In the months after the financial crisis in 2008, I recall a conversation with an American friend of mine; we discussed the fallout and numerous rescue packages by countries. Financial media outlets, such as Bloomberg and CNBC, described the capital injections into financial institutions as a sign we are “all socialists now” – according to my American companion, this was far from the truth. In reality, Western economies have turned the page to fascism, not socialism.
When he mentioned this to me, I confess, it was rather amusing to listen to; very sceptical of such claims, until the request to research the facts myself led me to a worrying conclusion. The truth of matter is that we are not far off from what British fascists in the 1930s thought the financial sector should administrate to the rest of society.
I assure you this is not hyperbole. As evidence of this proposition, I was referred to The Coming Corporate State (A. Revan Thomson, 1935) which is the manifesto of the British Union of Fascists; as liberals, we will be horrified to discover the similarities. The Financial Corporation envisioned by the BUF paints a society, in which financial activities are monitored and co-ordinated by the Bank of England. Furthermore, the government would set lending targets to ensure the banking sector met the needs of the wider economy and served the national interest.
The state would aim to end ‘boom and bust’ and set-up a credit lending scheme to provide liquidity to businesses, primarily the manufacturing sector. This credit lending scheme was a combination of government guarantees and loans from the Bank of England.
After the collapse in the 1930s, fascism advocated private but centrally influenced banking via the state. If the state was able to construct artificial lending targets and encourage consumption, not just production, it potentially could manipulate the economy to prevent economic declines. This would allow a minister to foresee a potential drop in economic activity and halt it. Sounds wonderful, but this is far from truth; you and I would be pawns in this artificial reality, in which families pensions, savings and homes could fall victim to widespread manipulation – far greater than what already occurs.
The recent LIBOR scandal serves as a warning of what happens when a central bank, government and the banking system engage in false management; hard working people become vulnerable to shocks when interest rates are correctly priced. It should put the fear of God into the hearts of liberals to see how close Britain is to constructing the BUF financial corporate dystopia – vast amounts of control has already passed into the hands of the few in the name of ‘stability’. Do you know, post-2008, the biggest holder of British government debt (which you and I are liable for, not the government) is the Bank of England? That’s right; British families, up and down the country, are debtors to the central bank of this country – that should be enough to wake us up.
Liberal Democrats should rightly advocate a fairer banking system, which does not have the potential to destroy the wider economy. However, this banking system needs to be open, transparent and free from potential centralisation. If we don’t, in the long term, our democracy will suffer and suffer greatly.
* Daniel Furr is a former Liberal Democrat member from Canterbury and blogs here
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51 Comments
Fascism and socialism are very similar in the regard that authoritarian economies always end up fundamentally under-performing. The freer the market, the better for the consumer.
Labour’s policy in 2008 resembled both socialism and fascism in certain ways. I think we can all agree though that it was a failure and a step in the wrong direction. Capitalism can never succeed when the state picks up the pieces .
I’m not sure that there’s anything particularly controversial/illiberal about a lot of this stuff. The FSA/BoE should be acting as a regulator on banks, monitoring their activities (if not coordinating them – but it’s not trying to do that anyway). I don’t really see encouraging lending to small businesses or manufacturing as particularly illiberal or, indeed “manipulating the economy to prevent economic declines” and “encouraging consumption” – interest rate setting and fiscal stimuli are both pretty mainstream economics. As for the crux of it – banks getting together to manipulate the environment in their favour (presumably not in that of everybody else) – I’m not sure any modern politician would be in favour of that. And actually, the way to achieve greater competition in the banking sector is most likely through heavier touch competition regulation. I’m certainly not a Fascist, and I think the majority of their ideas are pretty disgusting – but just because a Fascist says something it doesn’t automatically make it wrong – if a Fascist helps an old lady across the road, it does make it wrong to help old ladies across the road!
I am very pleased this article by Daniel Furr has been posted. It is an issue that has been of great concern to me since the austerity measures were put in place. The wealth of the nation is being placed into fewer and fewer hands, which, as far as I can see, will ensure the majority of our children and grandchildren will have no other choice but to be the employees of one global corporation or another and rent their homes from the same group.
This, from Faisal Islam, [on quantitive easing] was an item on C4 News last night and helps to emphasise Daniel’s concerns:
http://blogs.channel4.com/faisal-islam-on-economics/bank-of-england-qe-makes-the-wealthy-even-wealthier/17305
Sadly, Faisal Islam posted his remarks after I finished writing this up; would’ve included it otherwise.
People may disagree with me using the term fascism, but it most certainly is not democratic or open. The future is very worrying when the central bank and several state owned banks hold vast amounts of our national debt. Britain is effectively bailing out our debtors.
And I didn’t even mention the Eurozone in the op/ed. That in itself is a prime example of democracy being stripped to save the banking industry, instead of the savings and wealth of families.
