Quantitative Easing isn’t working

There is an economic crisis, yet those who advocate quantitative easing as a solution have misunderstood both the nature and the magnitude of it. This blog has consistently criticised Osborne's austerity programme and his evidence free belief that the public sector has been ‘crowding out’ the private sector.

Now I want to look at the Bank of England’s monetary policy: quantitative easing.

Quantitative easing (QE) is often referred to as ‘printing money’. In fact it is more accurately described as giving banks cheap credit (see BBC guide to QE). The use of QE is based on the assumption that our economic system is in crisis due to a lack of available credit (a credit crunch) and a lack of lending.

The same intellectual malaise is evident in the ‘soft Keynesians’ who advocated bailing out the banking system, but now reject an economic stimulus. Their unspoken slogan is ‘save the banks, fuck the people’.

These people failed to foresee the crisis, and now fail to offer viable solutions for resolving it – in fact (if one assumes their policies are advocated rationally) they seek to make it permanent by institutionalising declining real pay and hoping the private sector will magic some jobs soon (crowding out theory)

There are several collective nouns for this group: Chancellors, Treasury ministers, leading economists or business leaders.

Today the economy does not suffer from a lack of credit. It suffers from a lack of demand. Unemployment, underemployment and wage constraint have all produced a situation in which living standards are falling.

Separately, the government has massively cut its capital spending, sucking further billions out of the economy.

Vincent Cable whinges that the banks are not lending to small businesses yet why would they in a climate of falling demand, and wider financial uncertainty? Regular pay is increasing at only 1.1% per year, outstripped by inflation at over three times the rate. It is no surprise that retail sales volumes fell 0.8% in February 2012 (incorporating a 1.5% decline for non-food items).

Some, to make the case that QE is necessary, have pointed to statistics showing that the number of small business loans rejected by the banks has quadrupled since the crisis. This ignores two very salient factors:

1. Businesses are now making more loan applications to cover (what they hope are temporary) shortfalls, rather than to invest
2. Banks, whose reckless lending practices played a major role in causing the crisis, are now more rightly more cautious
3. The same business plan in 2006/07 at a time of high employment and rising real wages was a lot more attractive to invest in than it is in 2012/13

The real need for the UK economy is not more credit, but more demand –and that means putting more not less money in people’s pockets. It would mean doing the exact opposite of what George Osborne is doing – redistributing £30bn from benefits and tax credits into the pockets of businesses via tax breaks. It would mean ending pay constraint and reversing the VAT hike (a tax on consumption). This could be funded by reinstituting the 50% rate and closing down on the loopholes used by the super-rich and big business to avoid their obligations.

Meanwhile the Bank of England’s now £325bn quantitative easing programme has clearly not been used to extend credit to meet any growing demand. Instead, the banks have used the extra liquidity to speculate in derivatives markets and to invest in safer foreign markets.

This is not to say quantitative easing is always a bad policy. It’s not, but in the current climate it has long outlived its utility. Part of the problem is the limited policy options open to the outsourced (independent) Bank of England and the lack of any coherent strategy from HM Treasury.

Instead of botched austerity, we need investment based around a new industrial policy to create jobs in sectors that meet people’s urgent needs, including housing, energy, and transport.

Cracks deepen as 'recovery' proves a myth

New figures from the Office for National Statistics confirm what most people know only too well: living standards are falling sharply as a result of the recession. And the Con-Dem Coalition’s budget measures will ensure that things get a whole lot worse.

Real household disposable income – the total income of Britain's working and unemployed populations after taxes and adjusted for inflation – dropped by 0.8% in 2010, according to the ONS. The slide signals the first drop in real incomes since 1981, also during a recession, and the biggest since 1977, when there was double-digit inflation. The decline is set to worsen sharply to about 2.0% this year as the biggest public spending cuts since the second world war begin in earnest.

Incomes are being held down or falling, whilst prices of basic necessities including food, clothing and transport are soaring. Despite historically low interest rates and falling property prices, housing hasn’t got any cheaper apart from a lucky few with short-lived tracker deals.

Chancellor Osborne has learned something from the family wall coverings firm of Osborne and Little. He’s adept at papering over the cracks, or trying to, using faint praise from the Organisation of Economic Co-operation and Development – the club of rich countries – which said: “While this budget includes hard measures, we are convinced they are unavoidable in the short term to pave the way for a strong recovery".

The trouble is there’s no chance of a strong recovery. Trying to bring one about just makes things worse. Despite adopting a series of unprecedented changes, the list of bankrupt European countries is growing rapidly.

