The credit crunch - an effect not a cause
Robert Henderson
Here we go again
What this crisis is not about
The money supply
The truly frightening thing
The effects of the credit crisis
How do we get out of this mess?
The economic fragility of most people’s lives
The road to a safer future
Here we go again
I am writing this article in May 2008. By the time it is published the
danger of a full blown depression may have been averted, although that
is improbable because after eight months the credit market is still
tightening despite a vast amount of governmental pump priming around
the developed world.
On the level of common humanity the hope must be that the crisis is
contained reasonably quickly, because even as things stand it will
have hurt large numbers of people both here and abroad. But there is
danger in a rapid resolution, namely, that the underlying reasons for
this economic crisis will not be admitted or even identified by those
responsible for the operation of the economy because to do so would
require a rejection of the dominant economic creed of the moment:
laissez faire..
Looking at the present mess the thought comes to mind "here we go
again". The credit crunch is simply the latest in a line of dangerous
economic crises stretching back a century an a half which were brought
about by the same fundamental problem, the abdication of government
responsibility for the economy. This behaviour began in earnest in the
1840s when the Tory Prime Minister Robert Peel started the dismantling
of the Old Colonial system (a system of economic protection under which
Britain had created the first industrial revolution) with the
abolition of the Corn Laws. Since then, apart from the period
1931-1979 when Britain was tem****arily detached from the free trade
mania by the shock of the Great Depression, the British economy has
been left largely to the vagaries of international trade, a policy
which by 1914 had turned Britain from the largest economy in the world
to one which had been overtaken by USA and Germany (who pursued very
strong protectionist policies while Britain got rid of hers),
unbalanced our economy (the British chemical industry was particularly
weak) and done such damage to British farming that by the time of the
Great War Britain was dangerously reliant on im****ted food, a
deficiency not remedied by the time of the second world war and a
mistake being repeated in our present time..
Since Margaret Thatcher came to power in 1979 the wor****p of the
laissez faire god has become more devout in practice than it had ever
been. During the previous attacks of the quasi- religious fervour there
was always in Britain mainstream political opposition to the idea
that a country should incontinently open itself up to the icy weather
of international trading competition, for example, Joe Chamberlain’s
attempt at re-introducing protection under the guise of Imperial
Preference around the turn of the 19th Century. It is also true that
throughout the period of laissez faire up to the Depression, the
state greatly added to the public provision it provided with
taxpayers’ money, intervened with increasing frequency to regulate
business practice and allowed more freedom to trade unions, all of which
mitigated the effects of the ostensible policy of laissez faire.
There was also no question during that time of British industries of
strategic im****tance such as coal mining or the public utilities being
sold off to foreigners or, indeed, of a wholesale ****ft of owner****p
from British to foreign hands of British companies such as has
happened in the last 25 years.
Thatcher introduced something quite new. For the first time in history
a British prime minister and government actively welcomed the wholesale
destruction of strategically im****tant industries on the grounds that
they could not compete with international competition. It was the
doctrine of comparative advantage pursued by a government in an
advanced economy to a degree never previously seen.
Thatcher was also responsible for one great political act of folly in
the name of laissez faire when she successfully fought for the
Single European Market. The consequence of this was to rob Britain of
its ability to economically favour its own industry (beyond what was
already being done) and gave any citizen of another EU country the
same rights as a British citizen to be employed in Britain or for any
foreign cor****ation to bid for any public sector contract offered in
Britain.
Her ultimate triumph was to not only drive the anti-laissez faire
strain from her own party, but to eventually force the rest of the
British political mainstream to follow suit as they became ever more
desperate for power the longer they remained in opposition. The upshot
today is that the three major political parties in Britain have as
articles of faith both a commitment to free trade and the belief that
private enterprise is preferable to public provision in virtually every
area or life.
The latter belief has created a novel situation in Britain. Great
swathes of economic activity which were once controlled by the state -
everything from the great nationalised industries to prisons - have
been either sold off or contracted out to private companies. Once
privatised , these erstwhile public operations have become prey to
foreigners because post-1979 British governments’ commitment to
laissez faire has become so complete that we have reached the stage
whereby anyone is allowed to purchase any British company , no matter
its strategic im****tance, and most public contracts are given to the
highest bidder regardless of their provenance. Nor in most instances,
(because of Britain’s member****p of the EU) can the privatised
industries be subsidised by the taxpayer, a particularly difficult
restriction in the case of the old public utilities.
