The Bank of England was charged with keeping inflation at 2%. For several years, it failed in that objective, with inflation running at 4-5%. Then it failed on the other side with Britain nearly falling into deflation, and with inflation languishing, along with economic growth, at not much more than 0-1%. Now inflation has spiked again, as the Pound falls due to Brexit, whilst wages have remained at historic lows, with the slowest pace of wage growth in the last ten years, for nearly 200 years. In terms of the task officially set it, the Bank of England, therefore, has consistently failed. But, of course, what the Bank of England has really sought to do, over the last twenty years, and particularly over the last ten years, is not to constrain inflation, or as the Federal Reserve is supposed to do, to ensure economic growth, is to keep asset prices inflated, and thereby to protect the fictitious wealth of the top 0.001%. In that it has been very effective.
The Bank of England, like the US Federal Reserve, has acted whenever those asset prices have fallen, to reduce official interest rates, and to pump additional liquidity into circulation, so that money could again been funnelled into pushing bond, share and property prices higher. When in 2007, the UK economy was being dragged forward at a rapid pace by the global long wave boom that started in 1999, the bank had to react to the sharp rise in inflation that occurred, and particularly to the fact that workers were beginning to demand higher wages to compensate for that higher inflation. Oil tanker drivers had just won, after a very short strike, a 14% pay rise, and it looked like that would set a pattern for other industries.
The Bank of England raised its official interest rates to nearly 6%. That rate, in itself was not exceptional. The interest rate in the United Kingdom averaged 7.68 percent from 1971 until 2017, reaching an all time high of 17 percent in November of 1979 and a record low of 0.25 percent in August of 2016. Historically, even the 6% rate was below average, with rates more typically ranging from 6% up to 15%. Yet, the 6% rate was enough to cause a sharp response, which led to the collapse of Northern Rock, and as other central banks raised rates, and the credit crunch unfolded, to the financial meltdown of 2008. The 6% interest rate seemed high, because in the preceding period, interest rates had been pushed down to unsustainably low levels, liquidity injections by central banks had pushed up asset prices, and equally depressed yields on financial assets.
But, shockingly, the official interest rate today is even lower than it was prior to the start of the credit crunch, and the collapse of Northern Rock in 2007, and by a very large margin. Correspondingly, asset prices have been pumped even higher than they were in 2007, whilst private household debt is back to the same unsustainable levels it was at prior to the financial crisis. A rise in interest rates will this time be even more dramatic in terms of the financial crisis that ensues than was the case in 2007 and 2008. Yet, such a financial crisis, a bursting of those huge asset price bubbles is precisely what the economy needs.
There are two levers that the state can pull to influence the economy. One is the monetary policy lever, the other is the fiscal policy lever. From the late 1980's, conservative governments across the globe put nearly all of the weight on using the former rather than the latter. That is not to say that they didn't use fiscal policy to intervene in the economy too. The capitalist economy depends upon the state intervening, because the state must provide things like education and health and social care to ensure that capital has the supply of labour-power it requires, and the state must also provide all of the huge infrastructure of roads, and other facilities that a capitalist economy requires to move goods and services around efficiently.
But, conservative government, based upon the interests they serve, of the money-lending capitalists and the landed oligarchy, placed its emphasis on monetary policy, because fiscal policy, certainly in respect of increasing public expenditure, tends to strengthen demand in the real economy, which increases the power of workers to get higher wages, and thereby to reduce profits. It also tends to cause the demand for money-capital to rise, which leads to higher rates of interest, which in turn causes the capitalised prices of financial assets such as bonds and shares, as well as of land, to fall. The capitalist class holds nearly all of its wealth in the form of these assets of fictitious capital. It does not take kindly to policies which cause the prices of those assets to fall, because it is from that paper wealth that it derives its power and influence in society.
In 1987, Thatcher in Britain and Reagan in the US, therefore, deregulated financial markets. It meant that their friends the money lenders could make big bucks from lending vast amounts of money to individuals who got deeper and deeper into debt, especially as their wages fell or remained stagnant. When global stock markets crashed in 1987, and the capitalists panicked, the US Federal Reserve, and the Bank of England intervened to reduce official interest rates, and to pump money into the economy, so that these financial assets rose once more in price. Over the last 30 years, they have continually had to repeat the exercise with larger and larger doses of money, and with official interest rates driven to ever lower levels, just to prevent the asset prices collapsing. But, with official interest rates more or less at zero, and yet with global economic activity rising, and inflation rising along with it, and with actual market rates of interest rising so as to begin to dislocate entirely from official rates, the central banks are themselves having to try to withdraw the support they have been giving.
Of course, for taking back operational control to be of use, a Labour government would itself have to use that control to benefit the real economy rather than to simply keep underpinning those astronomically inflated asset prices. It would have to be prepared to raise official interest rates, so as to burst those asset prices, whilst ensuring that the economy continued to have the liquidity it required to ensure that commodity circulation could continue unimpeded. The crash in asset prices is inevitable one way or another, because global interest rates (market rates) are inevitably rising. The question is whether that crash arises spontaneously, and unexpectedly as in 1987, 2000, and 2008, or whether it is planned for and engineered, in such a way that it does not damage the real economy, but rather benefits it.