As the IMF quietly confessed, Iceland was right to let their banks fail. The economy is growing, rebalanced and those responsible for the crash are standing trial.
There’s been a steady trickle of us saying similar things for a decade and longer. None have so far been teaken seriously or even listened to. And all along politicians keep vainly trying to fix the problems this system creates, rather than fix the system. This is largely why I am an anarchist now. I’m sick to death of waiting for politicians to do anything other than learn to play the fiddle while stoking the flames of the economic firestorm always less than one pay day away. Maybe they’ll listen to Daniel?
” I don’t really see encouraging lending to small businesses or manufacturing as particularly illiberal”
It is, though, because the state is insisting on the lending – not the market. The state should not be ensuring cheap credit to the private sector – that’s what created this mess in the first place. Money was too cheap and insane levels of borrowing was almost encouraged by the government.
So you don’t think the state has a counter-cyclical role to play, stimulating demand in recessions and trying to limit credit bubbles in boom years?
And while I imagine you think people’s savings should not be backed by the state if banks go bust, I’m not sure most people would agree, and so there is a need to monitor financial activities.
I’m also very happy for the BoE to hold a large chunk of our debt. I’m sure many Eurozone countries would love for more of their bonds to be held by their own central bank (if they had one) rather than fickle private traders.
“I’m also very happy for the BoE to hold a large chunk of our debt.”
The Weimar Republic thought the same, too.
I think the problem with lending to small and medium sized companies is created by the banks themselves. Often these companies do have a good and growing market for their products and services and by most measures are a good investment, but the banks do not want to follow this route. They would rather lend to their existing private customers who are in some difficult and are forced to go overdrawn or better still create an unauthorised overdraft.
When you see the rates charged, plus of course the various penalties, the rate of interest received compared to the amount they are paying savers amounts to very good business indeed.
Also, I would be very surprised if it is not the banks who are financing the ‘until pay day loans’ and other such schemes where the APR reaches 2000% and more – even better business if you are paying 0.5% on the money you are lending out!
Re state lending to businesses, it rather depends on whether you think that the market is functioning as a market at all in the first place (arguably not) . Credit allows businesses to invest and thus expand – without credit, it’s very, very difficult for them to do so. The Government claims that there are some businesses that aren’t able to get credit to expand as a result of excessive nervousness on the part of the banks. This, in turn, dampens growth, and further fuels the unwillingness of the banks to lend – a downwards spiral is created. Were the banks to start lending more, the theory goes, we would achieve growth, which in turn would mean that banks were less nervous about lending. There’s a pretty compelling case for Government intervention here.
As for bailing out banks, Iceland has had a pretty rough ride over the last 5 years. It’s also worth bearing in mind that its banks had nowhere near the systemic importance to the world economy of HBOS, Lloyds, HSBC, RBS and so on – so really, their advantage was that their banks weren’t too big to fail in the first place.
As we all should know, fascism developed in the twenties and thirties as a response to perceived and actual hardship. Nazis (National Socialists) advocated both the better known scapegoating of what they saw as outsiders and others, who, according to them, were taking the money from the mass of “ordinary Germans”, but also a form of socialism which would ensure that everyone in society would not be poverty stricken. At that time, whether you were a Communist or a Fascist rather depended on who you blamed for the hardships that were prevalent, but whichever way, the solutions advocated for those found responsible were cruel, illiberal etc.
So, IMO, they should be remembered and condemned more for their cruelty, not their economic policies, many of which were mainstream, at least prior to the 1980s. The same, of course applies to international action, which both movements supported in certain circumstances, and which, for instance, UKIP tries to use as a stick to beat the EU with. “Didn’t Hitler support a single European currency….etc” So we need to be very careful about condemning economic policies, “because that was what fascists / communists advocated”. Daniel, there are other kinds of Liberal economically, and many will not support your views that people do better when public authorities stay out of industrial finance etc.
Daniel : Your understanding and justified worries of this situation is only halfway there.
http://www.youtube.com/watch?NR=1&v=Jv2YUMsG5A0&feature=endscreen
Check the link
Many thanks
If I may paraphrase what appears to be your basic argument: ‘The British Union of Fascists wanted an economy like we have today, therefore the economy we have today is fascist’. How is this any more true than suggesting ‘Hitler was a vegetarian, therefore vegetarians are Nazis’. The policy of 1930’s British fascists is of historical interest, but nothing more.
There are plenty of reasons to oppose our economic system from a liberal perspective without invoking ad hominem. As John Roffey has mentioned above, QE has caused an unprecedented transfer of £120bn wealth to the richest 5%, an outcome that I would hope no liberal can support. If a politician had caused this, it would be one of the greatest scandals of our era. However, a bureaucrat has caused this, so it only gets mentioned as an interesting quirk, far down a single day’s news agenda. Bank of England independence was widely praised before the credit crunch hit, but now we’re in hard times and the response is having deeply worrying consequences, questions must surely be asked now about the lack of democratic accountability over monetary policy.