Today, British utilities such as gas, electricity and water are largely
in foreign hands , our major air****ts are owned by Spaniards, we no
longer have serious mining or ****pbuilding industries, and our
largest native owned car manufacturer is the company which produces the
three-wheeler music-hall joke of a car, the Reliant Robin. In
addition, many of the iconic names of British business - think
Bentley, Roll-Royce cars, Tetley Tea, ICI, Cunard, British Steel for
starters - have fallen to foreign buyers, while the supposed flag****p
of the British economy - the City of London - has seen the wholesale
transfer of British merchant banks to foreign owner****p. The present
Government has even stood sanguinely by while the London Stock
Exchange has come under persistent foreign take-over attempts.
All of this is symptomatic of the neo-Liberal mentality which has
brought us to the brink of what is probably the most dangerous economic
crisis since the Depression. Perhaps it may turn out to be even more
disastrous than that dire episode because countries throughout the
world (including Britain) are now so much less self-sufficient than
they were in the 1930s while the scope and speed of communications are
beyond anything imagined let alone in existence during the Depression.
Most problematic are the immense and entirely novel op****tunities
permitted by of digital technology., a technological development
particularly pertinent to the money markets which are at the root of the
credit crunch. No one living remotely understands the medium term let
alone the long term implications for the money markets of the
creation of a universal market for every form of financial instrument,
which is what the internet potentially provides, or its potential for
destabilising currencies. All that can be done at present is guess and
guessing when the lives and prosperity of entire populations are at
stake is a criminally reckless gamble.
What this crisis is not about
It is not about levels of government spending, although that is probably
the next great economic shock which will hit the Britain as the economy
slows, tax revenues stagnate, the PSBR grows and the Enron-style "off
the books accounting" involved in the Public Private Partner****p (PPP)
and Private Finance Initiative (PFI) schemes becomes impossible to hide.
What this crisis is about is the virtually unrestrained working of
private enterprise, which has created a titanic pile of indebtedness
ranging from dangerously generous mortgages to unsecured debt, much of
it promiscuously and casually granted with a significant pro****tion
going to people providing false information about their financial
circumstances.
At the heart of the crisis lies the bundling of risky loans
(especially mortgages in the USA - the so-called sub-prime mortgages)
into financial packages . These have been sold on and treated not
as toxic debt but much better quality debt, debt which could be used by
the banks as collateral against which to borrow. Eventually the game
was up as people (especially in the USA) began defaulting on payments
big-time and banks stopped lending freely to one another because much
of the debt they held, was seen for what it was, toxic. Banks had to
write off bewilderingly large amounts in bad debts - £5 billion here,
£10 billion there - and their store of useable collateral to set
against future loans was much reduced.
This crisis is a peculiarly difficult thing for free marketers to fit
into their ideology. They cannot rationally blame it on too much
government interference, because British financial institutions have
been allowed to run their affairs largely unchecked by government for
the better part of a quarter of a century , a process begun by the
Thatcher Government when they threw away credit controls, permitted the
de-mutualisation of building societies and their transformation into
banks (which placed them under less rigorous rules regarding what they
could borrow and lend) and generally slackened financial controls and
state oversight.
These practices have been assiduously followed by successor British
governments, who have added their own irresponsibility to that of
Thatcher by failing to understand and control the developments of exotic
financial instruments such derivatives and by relinqui****ng the power
to set Bank Rate (Bank Rate being ,in theory at least, set by a body
independent of the Government, the Monetary Policy Committee (MPC) of
the Bank of England) and by embracing fiscal restraints imposed by the
EU , such as restrictions on state aid to industry and restrictions on
the setting of VAT rates.
The upshot of all this is that the present Government is left with only
two very general means of controlling the economy under its direct
control, the variation of taxation and of government borrowing and
spending . These are hopelessly inadequate measures, being
instruments which are far too blunt to deal efficiently or even at all
with the multifarious financial problems which arise in an advanced
economy. If, for example, credit is growing too fast, raising taxes
to take money out of the economy may actually fuel further borrowing,
at least in the short term, as people try to service the debts they have
and to maintain their standard of living, while the additional taxation
will have the unwanted extra effect of depressing the economy to some
degree. Alternatively, cutting taxes could conceivably reduce
borrowing, although human nature being what it is people might actually
feel more confident about the future and hence even more willing to
borrow. However, even if such action reduced borrowing it will tend to
worsen inflation because the amount of money put into the economy will
probably be larger than any reduction in borrowing because a tax
reduction will effect the population generally while the propensity to
borrow, especially heavily, is concentrated on less than the entire
population.
