Philip Bond: Regulation won't solve this crisis of capitalism

George Osborne's speech yesterday took place on the day that Bradford and Bingley was nationalised taking some £41bn worth of dubious mortgage debt onto the Government's already compromised balance sheet. In America the world's biggest ever act of mass nationalisation, at $700bn, is facing fierce opposition in Congress.

So who did the shadow Chancellor blame? Well, not the free market. It was mostly Gordon Brown for encouraging an economy founded on debt. As Osborne said, we are the most indebted country on the planet with £1.449bn worth of personal debt exceeding our nation's disposable income by a factor of 1.7. Likewise the nation's coffers are also empty, net debt is now 43.3 per cent of GDP and estimates suggest that the planned borrowing for this year will be £65bn as against the planned £43bn; whereas next year could see the overdraft hitting £90bn against an envisaged £38bn.

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Most interestingly Osborne decried this huge explosion of personal and public debt as stemming from a credit financed variant of "casino capitalism". On any objective assessment it seem clear that Britain has a dangerously debt-fuelled credit economy. Moreover higher government debt, however necessary in the short term serves nobody's long-term interest, not least because it keeps interest rates high and prevents a nation of borrowers from paying back their debts.

Yet Osborne could have gone much further in his analysis and extended the new Conservative analysis and critique. The causes of our present indebtedness go back much further than Brown and Blair. On a global level, they originated in the abolition of capital controls by Thatcher, Reagan and Clinton. The casino opened its doors in the 1980s, not with the election of New Labour in 1997. As financial globalisation took off, it created securitised mortgage debt and allowed it to multiply and infect the whole financial system.

As such we allowed a tax-evading, off-balance sheet, offshore economy to speculate with the savings and assets of an onshore, on-balance sheet, tax-paying public. What is worse it that having lost our savings this industry now expects us – through tax bailouts – to pay again. Similarly on a national or local level Conservatives need to recognise why so many people have turned to credit. For too many, wages were too low, there was simply no other way to make ends meet.

For the real story of the last 30 years of neo-liberalism is not rising prosperity for all, but rather the utter destruction of the wealth and savings of the bottom half of the population. Outside of property, 50 per cent of the population now own just 1 per cent of the wealth whereas in 1976 it was 12 per cent. Similarly wages for those at the bottom have stagnated – and the much-vaunted minimum wage is set so low that the state must subsidise it through tax credits.

All of which means that the Conservatives must think more globally and more locally. It is clear that if we are to continue to have a financial industry, national regulation, however improved, is still woefully inadequate to the task. We need a new global regulatory authority for money. Trade in credit defaults swaps, now worth some $50trn, are entirely unregulated, as is the extreme leverage of many hedge funds and the exposure of re-insurance companies.

Given the destruction of Anglo-Saxon capital and the erosion of the wealth of the nation, the idea that free markets don't need regulation by common codes and standards is farcical. Adam Smith thought that if capitalism was separated from its Judeo-Christian context and became merely speculative then disaster would ensue.

He was right. Finally the Conservatives should realise that the answer to the current crisis is what they most strongly advocate – localism. The revival of local economies is vital to raising the income and prosperity of all of us. Global capital wholly ignored the real investment needs of a balanced economy – domestic lending to manufacturing constituted just 2.3 per cent of all lending in 2007.

If the Conservatives develop a political economy of the local it would allow cities and regions to invest in and develop their own economies. As such, the Tories need to recover the notion of patriotic capital, where assets and wealth look to investment in the locality rather than speculation via global systems of finance. This is what has helped Germany to grow its small and medium businesses and remain, still, the world's largest exporter. Ending the casino economy is a noble goal – the solution is to go global and go local.

The writer is a senior lecturer at the University of Cumbria. He is currently writing 'Red Tory', a book on radical Conservatism