It might be an idea for the author to avoid using emotive phrases such as ‘fascism’ and ‘socialism’ . They inflame opinion, especially on the internet, and threads degenerate into arguments about the meaning of the words rather than the actual issue.
I certainly agree with the claim that power has ebbed away from the democratic institutions that supposedly run this country. The media, politicians and judiciary appear to do the bidding of various corporate interests-the financial sector being one of the most important.
The problem is the size of our banks now. We need to go back to the model in the 60’s when we had
national provincial
westminster
lloyds
TSB
Martins
Barclays
Williams and Glyns
midland
et al
Then we will get true competition instead of a near monopoly
Duncan and others, you say “QE has caused an unprecedented transfer of £120bn wealth to the richest 5%”
But fail to mention the further £480 billion ‘transfered’ to the other 95%.
Without QE the FTSE would still be languishing in the 3,000 to 3,500 range and Britain would be experiencing its fourth year of Depression with double digit unemployment.
Surely you should applaud the role of this kind of monetary policy in helping to sustain the National Income and help avoid even more unemployment blighting lives and communities, and use of taxes on wealth to sort out the problem of unequal distribution of wealth.
Faisal says the young are suffering most – but how much more would they suffer from growing up in a smaller economy with even worse youth unemployment?
@ Bill le Breton
Nevertheless, an even distribution would have been £30bn to the richest 5% – still £90bn too much.
That is of course if you believe the sum should have been evenly distributed!
QE was enacted to avoid deflation. Helicopter money would have done the same and wouldn’t have had such unequivocally regressive outcomes.
And all this assumes that QE isn’t storing up problems later – some economists are worried about this new money fueling hyperinflation when we see growth return.
Just a point of thought to Daniel and others.
An ‘elected’ Osborne and Alexander are struggling to bring down the public debt by 10 to 20 billion by political means.
An ‘unelected’ Mervyn King at the Bank of England has created out of thin air £375 billion (QE) and crow barred it into the banks, to absolutely no effect.
Is this $375 billion free money with no consequences? Hell No. Our children, their children, and their children’s children will pay dearly for the rest of their lives.
I love democracy, but I’d love to be one of the (owners?), shareholders or advocates with an interest in the Bank of England who will reap the reward from our children’s sweat.
You are more right that you can possibly imagine Daniel.
It’s hardly surprising that some economic ideas from the 30s resemble those of today. Both are era’s of economic collapse after too much faith was put in the free market to self regulate. This doesn’t make those policies fascist , but it doesn’t make them good either.
The elephant in the room is that banking is built on debt, because debt looks a lot l like profit until you realise no one has the money to pay it off. Banks are charging interest on money they have borrowed. from governments, who borrowed it from banks, that have borrowed it from customers, who’ve borrowed it from banks, in a bizarre ritual designed to disguise the fact than money is itself basically an IOU note that can be cashed-in in exchange for goods and services. QE is merely part of the pretence. that governments and the financial sector are doing something concrete, because the goods and services bit as been shipped elsewhere.
When the BoE engages in QE then it seems to me that the question that we as Liberals should ask is “to whom is this money being allocated and what are they doing with it?”.
Bill Le Breton answers the question by noting that without QE the FTSE would be significantly lower than it currently is. This correctly indicates that those who have benefited from QE are those who have exposure to the FTSE – ie those who already are wealthiest.
QE acts to protect the wealth of the richest by marking up equities in proportion to the increase in the monetary base while at the same time cash savings and fixed incomes fester under a deliberate policy of ZIRP or NIRP.
QE as currently implemented is a shameful policy that brings disgrace to us as a party of government.
QE could bring benefits – it could be used to fund infrastructure development, buy bonds from non-profit social housing organizations or directly fund SMEs. Instead it is wasted on enriching the rich and creating asset bubbles in commodities that can be seen as directly contributing to world hunger.
“Socialism for the rich?”. No. This is pure and simple theft from the poor.
Paul, I agree when you write, ‘QE could bring benefits – it could be used to fund infrastructure development, buy bonds from non-profit social housing organizations or directly fund SMEs’. And, although it wasn’t called QE, I advocated this in the first OP I wrote here three or so years ago. Fiscal and monetary policy are joined at this very point. Getting both fiscal and monetary policy right is essential recovery. One without the other won’t work.
Thus, if we allow the superstitious to discredit the process of QE, we cannot then succeed in using it for LIberal Democrat purposes such as you describe.
Not forgetting that we MUST also change the instructions the GOvernment gives to the MPC. Without this any stimulus funded in this way will be seen by the hawks on the MPC as inflationary and will lead to further monetary tightening. And, because decision takers in the private sector already know this and would expect tightening, they will continue to hold off new projects.