Of course, all economic interventions by governments have consequences
which go beyond the narrow desired ends of the intervention, but the
more economic weapons in a government’s hands , the greater the
likelihood that they will be able to find one which is best suited to
solve a particular problem with the minimum of unwonted side effects.
For example, if the multiplier of salary for mortgages had been
remained by law no more than two times salary throughout the past
quarter century, the vast increase in house prices over the period
would have been impossible because the market would have been pegged
back by what most people could afford to borrow.
The other pernicious thing which Thatcher introduced into Britain was
the "greed is good" mentality. Of course she did not ever put it in
such blunt terms, speaking instead of how people should be aspirational
and find their freedom by becoming home owners and shareholders.
She may even have sincerely believed that this was the way to the
promised land of independent minded individuals who took
responsibility for their lives. The problem with this view is that it
takes no account of human nature or its sociological expression.
Ironically, the effect of laissez faire is to do what Marxism does,
reduce human life to a series of economic relation****ps.
If personal material advancement is made the prime aim of people’s
lives, they tend to become more selfish because they are focused on
only advancing the narrow material interest of themselves and those
close to them. It is also true that the richer a person is the less
social engagement with their neighbours they are likely to have, the oft
lamented loss of community. (There is a simple explanation for this:
the poorer people are the more they are reliant on the help of others. )
Add in the strong "keeping up with the Jones" mentality within homo
sapiens and the increasing job insecurity wrought by the destruction
of traditional British industries and practices such as off-shoring ,
the effects of mass immigration and the ceaseless propaganda retailed
by the mainstream media and politicians that Britain and Britons must
be competitive and you have the recipe for a society which is
increasingly ill at ease and ill natured.
The great expansion of credit generally has a poor moral effect. The
reality is that millions of people have committed the criminal offence
of obtaining money under false pretences by making false declarations to
lenders. These crimes are rarely punished because the lenders rarely
prosecute and the police do not want to know. Politicians remain silent
because they realise the vast extent of the criminality which could
never be dealt with simply because of its size.
There is also fault on the side of some central banks, most notably
the Fed, which kept money too cheap for a long time The author of this
cheap money was Alan Greenspan, who was treated with quasi-religious
awe by politicians and so-called financial experts alike while he was
running the Fed. Come the credit crunch and the knives came out for
him: " It is clear that monetary policy was too accommodative. Rates of
1 per cent were bound to encourage all kinds of risky behaviour." (The
American monetarist Professor Anna Scwartz in the Daily telegraph 13 1
2008.) Easy to say after the event. The trick is to say it when it
matters, during or preferably before the event.
The money supply
There is a vital technical reason why government should control credit:
it increases the money supply. To understand why it is necessary to
understand what constitutes money, a concept which is far from
straightforward.
A currency based on precious metals formed into coins is a relatively
simple thing, because it is to a large degree self-regulating. The
coinage has an objective value in itself. The practices of debasing the
quality of the metal or of clipping the edges of coins to remove some of
the metal may have been common, but such things can be tested
objectively by anyone with the requisite knowledge, for example, by
weighing the coin. Moreover, the amount of physical money is limited
by the availability of the precious metal (s) used in the currency.
Once a country moves from a physical currency based entirely on a
precious metal to one which remains, in theory at least, fully
convertible to the precious metal, but which uses paper money
alongside coins made of the precious metal, government ‘s role is
expanded in im****tance because it is ultimately the guarantor of the
currency's integrity. This is so because the promise of full
convertibility of the paper money to the precious metal could not be
met if most, let alone all, of those holding paper money decided to
demand at the same time coins made of the precious metal to the same
value, or, in extreme cases, a quantity of the metal to the value of
the paper money. (Britain’s return to the Gold Standard after the
Great War was of the latter nature, being a promise to convert paper
money to bullion - the Gold Bullion Standard). To minimise the chances
of a run on the currency caused by too many people demanding that
their paper money be converted to the precious metal, wise governments
in such circumstances restrict the amount of paper which could be
created by placing legally required ratios between paper money and
the amount of the precious metal held.
The final stage in physical money is when the link between a precious
metal and the currency is broken and the entire currency rests upon
trust. At that point a currency is entirely at the mercy of
governments
because there is no natural restraint on how much money is printed or
coined in base metals.
