Wednesday, 7 September 2016

A Crisis Carol - Stave 2 - The Ghost Of Crisis Past - Part 3

Stave 2 - The Ghost of Crisis Past

What Greenspan did in 1987, by printing money, and slashing official interest rates, had nothing to do with ending a credit crunch, as was the case with the suspension of the Bank Acts in 1847. What became known as “The Greenspan Put”, was rather Greenspan, and subsequently all other central banks, saying to the scrooges “We have your back!” Where every other major financial crisis had spelled the end of a period of insanity, and a return to the need for real productive investment, as the basis for growth, and for the provision of all of the revenues that flow from it, including the payment of rents and interest, what Greenspan and the central banks did, in 1987, was the exact opposite.

It created the idea that what was only fictitious wealth was now the real wealth, that the protection of that fictitious wealth was the most important function of central banks and governments. That was not that surprising. The government in the US and UK, was firmly in the grip of conservatives whose purpose is to protect the interests of those money lending and landowning capitalists that derive their revenue from interest and rents, and who now saw their wealth threatened as stock, bond and property markets fell sharply. Their power flowed from that wealth. The basis for bursting speculative bubbles is that the speculators believe that they may lose their wealth, and not get it back for a very long time. What The Greenspan Put did was to remove the potential for that fear ever arising. It created the idea that whenever stock, bond or property markets fell, the central banks would step in to print money, to lower official rates, to provide the banks with money, and to even themselves step into the markets to buy up all of the fictitious assets that everyone else wanted to sell, and thereby to underpin, and inflate their prices once more. And that is what they have continued to do ever since 1987.

So, huge rises in stock, bond and property prices occurred during the 1990's and early 2000's, so that, even as profits rose, yields fell, because the rise in asset prices outstripped even rapid rises in profits, and the ability to pay interest out of them. In order to maintain yields a higher and higher proportion of profits then has to be paid out as interest, which means a correspondingly smaller proportion of profits is available for reinvestment in productive-capital. Anyone who believes that the actions of central banks, particularly since 2008, have been about rescuing the real economy, stimulating economic activity, and so on, has not understood what is really going on. The central banks and conservative governments have had one central purpose, and that is to protect that fictitious wealth from being devalued, even if that means taking down the real economy to do it.

That process, over the last thirty years, had other consequences. In Britain, during the 1980's, property prices quadrupled. But, in 1990, an economic slowdown, and a rise in interest rates, saw house prices drop 40% in a matter of weeks. Many of those who had been encouraged by Thatcher to speculate in buying their council house found they could not make the monthly mortgage payments, and lost their houses, whose market price was now lower than their mortgage. It took until 1996 before house prices recovered their nominal level from 1990.

But, it meant the owners of money-capital, seeing the yield on their bonds and shares fall, had another avenue from which to obtain yield. They could buy up these houses and rent them out. About two-thirds of all council houses that were sold as part of “Right-To-Buy” have ended up now in the hands of private landlords. At the same time, as rents have continued to climb inexorably, the level of Housing Benefit, that now finds its way into the pockets of those private landlords has risen to around £9 billion a year. That is a huge transfer of wealth from ordinary taxpayers, into the hands of rich capitalist property owners.

Even where it was not the owners of money-capital themselves that bought such rental property, they provided the money-capital to others who undertook such activity. They also found an extension of that as councils, at the start of the century, were told to sell off their housing stocks to ALMO's, and Housing Associations, who, in turn, obtained the money-capital to buy the houses from the scrooges.

There are two reasons for buying such assets. Firstly, some institutions, like pension funds, are required to invest in assets that provide yield over the longer-term. For anyone seeking yield, it becomes necessary to search out those assets that provide this higher yield, whilst remaining relatively safe. But, also, speculators will gamble that any such high yielding asset is underpriced, so that they stand to make a capital gain as its price rises.

But, none of this activity creates any additional wealth, even though the astronomical rises in the prices of these paper assets creates that illusion. If the share price of a company goes from $1 to $1,000 it makes the owners of those shares individually rich – on paper – but it does not increase the ability of the company to increase its output, or to make more profits. If the price of houses rise from an average £5,000 to an average £200,000 it does not create any additional wealth. In fact, by raising the value of labour-power, by raising the cost of pension provision and shelter, it acts to reduce surplus value, and capital accumulation.

Yet, if the basis of creating real wealth is not increased, if the potential for expanding profits is not increased, the potential to increase the payment of interest as dividends etc. is diminished. If despite that reduced potential, asset prices continue to be driven higher, then yields must fall. By the end of the last century, that had become manifest. The prices of technology companies, listed on the NASDAQ, soared, year after year, during the 1990's. Mutual funds, invested in the technology sector frequently rose by 70% p.a.

Who was bothered about a measly 7% rate of interest from the Building Society when you could see your wealth grow by that amount? And, similarly, no one was bothered about whether any of these companies actually made any profits or paid any dividends. The only thing that mattered was that the asset price rose sharply, and so the paper wealth of the owners of those assets rose sharply. And the same was true of house prices.

In 2000, the NASDAQ fell by 75% in a matter of a few weeks, and not even The Greenspan Put could restore it. Only now, sixteen years later, has it more or less recovered the nominal level it reached back then. But, yields had, by this process, been forced lower and lower. Even with property, although rents rose to record levels, because property prices had risen even more, rental yields fell. In Britain, it was only massive state subsidies to private landlords, via ever escalating levels of Housing Benefit, that prevented yields falling even more.

This was the vision that the ghost of crisis past presented to the scrooges, of the situation in 2008. In the 1970's a criticism of Keynesian fiscal stimulus, and evidence that it had failed, was that, although it provided temporary relief, it had to be reapplied in ever bigger doses, and at each stage, it resulted in inflation that eventually turned into the stagflation of the late 70's and early 80's.

The ghost of crisis past pointed to the recognition of the failure of Keynesianism, and then pointed to the ever increasing amounts of monetarist stimulus from 1987 through to 2008, required to prevent the collapse of financial asset prices and the paper wealth of the scrooges. He pointed to the attendant deflation of consumer prices, as liquidity was sucked out of general circulation to finance ever increasing levels of speculative activity, of one form or another, by all sections of society.

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