With NGDP languishing well under trend capacity we need open ended QE and a communications policy that convinces everyone that QE will proceed until we reach and then maintain a figure of (say) 5% growth in NGDP.
Regarding QE: in the end, after the economy has recovered (which could take up to 15 years), the BoE will have acquired 80% of the national debt. Any ‘exit’ is near enough impossible with creating hyper inflation and destroying the economy. If the BoE attempted to sell its holdings back to the market, we would experience something called ‘velocity’ – its when inflation rapidly increases.
The only solution is holding the debt until the economy grows to a sufficient amount that auctions can be carried out without risking hyperinflation.
The thing is QE, as far as i can tell, is basically controlled devaluation. It’s driven by the banking sector’s inability to cut interest rates further once they hit or near zero. The fear is deflation,. QE can’t really go into the real economy because it’s more akin to debt exchange than a real injection of cash. .
In a modern society the state has no option but to attempt to control the money supply. Failure to do so destroys the public good of financial stability. But it is the private sector banks that create money through their lending activities. If they are allowed to do so in an unrestricted way then we simply move from bubble to bust, and potentially inflation gets out of hand. What seems to be good for the bank and its managers can create collateral damage to the rest of society. So I don’t think there is any alternative to the state taking quite an intrusive role in regulating the banks. Ideas such as controlling the total amount of credit and, to some extent, where that credit is directed, have real merit, as well as dangers. This is not an issue of liberals vs fascists or socialists. It’s a fact of life.
What nonsense. The UK is both a free society AND a corporate state, and that’s a good thing, We need corporations and we need freedom. They’re not mutually exclusive. And even the fascists get some things right sometimes.
“those who have benefited from QE are those who have exposure to the FTSE – ie those who already are wealthiest.”
‘individuals’ would constitute a more accurate statement than the generalisation ‘those’. Let’s not forget the collectively-held pension funds etc invested in the markets.
Bill le Breton,
On BBC’s Hardtalk this week, Adam Posen, an outgoing member of the Bank of England’s Monetary Policy Committee challenged the governor Sir Mervyn King for his insistence that central banks should buy only government bonds in quantitative easing programmes to stimulate growth.
He said that the BoE could be much more effective in fostering economic recovery if it ditched “anguished religious ethics” over what it considered reasonable intervention and should target measures to unblock financing constraints for mortgages and small businesses.
“I have no question in my mind that what we’re doing with QE is preventing things from getting much worse, but that doesn’t mean you couldn’t have an additional or better instrument,” he said.
Rejecting the standard view of central bankers that only elected governments can buy private sector assets, he added: “I personally view the teeth-gnashing and garment-rending about what’s fiscal and monetary as too much drama for too little content. As long as the central bank isn’t monetising government debt in the primary market – directly buying from the government so it can expand fiscal policy – I don’t think it really matters that much what assets the central bank acts on.”
He said the outcome could have been “significantly better” had the BoE acted sooner and more decisively to signs of faltering recovery, although he accepted that fiscal consolidation, the euro crisis and a broken financial system would have always frustrated a recovery.
Oranjepan, is it that we agree again and so soon?
Joe, thanks for pointing to this interview. History will show the four wasted years. Nor should we forget that five years ago the MPC failed to react to Northern Rock’s difficulties. KIng should be sacked this weekend and the MPC should receive the Sir Alex Ferg team rebuilding treatment.
We there yet. However, the tour de force from Martin Wolf with its seven action points is the best encapsulation yet of what our policy should be. http://blogs.ft.com/martin-wolf-exchange/2012/07/30/accelerating-private-sector-deleveraging/#axzz24OEAl9NM
Daniel, I admire your ability to see fifteen years into the future with such clarity.
Oranjepan: The ones who collectively own assets through pensions and so on still exclude the bottom third to half the population.
Bill, I can predict (not necessarily with any accuracy) as long as you want into the future under this state run money system. Have you read Detlev Schilchter’s “Paper Money Collapse” yet?
I did a nice timeline in a post a few weeks ago about the Libor scandal. Since the government took over the Bank of England (and the US Fed came into existence) our money has been clipped to the extent of 98% of its value. People who advocate the state playing with money supply are reckless as to who is actually harmed by it. The only thing you can reasonably predict is that the better connected and most wealthy will always gain the most out of money manipulation by the state and its coterie of a banking cartel it regulates.
IMO Liberals are really the only ones who might be willing to break this system. Though we do not appear to have any inclination to, or trusted advisers advocating, such necessary change.
However, people who advocate state run money and manipulation are pleading for the rich and dismissing the poor (or at the very least are as I said, reckless, about who gains and loses) and in my book they really do not deserve to be called liberal.
Daniel’s post, and my previous pleas, will be ignored because there is no appetite to tackle the issues that really entrench inequality in our economy in this party or any other. It is a disgrace.