Look at what the consequence of Bank of England, and other central bank policy has actually been over the last thirty years. Firstly, it massively inflated share prices, and bond prices. For the top 0.001% who hold nearly all their wealth in this form, that has brought about a massive rise in their nominal wealth. If we take the Dow Jones Index, it has risen from just over 800 in 1980, to more than 22,000 today. That is a rise of 2750%. That is way in excess of the increase in US GDP during that period. Now let us look at the effect of that for everyone else.
Firstly, of course, this massive rise in share prices is the main cause of the huge growth in wealth inequality. Other people, hold shares but that share ownership is massively diluted amongst the rest of the population compared to its concentration in the hands of that top 0.001%. For most people, the shares are held in pension funds, or mutual funds, over which they have no control. But, the other effect is that as these share and bond prices have been massively inflated, so ordinary people find it harder and harder to buy them. And the importance of that is clear when it comes to pensions.
In order to be able to pay out a pension, a pension fund has to take in revenues from dividends on the shares it owns, or interest on the bonds it owns. The more shares and bonds it owns, the better it is able to be able to pay out pensions. But, as share and bond prices have been pushed up to astronomic levels, the fewer shares and bonds, workers monthly pension contributions are able to buy. That together with the fall in yields on shares and bonds, which is the corollary of their higher price, means that pension funds have been increasingly unable to meet their pension commitments. That is a direct result of the fact that central banks, like the Bank of England, have pumped up those asset prices.
What it should have meant was that workers needed much higher wages, so as to be able to make much higher monthly pension contributions. But employers were not going to volunteer to do that, and wherever workers resisted the consequent cuts in their pension, such as with public sector workers, they were vilified for having done so. It means that workers wages, in the form of deferred wages (pension) have been massively reduced, so as to not cut profits, which in turn was made necessary, because a massive transfer has been made in favour of the owners of fictitious-capital.
But, even that is contradictory, and only storing up problems. With workers future pensions slashed as a result of the inflation of share and bond prices, those workers will have less revenue to spend in coming years. These will be the same workers who over the last thirty years have been driven into debt by falling and stagnant wages, and by the astronomic rise in housing costs, let alone all of the debt incurred as student debt. Either the state will have to step in to increase its support for such workers, via a higher state pension etc., or else there will be a massive drop in spending power by a large cohort of the population, which will make it difficult for businesses to be able to sell their output, which in turn will cause their future profits to fall.
The monetary policy adopted by the Bank of England acted to encourage speculation in all kinds of financial assets, and that spread into every other kind of asset, including land and property. Typical of every bubble in history, going back to Tulipmania, it was characterised by the mantra that it was necessary to get on to the property ladder, before prices went any higher. Bubbles are always inflated in this manner, of the bigger fool principle, i.e. that prices continue to rise so long as there is always some bigger fool prepared to pay the over inflated prices, for fear of missing out, and the bubbles collapse as soon as the supply of such bigger fools runs out.
Contrary to popular belief, the high price of houses is not the result of a shortage of supply, as I have set out many times before. There is actually 50% more homes per head of population today than there was in the 1970's. There are at least 1.5 million empty homes in the country, a fact that was highlighted recently by the Grenfell Tower catastrophe. And, as 2007/8 demonstrated, any such shortage did not stop house prices dropping 20% almost overnight. The real cause of high house prices is speculation. Every individual has been led to believe they must own one, as an “investment”, so as not to miss out on further rising prices. Some people having seen their savings produce them no interest have been encouraged to speculate in buying houses to rent, and to obtain a capital gain as prices rise.
The action of the central bank has encouraged such reckless speculative behaviour, and it was further encouraged by Thatcher's government in the 1980's, and by every government since, because higher house prices deluded some homebuyers to think they had become richer, and also encouraged them to borrow further on the back of their house price to finance further spending, which thereby acted to keep up the level of aggregate demand in the economy, at a time when wages were stagnant or falling.
But, the children and grandchildren of those people then found that they could not afford to buy these houses at these massively inflated prices. They were forced into renting. And, as house prices rose, so landlords charged higher rents, and as more people were driven into private renting because they could not buy, and council houses were not available, so that pushed up private rents further, and as private rents rose further, so that made it even more worthwhile, for private "buy to let" landlords to engage in such speculative activity. The one area where the mass of liquidity, and low official interest rates has flowed into, besides the stock and bond markets, has been into the provision of mortgages. Nearly all of the lending of banks in recent years has gone to finance mortgages, or property in some other form, in contrast to the problems of small and medium sized businesses in being able to obtain bank finance. The banks have been prepared to lend into the housing markets, at lower interest rates, because they have not wanted to cause existing borrowers to default, causing a house price crash, and because they have believed that if they do need to repossess houses they could do so without losing capital.