Describing physical money is the easy bit. The concept of money
becomes complicated the first time someone makes a loan. That has the
same effect as someone depositing money with a bank: where one person
had the money before, now two have it. Once a society develops a banking
system government needs to intervene. That applies even in a supposedly
100% precious metal based currency, because even then there are
primitive financial instruments such as bills of exchange which
effectively act as money.
The more advanced a society is, the less im****tant physical cash
becomes as the instruments by which the money supply is multiplied
increases. To see what a confused state we are in today we need only
reflect on some of the various measures of the money supply which have
been used in r modern times in attempts to quantify the money supply.:
M0 is the total of coins and notes in circulation plus banks’
deposits at the Bank of England.
M1 is M0 plus current account deposits
M3 is M1 plus all other types of bank accounts (deposit accounts,
foreign currency accounts, public sector accounts)
Derivatives more than any other financial instrument cast doubt over
what actually constitutes money any more. It is not cash, not cash plus
bank accounts, not even cash plus bank accounts plus equities plus
policies such as life assurance. The measures of the money supply M0,
M1, M3 are becoming increasingly inadequate.
The crisis has called the bluff of the free marketers
Most of the laissez faire disciples have kept very quiet during the
crisis. There have been precious few if any calls for central banks to
stand back and do nothing. Even in the case of Northern Rock (see below)
the sup****ters of the supposed wisdom of the Adam Smith’s invisible
hand have been loth to say that it should simply be left to go to the
wall.
Faced with the dangerous mess they have created these ostensible free
marketers have done what they always do when the market fails, they have
run to government for rescue. The consequence is that the ordinary
person gets the worst of all worlds, for they not only have to suffer
the effects of the failure of the market to self-regulate, in this case
a contracting of the credit market, but they also have to fund the
rescue of financial institutions either directly in the case of Northern
Rock by nationalisation or indirectly through the extension of credit by
the Bank of England (as lender of the last resort) to introduce money
into the market for the financial institutions to borrow .
Commercial banks throughout the developed world have run squealing for
help to governments, while the major Western central banks have reacted
with behaviour ranging from the dramatic to the reluctant. The Fed has
led the way sla****ng interest rates dramatically and making tens of
billions of dollars in loans to the banks available to the money markets
, much of it on distinctly questionable collateral. The European Central
Bank (ECB) has been more cautious on interest rates but has also made
vast sums in loans available to banks.
Britain has somewhat tardily followed suit , reducing Bank Rate by three
quarters of a per cent since September and belatedly providing billions
in loans to the banks on collateral of ever decreasing value. The
disquieting thing is that no matter what action has been taken, the flow
of credit remains stubbornly locked and governments including
Britain’s, are reduced to throwing more and more money at the banks
with less and less assurance that the money the taxpayer is risking will
ever be repaid.
On 19 April the BoE it was re****ted (for example, Daily Telegraph) that
not only will it inject a further £50 billion into the market with the
banks using some of the sub-prime mortgage products they invested as
collateral , but that the British government will also underwrite credit
card debts held by the banks. All this on top of the eye-watering
Northern Rock liabilities
September 2007 saw the first run on a British bank since the 19th
Century with people literally queuing round the block to get their money
out.. A converted building society, Northern Rock, had been operating a
reckless business plan whereby their core business of mortgages was
predominantly funded not by deposits but by borrowing on the money
markets. When the credit market tightened Northern Rock were left
stranded and were forced to go to the Bank of England (BoE) as the
lender of the last resort, which made a loan of 25 billion to them.
Once that news became public the panic began and the Government was
forced to guarantee all Northern Rock deposits which committed the
taxpayer to a further £25 billion, a total of £50 billion including
the loan. The Government then left the bank in limbo until February
2008 as it desperately tried to find private buyer for the bank .
Eventually, it had to admit defeat and nationalise the bank , exposing
the taxpayer to another £50 billion of risk as it took over
responsibility for the bank s mortgage book. The taxpayer is now in for
a potential liability of £100 billion To put the scale of the risk in
context, the Red Book forecast for total Government expenditure in
2008/9 is £617 billion, so the Northern Rock risk amounts to around
18%of total Government expenditure for this financial year.
All this is worrying enough, ,but just imagine what will happen if a
few more banks go mammaries up. It is as reckless an act by a
Chancellor as you can find in British history., for not only are
massive liabilities being put around the neck of the entire population,
a precedent has been set.. If other banks (and quite possibly much
larger banks) get into the same position, it is difficult to see how
the government could underwrite another Northern Rock let alone one of
the clearing banks., especially in the light of the extensive borrowing
facilities the BoE has extended to the banks generally.