The MPC *deliberately* and *knowingly* stoked a bubble they knew was unsustainable from 2001 onwards and itself transferred billions from the bottom few deciles to the middle and top few deciles who had access to assets, debt and property. Eddie George told MPs as much five years ago now. Not one (in government – then or now) picked up on it. It makes me livid.
Still can’t help thinking that people are not really understanding what Daniel refers to when he uses the emotive, but accurate, term fascism. The definingly fascist symbiosis between state and corporation, which has undoubtedly taken hold now in Britain and elsewhere, is diametrically opposed to the interests of those the state purports to serve – its people. Yet as another Adolphe, Milliband in this case, knew, it is the very raison d’être of the state.
@Oranjepan: I completely agree that shares are widely held by those in pension schemes and all those boats have been lifted by the QE tide. However that does not deflect from the fact that monetary policy is skewed to favour the wealthiest, nor does it alter the fact that these QE-generated increases are bubbles: and bubbles tend to burst.
QE is a zero-sum game. No wealth is created. The markets rise on the expectation of additional QE because the price of Acme Widget Company stock will be numerically larger as a result of currency debasement. But Acme is not actually a more valuable company – they haven’t found a way to make a better widget or to tap overseas markets.
Market manipulation by central banks is the order of the day. What is the political agenda behind this?
Britmouse here: http://uneconomical.wordpress.com/2012/08/11/monetary-policy-stance-under-inflation-targeting/ conducts a fascinating analysis of the performance of the MPC in relation to inflation targeting since 2004.
In terms of the instructions it received from HMT, he suggests effective policy between 2004Q1 and 2008Q1.
Over the next period to 2010 the MPC imposes very tight monetary policy even though a huge output gap was developing – this was the period when nominal GDP plunged without invoking a compensating loosening of monetary policy.
This was therefore the period of the greatest destruction of both capacity and confidence, the period of greatest ineptitude and negligence, which culminates in Mervin King being knighted!
Between 2011 Q1 and 2012 Q2 the work of disinflation continued apace despite the UK entering the second dip of the double dip recession (or actually consigning it to the feared L shape of the lost decades syndrome which Daniel, above, is complacent enough to expect lasting for a further 15 years under present policy).
One has to agree with Jock that the policy was too loose in the period he points to. The Governors and the MPC could and should have said that they had an inappropriate target which failed to take account of the assets which were ‘bubbling’. Ditto their ministers and advisers at HMT. They didn’t.
But to say that what was appropriate for this period was appropriate for 2008 is the error that King, the MPC, large numbers of economists and all politicians made.
For some reason, the policy that prevented the dot-com bust turning into a Great Recession in 2001 was deemed inappropriate at the time of the next asset burst – and we are paying dearly for that misjudgement.
Fiscal stimulus and a loosening of monetary policy became reviled and remain so since 2008. Inevitably the economy has failed to recover.
Because of the lack of growth, the Government debt situation (under Osborne and Alexander’s accelerated deficit reduction programme) has worsened. The performance of the economy has continued to deteriorate.
Britmouse in his latest post informs us that, at basic prices, nominal Gross Value Added for the last two quarters is an anaemic 2.3 and 2%. The implied deflator is 3.8% for both quarters. The real GVA had therefore declined by an annualized rate of 1.4 and now 1.8%.
This is a national emergency. In the face of these challenges, personnel and policy must change and Liberal Democrats must lead the campaign for those changes.
Paul, the Acme Widget Company has invented a better way to make widgets. They have adapted a proto-type robot. It requires an investment of £50million. But, at present, plans to have ten of these new robots built by Robots of Blackburn are on hold. Why? Because there is no demand for the extra widgets and there isn’t sufficient return at present demand to offset the costs of that investment.
Central Banks are responsible for aggregate demand. When they get their policies right they can produce a fairly stable increase in aggregate demand of about 5% (2% inflation and 3%).
If they and the Coalition could convince companies like Acme (and Robots of Blackburn) that next year aggregate demand growth will increase from its present 1.7% to 5% (because they will go on conducting QE until it does reaches 5%), Acme directors will order those new robots, the Robots of Blackburn will gear up now to produce them, the commercial banks will have the confidence to lend to both companies given their belief that demand is rising again.
In fact, the expectation of rising demand may be sufficient without much more QE to bring this all about. You may just have to communicate with conviction. Ah! That’s the job of the politicians.
@Bill. I agree. My last posting initially included a para about “second order effects of QE such as improved confidence …” but I deleted it before posting. Why? Because it was loaded with ifs and buts.
Here are some simple, uncontested facts: Corporate Britain is sitting on huge cash piles. Householders are paying down debt. We are again in a recession. Parts of our largest trading partner – the Eurozone – are in a depression and it is suffering from an existential crisis. China’s epic expansion has stopped dead in its tracks. The Baltic Dry Index has collapsed. Japan is entering its third decade of stagnation. AAA-rated government bonds are trading at sub-zero yields. There is fear everywhere.