Food price inflation brought on by the tsunami of credit that followed the 2008 financial meltdown triggered a wave of simmering revolutions in the Middle East and North Africa that is spreading throughout the region to Syria and Saudi Arabia sending oil prices to record levels despite slowing demand.

In America, the strengthening of financial services regulation is already making a bad crisis worse. According to Alan Greenspan, former chairman of the US Federal Reserve, the legislation “fails to capture the degree of global interconnectedness of recent decades which has not been substantially altered by the crisis of 2008”. Greenspan should know about these things as he presided over the growth of the credit bubble in the first place.

Greenspan, an arch-defender of unbridled capitalism says the modern economy is far too complex for regulators to understand, and to meddle is dangerous. He’s a much more old-fashioned kind of 'hands-off' guy, seeing crises as unfortunate exceptions to the normal functioning of the system.

He says: “Today’s competitive markets, whether we seek to recognise it or not, are driven by an international version of Adam Smith’s ‘invisible hand’ that is unredeemably opaque. With notably rare exceptions (2008, for example), the global ‘invisible hand’ has created relatively stable exchange rates, interest rates, prices, and wage rates.”

There is a truth in what he says, of course, in that market forces are pretty much uncontrollable. But in arguing against regulation, Greenspan is forced to open the can of worms that bedevils every one of the capitalist camps – the post-war relationship between growth and ever-expanding credit:

“The vexing question confronting regulators is whether this rising share of finance has been a necessary condition of growth in the past half century, or coincidence. In moving forward with regulatory repair, we may have to address the as yet unproved tie between the degree of financial complexity and higher standards of living.”

Like Osborne’s wallpaper, this thinly-veiled threat fails to mask the reality. Regulation or not, the majority of us will either have to live with the devastating and worsening consequences of the great crash that inevitably brought 50 years of credit fuelled growth to an end, or organise ourselves to replace the capitalist system with a sustainable, not-for-profit alternative.

Gerry Gold
Economics editor

www.aworldtowin.net

Good bank, bad bank? Peoples bank!

The European Union (EU) is expected today to approve plans for the Northern Rock bank to be split in two – so-called “good” and “bad” banks. The Rock has been state-owned since the spring of 2008.

This was an early part of New Labour’s attempts to prevent a complete meltdown after customers queued to withdraw their deposits in 2007 when the default rate on sub-prime mortgages in the United States triggered the global credit collapse.

The idea is that the “good” or profitable business will be sold back to the private sector, whilst the “bad” part containing the “toxic” non-performing loans, including the 125% mortgages pressed onto people desperate for housing at any cost, will be retained in the public sector, to be serviced from taxation.

Once EU approval is in place, the principle is likely to be extended to the Royal Bank of Scotland and Lloyds. Supporters of the plan – and there are many from all the main parties – are keen to see wider competition. They want to open the field up to new entrants such as Tesco, Virgin and a range of foreign banks like National Australia Bank – already owner of the Clydesdale and Yorkshire.

The scheme has its roots in the 1930s’ rescue in the United States of a cascade of failing banks. Today’s proponents point to its success in Sweden after the country went through a property market collapse in 1991 which threatened the financial system.

But they choose to ignore the scale of today’s crisis which has engulfed the world’s much more highly-interconnected financial system so critical to the worldwide production and trading activities that underpin the globalised corporations.

The intertwined crises of collapsing consumer demand, shrinking global trade, declining manufacturing and inactive credit markets spell the end of the post-war era of a spiralling growth of commodity production fuelled by cheap labour and mountains of debt.

Plans to restore the financial system to profitability are necessary but not sufficient to restore the capitalist economy to the growth it so badly depends upon for survival.

Throughout its three and a half centuries, the capitalist system has alternated between periods of competitive growth fuelled by the credit that relied on the impossible dreams of ever-increasing profit and the crashes that followed when the interest payments ceased. As the dust clears it reveals the massive overcapacity that must be eliminated before a renewed period of growth can begin. That is the stage of the crisis that we are in now.

The looming impact of the changing climate provides the measure of the damage inflicted on the planet by half a century of profit-motivated credit-fuelled growth. The system of production for profit must be stopped, terminated, replaced. Its replacement can be democratically-determined sustainable production by communities working co-operatively to satisfy their needs and provide opportunities to fulfil individual and collective potential.

This new era will need a system of accounting for exchange and a means of measuring and redistributing the value generated in production to fund development. It won’t need a vast edifice of speculation. Stock and foreign exchange markets can be closed, gambling in the derivatives casino ended.

