hope to soon share some of the text with you.

Before I do, I want to congratulate the Labour party on its win, and on sweeping a whole generation of rotten, tired and often corrupt conservative politicians out of office. I am also aware that there are some genuinely progressive ministers on Labour’s team, with exciting ideas for decarbonising the economy, and for ending poverty, both in the UK and worldwide. I wish them well - particularly those focused on resolving the latest third world debt crisis.

The Greens and Independent candidates played a positive role in the election campaign by successfully asserting the case for a green transformation. Courageous independent candidates argued for Labour to end the daily horror of what looks like the genocide of a whole population of Palestinians. Some of those independents - like Faiza Shaheen - lost their campaigns, largely as a result of crude, brutal politicking by the Labour party machine. We wish those independents success in their ambitions.

And in a week in which the University of Birmingham has shown that more than 40% of parents with disabled children have thought about suicide, we must welcome the Liberal Democratic leader - Ed Davey’s - emphasis on the urgent need for securing government support for both the cared-for and carers…and for his apparent plan for expanding social care. As a proud member of the feminist Women’s Budget Group - I welcome this Lib Dem campaign as this is an issue with detrimental impacts on the lives of women.

So even while we were all alarmed by the rise of an overtly nationalist and racist private company posing as political party - the Reform group - the British nation is breathing a collective sigh of relief. Because while Labour has refused to share its real goals and plans with the electorate, millions have taken Labour’s leadership at its word, and are hoping for positive change, and an end to austerity. Above all, for a period of economic stability in which those on low, and falling real incomes can hope for some relief from the insecurity and poverty of today’s financialised capitalism and privatised public domain - conditions that led many to vote for Reform.

What of Labour’s real intentions?

Chancellor Rachel Reeves has been explicit and transparent about the party’s ambitions. In a speech to business leaders in February, 2024, she said this:

The government’s task is to offer the security that means a would-be entrepreneur can take a risk.

That a new firm can make the leap and scale up. That a business can raise finance and invest with confidence. That calls for active government working alongside business, to extend security, navigate those challenges, and seize the opportunities presented by a changing world.

Pro-business and pro-worker, in the knowledge that each depends on the success of the other.

Investing alongside business, through a new National Wealth Fund.

In other words, as Prof. Daniela Gabor has argued, Reeve’s speech was a promise to de-risk capitalism… It is a promise to transform capitalism into something not unlike the old Soviet system of subsidies for corporations. As my colleague Professor Kunibert Raffer once argued, risk is fundamental to the operation of capitalist markets - removing risk disables so-called ‘free market’ capitalism. Just as it is a basic precondition for capitalism that those who take risks, can make profits and capital gains…so it is

the most basic precondition for the functioning of the market mechanism that economic decisions must be accompanied by (co)responsibility: whoever takes economic decisions must also carry financial risks.

If this link is severed - as it was in the Centrally Planned Economies of the former East - efficiency is severely disturbed.

Chancellor Reeves, like President Biden and much of President von der Leyen’s policies, proposes to disturb that efficiency, by severing the key link in the private market mechanism.

In doing so, all three are advancing policies for bailout-out capitalism.

Now de-risking capitalist companies may not always be bad policy. But the companies to which Chancellor Reeves intends to turn to finance the new National Wealth Fund, are so-called ‘asset management funds’.

In reality these are private companies managing trillions of pounds and dollars that are our lifetime pension savings and insurance premia. We will depend in old age and in emergencies on decent rates of return on these savings - for our livelihoods.

Thanks to pension privatisation, those companies now manage an unthinkable $120 trillion of the world’s nest eggs. Blackrock, a company that looks to benefit from the Labour government’s de-risking strategy, manages about $10 trillion of the world’s savings and insurance contributions.

The biggest problem facing the managers of these vast pools of capital is this: where to safely invest our savings to make the rates of return necessary to pay out pensions in the future?

At a time of climate breakdown, there are not enough assets in the world - especially, safe assets - that can profitably absorb those vast pools of money.

Public assets - like the NHS, council housing, clean energy and care homes for the elderly - can safely be de-risked for companies like Blackrock, by a Labour government. But returns on their investments will have to be made profitable enough to meet the financial requirements we will demand for our retirements. And so prices for investment in NHS services, housing, clean energy and care homes will have to rise… regardless of whether the Labour government de-risks the initial investments.

Bear that in mind as Labour cheers on the private sector.

And there is one other unsettling point potential pensioners should take into account.

Managers like Larry Fink of Blackrock can very easily fail in their mandate to provide decent pensions in the future. If they do fail to furnish us with good pensions, they will not face the discipline that is essential to the functioning of capitalist ‘free’ markets - bankruptcy.

Here’s why.

If a homeowner borrows money to purchase a house, and, through no fault of her own - say, floods caused by climate breakdown - that house crashes in value causing the owner to default on the mortgage, she can be bankrupted - and made insolvent.

Asset managers are different.

They cannot be made insolvent by a collapse in the value of assets they hold. As the Bank of England’s then executive director of ‘Financial Stability’, Andy Haldane, explained back in 2014: Unlike a regulated, deposit-taking commercial banker:

“……asset managers do not bear credit, market and liquidity risk on their portfolios. [Ed: individual pensioners and other investors bear that risk.]

Currently, Blackrock has over $4 trillion of assets under management, but has only $9 billion of assets of its own.  Fluctuations in asset values do not threaten the insolvency of an asset manager as they would a bank. 

Asset managers are, to a large extent, insolvency-remote.”  

Not so British pensioners.

Something to bear in mind as we watch Chancellor Reeves mimic her predecessors in building the ‘bail-out state’.