Political capital (in the form of credibility) is a rare commodity these days. Liberals are optimists – in spite of Vince Cable’s “there are no sunlit uplands” speech. But it’s not enough to simply talk the talk. I liked the stuff in our 2010 manifesto such as http://www.libdems.org.uk/our_manifesto_your_job.aspx. Why did all of this become wrong once we got into government?
Bill;
i don’t think you can learn that much from the dot com bubble. In some ways it was more like over investing in a fad. or a film. When it collapsed the debt was relatively easy to write-off because the banking system looked strong. Some people lost their shirts, but the effect on the wider world was not that great.
Housing and banking problems make people homeless and broke. So the response was designed to ensure that people didn’t go to their cashpoint and find out the money was gone or end up with mass repossession on a scale bigger than the 1990s. These are fundamental social and financial issue. The Dot Com bubble was just banks backing things that turned out to be flops. Anyway the viable companies such as Amazon eventually surpassed expectation, They turned out to be blockbusters. It’s also why the rapid drop in Face Book’s shares have had a minimal impact.
@Matthew
“If they are allowed to do so in an unrestricted way then we simply move from bubble to bust, and potentially inflation gets out of hand. ”
Really? the housing bubble was encouraged by the state – not the market. As I stated previously, majority of bubbles occur because the state is exploiting them. “boom and bust” is not created by the market; dangerous levels of public spending, low interest rates created this crisis.
Subprime, for example, was a federal program created by President Bush in the 2002 “Great American Mortgage Challenge”. The mortgages were then brought by Fannie and Freddie Mac (government institutions) and then sold to the market.
Daniel .
neither Freddie or Fanny were heavily involved in sub-prime. The housing bubble was simply about over inflation of prices. Sub-prime didn’t even lead to much more ownership and was not just aimed at those who couldn’t afford normal loans. The problems in the housing market had been building for decades. The expectation of increasing value lead to rapid inflation until the market stagnated. The defaults simply triggered the inevitable.
It’s the same thing now. We keep hearing that we need more affordable homes, but what actually is affordable? The reason houses aren’t selling is because no one wants to sell at a loss and they are simply not worth the money that the buyers paid for them.. Sure, normally homes are an investment, but at the moment it’s like trying to sell a secondhand car. The value has depreciated.
In truth governments just seized on the bubble effects of loans, because the prevailing orthodoxies were that personal dent was not a big problem. In fact in banking terms debt, in the form of interest rates, is profit. Sadly it turns out that debt on a personal level, when you throw in job insecurity, rising living costs and such- like is also called being skint .
And from this springs more stagnation. People are not just waiting for a bargain or being thrifty. Hours have been cit, wages have stagnated and employers are opting for part-time workers. Not enough people have enough money to afford a consumer lead recovery. Look at provincial town centres,. Poundland, discount shops,, primark, second-hand shops, exchange marts, bookies and Aldi. that’s not because everyone is shopping on line or bargain hunting, it’s the result of low incomes. It’s been heading this way since at least the late 1970s.
Glenn, the importance of the dot com bubble is what happened at the end of it. Deliberate policy, discussed between the treasury and the “independent” Bank of England, decided that the UK could not go into recession (after all, one of the things that had given Labour some credibility was that the City had decided to trust it running the economy and a recession after just one term would have been electorally damaging).
It therefore loosened money supply and succeeded in preventing us following the US and Germany into a technical recession, at the cost of the housing bubble and the growing importance of cheap Chinese imports (neither of which would, conveniently, show up in inflation figures that Gordon and Eddie were supposedly targeting).
They knew at the time, said Eddie George to MPs six years later, that this was unsustainable and that they were stoking up trouble which it would be for their successors at the MPC to sort out. So while pebble dash man was happy seeing his house price rise rapidly and enjoyed the gadgets China was producing at ever falling prices, his kids were having their incomes scalped in higher housing costs and in getting into debt just to be able to stand still.
I can never trust central bank money manipulation again. It *is* reckless. It will always favour the well connected first and will have caused inflation before young Pebble-Dash or his granny see the money filtering through to them. It will always create distortions when Bill’s Mr Widget man above sees this new money, decides to invest, then realises that it was just inflationary money and the customers to spend that money aren’t coming his way.
There are too many unknowns in monetary policy in terms of where new money gets injected into the economy and who sees it before the inevitable inflation kicks in. It will always damage real economic resources somewhere as these entrepreneurs make bad choices because the monetary signals are confusing. It is reckless and many people and businesses are damaged by it. The state does not have the right to be that reckless with peoples’ economic resources and fortunes.
Personally I don’t really see the difference between inflation targeting and NGDP targeting from that perspective: someone will always lose and, knowing that, they do it anyway.