Yet it is difficult to see what else the Chancellor could do. If
Northern Rock had folded the rest of the banking sector would have been
placed in real danger. The position was not helped by the drawn out
attempt to find a private buyer for Northern Rock (a symptom of the
laissez faire mind set of the Government), but that was merely a
detail, not the heart of the problem. Had the Government nationalised
the bank immediately the problem was known , the liabilities would still
be on the taxpayer. The scandal is that the lax credit situation was
allowed to arise, something which could have been prevented by proper
government behaviour over the past quarter of a century. .
The truly frightening thing
The truly frightening thing about this crisis is that the people who are
supposed to understand the financial markets the best, the central
bankers, are completely at sea. The Bank of England (BoE) has admitted
that its understanding of the money markets is inadequate, viz.:
‘Amid accusations that it failed to respond quickly enough to the
crisis at Northern Rock, the Bank has admitted that it is struggling to
determine the impact of the credit meltdown on the economy. Charles
Bean, chief economist, said assessing conditions in the economy is
"subject to considerable uncertainty".
Writing in the Bank's quarterly bulletin, Mr Bean said: "One im****tant
step in analysing monetary demand and supply shocks involves improving
the Bank's information about credit conditions."
‘The Bank's admission that it needs to improve its understanding of
the credit markets comes as John McFall, chairman of the Treasury Select
Committee, voiced his frustration following the appearance of Bank of
England staff before the government watchdog. In an interview with
The Daily Telegraph, Mr McFall said: "The responses that people gave
were unconvincing as a whole. I'm looking at the system and asking the
question: Is it working? And it's not working." ‘ (Daily Telegraph
We don't understand the markets, BoE admits By Jonathan Sibun
24/09/2007)
A failure of oversight by central banks both here and abroad has been
compounded by the long period of very low interest rates led by the
central bank rates of the leading currencies, most notably by the
Federal Reserve (the Fed) in the USA, , which kept money too cheap for a
long time, thus encouraging people to borrow. The prime author of this
cheap money was Alan Greenspan, who was treated with quasi-religious
awe by politicians and so-called financial experts alike while he was
running the Fed. Come the credit crunch and the knives came out for
him, vide the famous American monetarist Professor Anna Schwartz: " It
is clear that monetary policy was too accommodative. Rates of 1 per
cent were bound to encourage all kinds of risky behaviour….the Fed
failed to confront something that was evident. It can‘t be blamed on
global events." ( The Daily telegraph 13 1 2008.)
The inability of everyone from bankers to governments to provide a
solution or even understand what is happening is palpable. Gordon Brown
ordered a "summit" with bankers and his chancellor Alistair Darling
railed against the irresponsibility of the banks for reckless lending,
Massive amounts of public money have been ploughed in ever more
desperately, without the squeeze on lending loosening : ""The Bank
confirmed it would swap treasury bills for premium asset backed debt
owned by the banks. Banks have six months to use the facility. The w
swap is for 12 months and banks can ask for two year-long extensions,
making a total of three years….. The Bank has put no ceiling on the
scheme….. DT 22 4 2008 Banks hail £50bn boost to liquidity . That it
has had no effect is unsurprising because the banks have used the money
to shore up the holes in their balance sheets .
As for leader of the Tory Party, a high priest of non-intervention,
here he is speaking before a meeting with the Council of Mortgage
Lenders (CML): ’Cameron said lenders had to learn lessons from the
"huge credit binge". He told the BBC that banks and building societies
should consider tapering the rise in mortgage payments, as well as
giving advice to customers and switching some to interest-only loans, to
prevent a boom in mortgage arrears and repossessions. "There's an even
greater cost for them if they don't do this," he said. "I believe in
something called social responsibility: rather than just always seeking
a regulatory answer, we should be asking banks and building societies,
who are responsible organisations, to act responsibly, to learn from
each other and to make sure they do everything they can."’ ( David
Cameron tells lenders to ease loan rates - Daily telegraph 12 12 2007).
The banks’ response: to put two fingers up at his request.
The effects of the credit crisis
The entire economy is rudely affected by a sudden shortage of credit.