That kept house prices at unsustainably high levels. For all those forced into renting, and at higher and higher levels of rent, the consequence has also been to drive up the level of Housing Benefit. Private Landlords are currently subsidised to the amount of around £9 billion a year paid out in Housing Benefit. Once again, as with pensions, if workers wages had risen so as to compensate for this higher cost of living caused by the inflation of property price bubbles, then profits would have been reduced accordingly. In effect, profits have been reduced, as a result, because the £9 billion of subsidies paid to landlords from Housing Benefit does not come from a magic money tree. It comes from taxes, which ultimately means it comes from profits, which thereby reduces the potential for capital accumulation and capital growth.
When it comes to pension provision and housing provision the interest of money-lending capital has been promoted over the interests of real capital, but that can only last for so long, and that has now come to the end of the line.
The rise in house prices caused by all this speculation has also acted to cause land prices to inflate, because landowners know that they can sell land at massively inflated prices to builders, who in turn sell new houses at massively inflated prices. In turn, the massively inflated land price increases the builders costs of building new houses. One reason that builders have not increased their house building, is because high land prices mean that the surplus profits they would have made are siphoned off by the landowner, and now at the current astronomical level of house prices, the demand for those houses is very limited. That has been seen in the sharp decline in home ownership, as people can no longer afford to buy, causing the demand (as opposed to need) for houses to fall. Builders will only build houses they are confident they can sell at a price which produces them an average profit. Only if the cost of building new houses falls significantly, which also requires a dramatic fall in land prices, will the demand for houses be able to rise, so that builders can build, and sell a greater number of houses. The policy of the Green Belt, is also forcing up land prices, and forcing down the quality of housing provision, by forcing new developments on to unsuitable brown field sites.
For land prices to fall, the Green Belt should be scrapped, and more intelligent planning policies put in place to prevent urban sprawl, and to develop attractive environmentally sustainable housing. But, for land prices to fall, first the astronomical house price bubble itself must be burst, and that requires that interest rates rise, and that the current measures inflating speculative demand for property be removed. That would act to massively reduce workers housing costs, raising real wages, spurring house building, and also facilitating a rise in profits at the expense of fictitious capital. It would act to stimulate economic activity, at the expense of financial speculation.
Labour should then take back control over the Bank of England. It should seek to burst the existing bubbles that are damaging and destabilising the real economy. It should do so, whilst preparing to ensure that the mechanisms for money transmission within the economy, required to circulate commodities and capital remain fully functional. There is absolutely no reason why a banking and financial crisis should impact on the real economy, if such provision is put in place. On the contrary, a financial crash, bursting those bubbles is exactly what the real economy requires, in order to repair itself.
Labour should use control of the Bank to raise official interest rates, and to withdraw the QE put into the economy. When share and bond prices fall, the cost of pension provision will fall along with it; when property prices crash, the cost of shelter for workers will fall dramatically too, raising real wages, and providing the basis for a rise in house building. A rise in interest rates will also mean that workers can again begin to see some safe return on their savings, rather than being pushed into speculative activity.
A rise in interest rates will not depress economic activity. If we take companies, they place their surplus funds in their bank, and a higher interest rate means they will obtain a better return on it. When those funds have reached the minimum level required to make a new investment, they will not then be borrowing money at these higher interest rates, but will simply be drawing down their own accumulated profits, stored in their bank account. Moreover, for all those millions of small and medium sized companies, they currently cannot borrow, or else in order to borrow they are forced to borrow from other sources such as peer to peer lenders, at rates of around 10% p.a. or else to use their own credit cards etc. with rates of interest up to 30% p.a.
The same applies to the millions of individual workers. The 0.25% official Bank of England interest rate is meaningless to them as they borrow at 30% p.a. on their credit card, or at 4000% p.a. on their payday loans, simply in order to make ends meet from one week to another. Far more significant for them will be the reduction in their living costs as rents and house prices collapse. More important for them, will be if a Labour government switches from a reliance on monetary policy to a return to the use of the fiscal levers so as to increase spending on infrastructure etc. so that more people are put back to work, in decent permanent jobs, at decent wages.
All that a Labour government need do is to ensure that as financial markets collapse, the payments systems of the economy continue to function, so that business can continue to pay their workers wages, and those workers direct debits for goods and services continue to be paid out from their accounts. None of that requires banks lending activities, certainly not their lending activities for speculative purposes to continue. As Marx describes in Capital III, the bankers have tended to delude everyone into the belief that all the money they advance to their customers is an advance of capital, whereas in 90% of cases, it is nothing more than those customers accessing their own funds that have been deposited with the bank. So long as a Labour government, via the Bank of England, guaranteed those deposits, there is no reason why a financial crisis should pose any problem for the real economy. It is only a problem for the speculators, and the owners of fictitious capital, who see the paper price of those assets collapse.
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