Thursday, 15 September 2011

The Economy Of Analysis - Part 4

In Part 3, I argued that the policies pursued by Governments and States have been shaped by ideological orthodoxy, as well as by the requirements of pragmatism to deal with the crisis that was sprung upon them. From the early 1980's Keynesianism fell from favour as it proved incapable of resolving the crisis that engulfed most of the developed economies. It was replaced first by Austrian, and then in the late 1980's, Monetarist policies designed to stimulate economies and boost profits through the injection of additional liquidity. Each time a new slow down was signalled by a fall in property or share markets, additional liquidity was injected.
It appeared a magic solution. On the one hand, inflation remained low as consumer goods were imported from China, and other low cost producers. On the other, the liquidity bubbled up house and share prices, giving the illusion of wealth and affluence. Increasing numbers of even ordinary workers were encouraged to see their wealth as being intimately tied up with the rising price of their house, and of the shares in their Mutual Funds, PEP's, ISA's, and Private Pension Funds.

As these assets rose in value, so they were encouraged to borrow even larger amounts against them, to finance the purchase of the increasing range of consumer goods, and lifestyle they were led to aspire to. But, like all Ponzi schemes, it had a limited lifespan. Once there were no more “bigger fools” to buy into the pyramid, it was bound to collapse like a house of cards.

In the US, house prices have fallen by between 60% and 75%, and they are still falling. The state has intervened to provide financial support for home-owners to prevent delinquencies on mortgage payments leading to an even bigger crisis.
Even so, many home owners have simply walked away from their properties, unable to pay the mortgage. TV programmes, have begun to show that in the US, an increasing number of “Middle Class” people, people who had well-paid jobs, are becoming homeless, as unemployment has left them unable to cover their debts. In Ireland, again house prices have fallen by around 60%, with many houses lying empty. In Spain, house prices have fallen by around 40%, though it is difficult to know the real extent of falls because selling prices are frequently around 30% less than asking prices. Yet, around 1.5 million homes remain unsold.
In the UK, house prices fell 20% after the Credit Crunch, but with mortgage rates slashed, prices rebounded to recover most of their losses in the following year. Now, despite interest rates at record lows, despite relaxation in lending requirements, and the Government imploring lenders to lend, house prices are sliding again. Selling prices are around 20-40% below asking prices already in many places, and yet there are around 700,000 empty properties in the UK, according to one account I heard recently – See Brent Council.

With the potential for the UK's credit rating to be downgraded, as Government policy leads to higher borrowing due to a stagnating economy, as inflation rises sharply due to the Monetary Policy of the Bank of England, reducing the value of the Pound, and thereby increasing the cost of imported goods such as Energy, Food, and consumer goods, and as the potential for risk increases due to global uncertainty – a spark in the Gulf, say over Bahrain, or in the growing conflict between Iraq and Kuwait, an unplanned default by Greece, or the collapse of a European Bank (today UBS announced a $2 billion loss from unauthorised trading!)– the chances of yields on UK Bonds rising from the record low levels are high. Whatever rate the Bank of England sets will be irrelevant if market rates are pushed up, and that means higher borrowing costs for home-owners at a time, when the austerity measures, and the growing economic crisis will be throwing tens of thousands of workers on to the dole, and slashing the living standards of millions more. Last month's sharp rise in unemployment is just the start of a much steeper deterioration, as Public Sector job losses kick in, and there effect is transmitted into the private sector.

It was similar conditions in 1990 that led to a 40% fall in UK house prices. Then on the basis of the OECD figures prices were only 20% overvalued. Today according to the OECD, prices are 40% overvalued, and a return to the mean implies something approaching an 80% fall in UK house prices when the crash comes.
Under those conditions, home-owners unable to make their mortgage payments will find themselves unable to sell quickly at a price that enables them to get out. Increasingly, banks and mortgage providers will find themselves, as happened in the US, with the sub-prime crisis, holding mortgages which have no real asset value standing behind them. It will mean that many of them become insolvent, requiring even further State intervention to keep them afloat, especially where they are already largely state owned. It's this danger that is part of the reason for the Bank of England retaining interest rates at such low levels, and is why there are attempts to talk up the housing market.

So, it is no wonder that for the last few years, ideologists of the ruling class such as Roubini, and Soros have been arguing that austerity was the wrong prescription.
Soros is today warning that the EU Debt Crisis threatens to bring about a new Great Depression, and all the calls now, are not for further austerity, which is making the situation worse, but for the EU leaders in Germany, France etc. to sort it out properly by recapitalising the banks, and sovereigns. Its no wonder that we see people such as George Magnus coming out and referring back to Marx, and why we see books such as Meghnad Desai's “Marx's Revenge” appearing.

Eddie Ford is right to say,

“Their new-found, but highly selective, ‘appreciation’ of Marx is more a warning to the establishment to get its act together - or risk being swept away by the swinish rabble”,

in the Weekly Worker, but he is wrong when he continues,

“Capitalism is in a big hole, but all it can do is keep digging; more austerity, more cuts, more retrenchment. No viable plans, no future - a busted flush.”

He is wrong for the reasons he had alluded to earlier in the same article. He pointed out,

“No wonder alarm bells are ringing - something has to be done. In particular, more voices are being raised doubting the wisdom of pushing ahead with all the various austerity programmes, which look more and more like an act of collective economic suicide. Hence the president of the World Bank, Robert Zoellick, warned that the drive to cut national deficits across Europe could “sink” the region’s economic recovery - as the hope that perhaps we can somehow “muddle through” by a magical emergence of “financing and liquidity” rapidly fades away.
More stridently still, Christine Lagarde, the IMF’s managing director, starkly declared that the global economy faced a “threatening downward spiral” if it did not abandon fiscal austerity and instead switch to “growth-intensive measures”. More concretely, Lagarde said it was essential to recapitalise banks so as to “avert contagion” and “withstand the risks linked to the debt crisis and weak growth”. In other words, do an about-turn before it is too late.”

In other words, not only is Capital still flourishing in China with growth rates of around 10%, and in other parts of the world, but in the US and in Europe, Capital does have alternatives to austerity. It does not have to keep digging a bigger hole.
And, in fact, the introduction of effective fiscal stimulus in the US in 2009/10, and in the UK by Labour, as well as in Brazil and elsewhere demonstrated that these alternatives could be very effective. In the US they led to growth rates of up to 5%. In the UK, and elsewhere as the OECD data show, they led to a traditional “V” shaped recovery prior to the talking down of the economy by the Liberal-Tories at the beginning of 2010, and their subsequent austerity programme.

But, Comrade Ford and the CPGB, along with all the others on the Left who have been arguing for the last couple of years that the austerity measures were a necessary Capital Logic, being carried out by Capitalist Governments, and States now have a problem in explaining why all of these organisations and representatives of global Capitalism are arguing the exact opposite, why they are arguing, rather as he puts it that “all the various austerity programmes, (which) look more and more like an act of collective economic suicide”!!!
It appears that the CPGB at least, have recognised that the Tea Partiers, the Liberal-Tories and so on were not after all arguing for the interests of the ruling class, but were instead putting forward policies that were going to cast them into the abyss!

Back To Part 3

Forward To Part 5

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