Apart from hyperinflation, there is no more toxic disease which can
affect a modern economy driven, especially one primarily on consumer
spending. The reduced availability of credit at any price causes an
economic slowdown. More expensive credit causes people and organisations
to draw in their borrowing horns. The reduction in the amount of money
available to spend reduces demand. Reduced demand and more expensive
credit drives down profits at best and puts companies out of business at
worst. Wages are depressed and jobs are lost. This reduces demand even
further.
People habituated to debt find they cannot service what they owe and
default. That is especially im****tant in an economy like modern
Britain’s where a large number of people have built their lives on a
continuous stream of credit , especially from credit card companies the
re-mortgaging of their home. Things which are heavily dependent on
credit, most notably property, lose value. People either cannot pay a
mortgages or find themselves unable to sell either at all or because the
price they could get would be much less than they owe on the property.
Even those who are do not end up in a position of negative equity find
they have great difficulty in selling , both because prospective buyers
cannot get a mortgage or because other people are unwilling to sell.
Those wi****ng to move, especially if they wish to trade up, find they
cannot easily get a new and larger mortgage.
Britain is more exposed to recession than most because her economy is
built primarily on consumer spending , much of which is on
non-necessities. Such an economy is inherently more fragile than one
which is primarily rooted in the production and consumption of
necessities, because it is very responsive to changes in economic
circumstances, in the language of economists, demand for much of what
is purchased in Britain is very elastic. .
How do we get out of this mess?
The honest answer is there is no certain escape. Nor is a "soft"
economic landing likely. Circumstances are forcing more prudent lending
behaviour onto private financial institutions, with substantial deposits
being required before mortgages are granted, the barking mad multipliers
of six or seven times salary for mortgages vani****ng, credit card
limits are being reduced, cards withdrawn and new card applications b
refused. Much more commonly. Unsecured personal loans are being
subjected to the same type of scrutiny. The problem is that this is all
happening in a rush which creates a tremendous shock to the economic
system rather than a controlled decline of credit.
All this will probably cause a sharp contraction in the economy. The
creates a dilemma for the BoE. Its remit is to keep inflation close
to 2% as measured by the Consumer Price Index (CPI). Inflation is
significantly above that and showing every sign of rising. According to
its remit, the Bank should be raising rates not lowering them. Yet the
BoE has cut Bank Rate by three quarters of one percent already and is
being urged universally by private business and many politicians to cut
further and quickly.
The likely outcome of such a policy would our old friend stagflation.
- the growth in UK output was down to a miserly 0.4% in the first
quarter of 2008.
The great problem is the dependence of housing to drive the economy.
There is no painless way out of our present predicament. If house prices
are kept high by low levels of house building and continuing mass
immigration an entire generation will find themselves stranded in a non
man‘s land where they can neither find good rented accommodation at a
reasonable price . Contrariwise, if there is a correction which brings
housing within the reach of first-time buyers we shall have a massive
problem of negative equity which will mean existing home owners cannot
move and if their homes are re-possessed, being burdened with ongoing
debts as their homes are sold for less than they owe..
The economic fragility of most peoples lives
Ever since Harold MacMillan declared in 1959 the "We’ve never had it
so good" British politicians have been religiously telling Britons
that they are getting wealthier. To sup****t this claim they point to
such things as the growth in owner-occupation , the myriad of electronic
consumer goods, holidays taken abroad and cost of living indices such
as the Retail Price Index (RPI) and the Consumer Price Index (CPI).
Most people have tended to take this as a given until fairly recently.
They have ignored the fact if it takes two incomes to maintain a
family where one was sufficient before, that is not wealthier. If most
people cannot afford to get on the housing ladder when once they could,
that is not wealthier. When the price of most essentials is rocketing
that is not wealthier. When the Government uses bogus cost of living
indices which ignore housing costs and council tax that is not a true
measure of purchasing power.
Data released by the Office of National Statistics showed that household
incomes fell last year in real terms, and have risen by only £2.25 a
year on average since 2001. The reality is worse because these figures
based on the bogus CPI measure which excludes housing and energy costs.
In addition, a majority of the British population do not have savings
which would allow them to survive for two months and a large segment of
the population lives on incomes well below the average wage. A true
recession will hit millions of people very hard indeed.
What can be done to make a safer future?