There is no good end to this fiat state controlled money system. I agree with Bill that this is an emergency. We should therefore take the opportunity not just to tinker with targets but fundamentally redesign the monetary system. And to be honest, I think if we don’t, the current system will lurch from one new crisis to another until we have no confidence in it anyway. Only left to die naturally it will destroy far more people’s economic resources before something new takes over. Like the Rentenmark in inter-war Germany.
Jock.
Fair dues. I think the thing with housing is that it isn’t seen as inflation. but as growth. Whilst cheap imports are seen as deflationary. It’s that “good” and “bad” deflation idea. My Kettle is cheaper “good”, my house is worth less “very bad”.
But that’s capitalism for you.
Jock Coats: “I did a nice timeline in a post a few weeks ago about the Libor scandal.”
This includes the line “Nobody has ever been prosecuted for the decline of 98.2% in the value of money in your pocket since 1931.”
That seems like a bizarre statement, given that the primary and over-riding focus of all governments since 1931 has been to shore-up the value of sterling, frequently with disastrous results (the 1976 IMF loan being the most obvious example). You expect politicians and central bankers to have been prosecuted for the failure of a policy that was anyway incredibly ill-advised? Or do you expect currency speculators (mostly abroad) to be prosecuted for doing perfectly legal trading? Better to prosecute the politicians for trying to prevent that decline, regardless of the damage trying to shore-up currencies does to people; and meanwhile, prevent the free trading of currencies.
Daniel Furr: “Really? the housing bubble was encouraged by the state – not the market.”
It was encouraged by the state to the extent that the state took the shackles off the market and allowed it to create a housing bubble, and to the extent that a conspiracy of consent has seen the UK hiding its fundamental economic problems with easy consumer spending since 1983. And it certainly is true to say that the way to solve the problem is not the sort of fiscal tinkering documented here but solid economic legislation and restrictions on credit, but the way you’re phrasing things makes it sound like the problem is too much government interference in the economy, too much “big government” – and after 30 years of deregulation and bare-bones government, accompanied by 30 years of recession, that’s just not a remotely supportable position.
Then you’ve got that similarly topsuy-turvy statement “boom and bust is not created by the market”. Well, no, markets don’t create boom and bust – markets are boom and bust. Certainly, putting control of markets solely in the hands of plutocrats instead of governments won’t somehow make markets work.
@Jock
“there is no appetite to tackle the issues”
absolute cod.
We, the party and the country are starving to tackle the fundamental inequality in the economy, it’s just that our ability to have a full and decisive debate has been hampered by everything from changes to communication technology through to the everyday distractions implicitly caused by it. Information overload creates opinion overload, and prevents majoritarian agreement (let alone the sort of consensus seen in the mid-90s).
For example, how many blogposts and twitter reactions can you keep up with in any 24hr stretch? Even Blair struggled with rolling TV news reports!
@Bill
Shh, professional media might get the wrong impression that we’re a united party with shared aims.
@Paul in Twickenham
partially agree.
It’s a fine line to tread – too much QE and values are distorted, too little QE and the market is insufficiently capitalised.
@Jock
If it’s reckless to inject QE then it could easily be more reckless not to. That’s why it’s called a crisis – it forces you to make a decision without being 100% certain of the results.
And just like the decision to go into coalition, we were always going to be damned in some quarters if we did and damned in others if we didn’t.
I inherently dislike conspiracy theories, as it unfairly credits either state or non-state actors with excessive power.
It’s the same as with media moguls like Murdoch: he didn’t pick and choose governments, he looked at who was going to win and backed them to ensure they were onside. But he encouraged the myth because he knew that tilted the odds.
And equally with the dot.com and housing bubbles, the populist myth has grown up that one group or another is guilty of deliberate manipulation because it suits the established duopoly of left and right to blame the other, all while it absolves the public of our own stupidity of buying into their mythologising.
If liberals are against concentrations of power, then we’re to blame if we cause this by crediting false myths.
In reality both Brown and the bankers made horrendous – if honest – mistakes (and Murdoch is nothing more than a sad, self-interested miser, still traumatised by the loss of the father he hero-worshipped).
Relaxing credit rules made bad investments (like unproven tech stock) more likely, with the consequence that the value of solid investments (like property) grew disproportionately. The level of QE reflected this shift in the wider market value – which is why we should be glad it was staged to ascertain some sort of appropriate level, even though we should still be very angry it was the best available coping mechanism.
@Anne Forgettable
“markets don’t create boom and bust – markets are boom and bust”
You’re confusing individual markets, which rise and fall according to fashion, and the wider market, which must balance the effect of the various sectors to prevent such crises from wrecking such devastation.
You can ride a wave, but the flip-side of staying on too long is to get churned in the surf – it is possible to end ‘boom and bust’, but anyone who thought they’d found the formula to do so was simply deluded.
If we learned anything it’s that Labour’s culture of fear, allied with the tory culture of greed, combined over several decades to build an irresponsible society with the corresponding blame game – “it’s-not-my-fault-gov.”