If the crisis is overcome it will be because governments in the
developed world have intervened dramatically not because the workings of
the market has solved the problem. Responsible governments have to
concern themselves with the totality of society. They cannot simply say
, apart from basic laws such as against assault and theft , we will
leave it for each individual to act as they will regardless of the
effect on the society as a whole. There needs to be a sea-change in the
mentality of politicians to recognise that government has a vital role
in controlling the economy, not the heavy hand of nationalisation or a
hideously complicated regulatory regimes, but simple and effective
measures such as restrictions on credit and the use of exotic financial
instruments and the protection of strategic industries such as farming
and energy supply.
Back to the future is the answer. We need to create a different moral
climate. As little as thirty years ago people still tended to look upon
debt as something to be avoided. For the most part people saved up for
things they wanted. Part of that caution was enforced because credit was
nowhere as readily available as it is now although we were already into
the age of the credit card. But much of the frugality was simply
cultural, people had been brought up to feel debt was something
loathsome and bankruptcy next door to theft. This was a Britain where
the morally vital mechanism of shame still had its place. T
The credit which was on offer almost always came with some pretty strong
strings attached. If you wanted a mortgage you had to save with a
building society for quite some time to established your credentials.
When a mortgage was eventually granted, the amount you could borrow was
restricted both absolutely (there was an upper ceiling of £13,000 in
the 1970s) and by sensible multipliers of household income (commonly
twice income and often the mortgage multiplier was applied only to the
main wage earner’s pay) . 100% mortgages or anything approaching them
were not to be found. A deposit of 10% of the property’s price would
have been the minimum required and in many cases more would have been
asked. Bank loans required a similar establishment of creditworthiness
over a decent period and credit card limits were modest. If anything was
bought on hire purchase, a substantial deposit was required. The
consequences of such a regime was that far fewer people got into serious
financial trouble than happens today.
Of course the past cannot and should not be imitated slavishly because
circumstances change. But direct governmental controls could be
instituted. A few examples of what might be done. Mortgages, the
multiplier of salary used to calculate mortgages should be a maximum of
three and a minimum deposit of 10 per cent. The re-mortgaging of owner
occupied property to release capital and buy-to-let mortgages to be
outlawed. Hire purchase: a minimum of 20% deposit with the monthly
repayment no more than ten per of the monthly net pay (net pay to be
that left after deduction tax, National Insurance and the repayment of
any existing debts). Bank and allied loans: to be granted on the basis
of
There is also a need to tighten up checks on credit worthiness. Lenders
have been incredibly lax about the information that prospective
borrowers supply to them. That is a a particular problem with credit
card issuers who tend to accept whatever the lender says, but it is also
a significant problem with mortgages with people allowed to
self-certificate their earnings in some cases. The laxity has its roots
in the belief by the lenders that they can reliably calculate the
percentage of borrowers who are poor credit risks who will default., and
in the case of loans secured against property, that house prices will
continue to rise rapidly, thus increasing the equity the borrower has in
the property. The events of the past year have shown that they cannot
reliably make calculations of defaulters nor rely on house price
inflation to increase equity..
The true nature of most economists and allied financial "experts" is
being starkly exposed. Even academic economists with no obvious
commercial axe to grind are worse than useless for economic theory is
next to worthless because its predictive power is pitifully weak, their
success predicting the future is on a par with betting tipsters. As for
financial "experts" with a direct commercial interest to sup****t, they
are s****-oil salesmen who neither understand the mess they are making
nor care provided they can pocket a profit before the balloon goes up.
Politicians need to be weaned away from believing that economists and
financial analysts have any meaningful expertise and concentrate
instead on the lesson of economic history. (This is precisely the
course I have always followed and it allowed me to predict the present
crisis in advance of it happening - I began writing about the "the
Great Crash of 2008" in July 2007. )
The greatest problem is overcoming the wor****p of laissez faire which
has developed amongst the British elite over the past thirty years .
The idea that the market will produce the best result has become an
article of faith amongst many of those who have the power to determine
what government does, both in Britain , and to varying degrees, amongst
governments throughout the First World.
The blindness of the true laissez fair believers is a massive obstacle.
Here is one of the most devout, Simon Heffer : "Why, when the world
financial markets are so close to the apocalyptic, are our politicians
so divorced from these realities? (- - - - - - -) Reality can, though,
only ever be postponed, not cancelled. We had in consequence of this the
three-day week, Heath's two election defeats of 1974, inflation at 26
per cent by 1975, food subsidies, tax on unearned income at 98 pence in
the pound, the International Monetary Fund brought in to run the economy
and, inevitably and eventually, three million unemployed. This was not
all Heath's fault. It was the fault of the consensual cowardice,
sentimentality, ignorance of economics and downright fear with which
most politicians had agreed to run the economy since 1945. To break this
spell required someone to see the nature of the problem, to have the
drive to change things utterly, and to convince the electorate to allow
them a chance to lead Britain out of the mess, whatever pain was
required: hence Margaret Thatcher. .….That means, first and foremost,
a serious cut in public spending. There will be
job cuts - mainly in the public sector - as a result. But tax cuts to
stimulate growth in the private sector can be deployed to offset this.