Anyone with a computer or a mobile phone or a mortgage or a credit card contributed to the crisis, by each according to their fault.
So until everyone recognises and accepts their share of the responsibility it is inevitable that it can occur again.
There’s only so many warnings anyone can make (thanks Vince), even if they’re not heeded, because to do so would mean allowing a truly liberal philosophy to permeate society, with power dispersed from the hands of a few individuals to the many.
That is of course in direct defiance of what Eddie George told MPs, Anne – that it was interest rate decisions at the Treasury and the Bank of England that “deliberately stoked” a credit expansion.
As to “bare bones government”, ha, ha!
Morning shift arriving for work: where we might all agree is that ‘discretionary’ action by a central bank is wrong.
I venture to suggest that what the Bank of England did immediately post the dot-com boom was right (and needed to be repeated in 2007 – at the time of Northern Rock, not six months after Lehman Brothers). But the error was continuing the ‘loose’ policy for too long.
The target that would remove this kind of discretionary action (by an unelected and undemocratic quango, the MPC) must react to a wider range of prices, to unemployment – that is to aggregate demand – and to failures to hit that policy in immediately prior periods.
The target therefore needs to be nominal GDP as this includes all the above. By providing that the target is also a level target – i.e. if it is undershot by 1% in a period it is relaxed by 1% in the immediate next period and vice versa, flexibility is built in which is not discretionary.
Experience suggests that a sustainable and stable level of NGDP growth would be 5%.
Business and the public would be able to keep an eye on this figure. There could be a market created in NGDP futures, just as there is presently a market in index linked gilts.
If that market showed sub-5% conditions they would know that interest rates and other instruments of monetary policy would remain ‘loose’ in the near term, but would not be allowed to exceed 5% and could make their decisions on new commercial projects or home purchasing accordingly.
They wouldn’t pile into housing for capital gain, for instance, because they would know (and their advisers would know) that ‘tight’ money conditions would follow with certainty in the very near term, expenses would rise and capital values fall. Ditto investment projects.
NGDP targeting, level targeting, as this is known, is far more effective and endogenous that targets such as the gold standard, exchange rates or CPI.
[If anyone wants to argue that monetary policy is loose at the moment because of ‘historically low rates and massive QE’, I would ask you to consider that, counter intuitively, falling demand pull inflation and low gilt rates are evidence that monetary policy has been too tight.]
NGDP level targeting along these lines would allow *today* the necessary fiscal and monetary stimulus that needs to be introduced. It only requires a letter from the Quad to the Governor of the Bank of England. Liberal Democrats should be campaigning for this.
You buy a house for £200,000 of which 80% is via a mortgage.
The true cost of that house when you include the interest, the insurance and the taxes you pay on the earnings during the life of the mortgage takes you over £1 million. You are then a slave of the bank, the insurance company the government and the company that employs you.
You have a chain around your neck, your waist and your ankles and if you dont pay then your children suffer as well as the family tries to cope with your 25 year term of imprisonment..
Welcome to the world of capitalist freedom.. !
Its a clever trick and seems to have fooled most of us.
Oranjepan, if you think there has been an appetite to change the money system at any point in my 45 year lifetime you are simply deluded, and whilst I would welcome any attempt to do so, it is not the same thing as tinkering with what we have.
Bill, central bank monetary tinkering is never moral. It *always* f**ks someone up. If, as a Liberal you think that is right, we are for sure not in the same liberalism. Artificial inflation will always f**ks someone up. The state has no right to do that to people. If you think it does, we cannot truly share the same ideology. And I know which proper liberals would go for if they were offered the real alternative.
I don’t care whether it is gold or a harlot’s underwear, something other than state manipulated money is a necessity before we can really move forward IMO.l
@Jock Coats – isn’t the trouble with asset-backed money that the government is effectively providing free secure storage of assests for investors? For example, if you buy a pound of gold in the real world through e-gold or a gold investment trust, you lose a percent or two each year as fees for the secure storage, if you buy gold futures there is a “cost of carry” implied in the difference between the spot price and the futures price. If you buy physical gold then you have to arrange and pay for secure storage yourself. It seems that if a 50 pound note was backed with a fixed weight of gold then you effectively are getting free storage for as long as you want.
It’s a long time since I worked in financial markets but as I remember pretty much all physical commodities had a positive cost of carry associated with them (negative cost of carry – i.e. profit to the holder- was only things like bonds that pay interest to the holder). I also want to say that I mean this as a question rather than a debating point, how is it supposed to work without providing this hidden subsidy?
Jock,
I completely agree there is no public appetite for half-baked ideas.
There are literally thousands of economic reforms with potentially far-reaching advantages, so it is confusing why you obsess over trying to enact one or two which are hopelessly unrealistic in their aims and which you articulate in ways designed to undermine any confidence.
Why you do so is perhaps less of a mystery.