There needs to be a tight control of the supply of money. Interest rates
may have to go up, not down - definitely not down. There need to be
bankruptcies because, as the late Professor von Hayek correctly pointed
out, it is only when we have these that we have a sign that efficiency
is returning to the economy. In short, the public, indulged for so long
by an economically illiterate and cynical government, has to be told the
party is over. " TELEGRAPH 19.3.08 -What David Cameron is unable to say
By Simon Heffer
This is not rational behaviour so why are people such as Heffer
engaging in it? The answer is that our elite has been firmly captured by
a harmful ideology. The true believers within the elite have succumbed
to what the evolutionary biologist Richard Dawkins calls a meme, a
mental virus which takes over a person's thought processes in a
particular area. Classic examples are religions and political
ideologies. In this case the meme is that of laissez faire
economics.There is a great deal of psychological comfort to be found in
a fully fledged ideology such as laissez faire because it removes the
need for critical thought. The ideology is used as an algorithm. All the
individual has to do in any situation is to ask what the ideology
requires by way of action. The fact that the action may be harmful or
the ideology objectively at odds with reality is emotionally unim****tant
for the individual. What matters is that an answer has been found which
is compatible with the ideology. This is especially appealing to the
less intellectually curious
Psychologically, political ideologies are akin to religion and their
practitioners behave in an essentially religious manner. For example, in
the case of laissez faire, its disciples chant "let the market decide"
in the manner of Christians saying "God will provide.
There is also the problem of politicians who do not care about laissez
faire per se, but who go along with it as a career device and because it
offers rich personal rewards. Corruption has in effect been legalised
with politicians getting their pay-off with very lucrative sinecures
after they leave political office. Under our present circumstances any
regulatory regime is unlikely to be conscientiously applied, because the
regulators will be only too aware that the politicians who ultimately
employ them do not want it to be conscientiously applied. Indeed, many
of the regulators will share the laissez faire ideas of the political
class. Senior people now move backwards and forwards between public
service and private enterprise and there is always the risk that a
regulator will be swayed in their operation of any regulatory regime by
the prospect of future employment in the industry they are regulating.
There need to be much stricter legally enforceable bars to both
politicians and public servants having any association with those they
have dealt with while in office.
I will leave the last word to Roger Bootle, managing director of Capital
Economics:
"Not long ago, banks and other lenders were falling over themselves to
lend on wafer-thin margins to people and propositions which their
predecessors would not have touched with a bargepole: 125 per cent
mortgages; huge multiples of earnings; self-certification. Now the
lenders are shutting up shop and fancy mortgages have disappeared like
melting snow. Both approaches cannot be right.
"The silence about the cor****ate behaviour which led us to this pretty
pass is scandalous. Come off it boys, you were sucked into a bubble of
the classic sort. You were persuaded to believe that nothing could go
wrong. Yet any study of financial history would have set the alarm bells
ringing. But do you ever read any? To his great credit, the Governor of
the Bank of England warned explicitly and publicly of the risks. But did
you listen? Outside commentators and analysts, and even, in some cases,
your own in-house experts, pointed out the over-valuation of property.
But did you pay any attention?
"We cannot go on like this. There are all sorts of ways in which banks
must be restrained and regulated to be better behaved in future,
including with regard to their remuneration packages. But the structure
and behaviour of boards and banks' procedures for assessing risk should
also be an im****tant part of this reform.
"Supposedly the justification for the gargantuan pay packages of recent
years has been the supreme cleverness of bankers. Yet so much of modern
banking is a form of gambling. Those clever bankers, nodded on by their
gilded boards, have done the equivalent of put a few billion quid on the
3.30 at Newmarket - and lost. Clever or not, what they really need more
of is not cleverness but wisdom. And what they need less of is money.
(Credit crisis shows that banks need wise men not wide boys Daily
Telegraph 5 5 2008)
--
Robert Henderson
Blair Scandal website: http://www.geocities.com/
blairscandal/
Personal website: http://www.anywhere.demon.co.uk
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