With democratic control over the finance system, decisions can be made about which debts can be cancelled and which renegotiated. The “good” and “bad” capitalist banks choice is no choice at all. In their place we want genuine people’s banks that protect savings and extend social investment.

It’ll need a social revolution to make these changes, but what’s the alternative?

Gerry Gold
Economics editor
reposted from A World to Win
http://www.aworldtowin.net/index.html

Brown presents the bill

A year and a day ago the Federal Reserve, the US central bank, took the decision to instruct Lehman Brothers to file for bankruptcy after 158 years of trading. It was a case of too big to fail and too big to save. Within days, the world economy fell off a cliff and has never recovered.

With its roots in barter, exchanging manufactured goods for raw cotton, Lehman’s history is inextricably a part of the history of capitalism. The company began its diversification into financial services in the 1880s (around the time of Marx’s death). In the 20th century, Lehman was instrumental in enabling the explosive growth of profitable commodity production and exchange, notably through finding the capital for retail giants like Woolworths, then television and later computer manufacture. It also helped finance Halliburton, the oil company at the heart of the Bush administration’s war on Iraq.

At its pinnacle it was among the elite of the world’s financial services companies, actively spinning the web of debt that enmeshed the world. As the credit crunch took hold in August 2007, it closed its sub-prime mortgage lender with the loss of 1,200 jobs.

But it was all too late. A year later, its liabilities exceeded its assets to such an extent that not even the American government could bail Lehman Brothers out and it went to the wall. Today, like much of the global capitalist economy, Lehman Brothers is bankrupt but still trading. So many dead men walking.

As the world was considering the significance of the passing of Lehman yesterday, prime minister Gordon Brown was opening a new chapter in the rapidly worsening global economic crisis that went hand-in-hand with the decline of banking and finance. Brown was a key figure in ensuring the subordination of the British economy to financial interests, announcing a new “golden age” for the City just weeks before it all went pear shaped. Now he’d come to present the bill for the damage, not to the bankers, but to the assembled ranks of the representatives of the organised working class at the TUC in Liverpool. They listened with protest messages raised while for the first time he talked of public spending cuts to come after the next election.

Attempts to restore the flow of credit have failed. Global stimulus packages have concentrated on eliminating huge swathes of the global car industry, dumping hundreds of thousands of workers on the streets. Unemployment is soaring. Tens of millions around the world are already without work, soon to be homeless if they aren’t already, without healthcare or pensions. And now Brown talks of cuts.

Politicians of all parties are competing to prepare voters for the devastation to come, the price to be paid for keeping the capitalist system in existence. This bidding process finds parties competing for the right to inflict the impact of the crisis on the majority of the world’s population, forcibly if necessary.

Commentators may delude themselves with good news, but the majority will see no sign or possibility of a “recovery”. They will not benefit from an illusory “return to growth” that is in essence the prelude to a further lurch towards outright slump. Lehman Brothers was broken by fantasy financing that in the form of debt fuelled the economic boom.

And there are mountains of debt still out there with claims on real assets and future earnings. In the absence of a recovery, these assets – in the shape of jobs, pensions and homes – are likely to be wiped out by capitalist bankers and corporations.

So this is no time to be caught up in discussions about ending “unbridled free market capitalism”, nor speculating on “a realignment of world capitalism”, nor even pushing for the kind of change that would “renew capitalism in a fairer form”. These are mere palliatives that leave the basic cause untouched and untreated.

What we must now do is to acquire the power to switch from a credit-dependent system of for-profit production based on legalised exploitation of labour to production for need guided by democratic decisions based on collective ownership. That’s how to fight the cuts as well as create a sustainable future.

Gerry Gold
Economics editor
A World to Win
reposted from http://www.aworldtowin.net/

Two years into the crisis and the human toll mounts

Two years ago this week, the global capitalist economy entered uncharted territory. It started with a crisis in the credit markets – the so-called “credit crunch” – and within a year it had led to a precipitate collapse in economic output in all sectors.

The collapse of inter-bank lending in August 2007 was bad enough to prompt senior, respected commentators to declare that “the system” – they only meant the unregulated system of institutions trading in credit-derived financial products – was broken beyond repair. These contagious sentiments expressed a mounting worldwide panic exemplified by the queues of customers outside Northern Rock in the middle of the following month.

Most of the attention then as now is focussed on the financial system. Attempts to prevent the financial crisis turning into a complete meltdown produced the second transformation in the role of the capitalist state since the 1970s.

The first transformation became known as globalisation. The irresistible need of capital for expansion resulted in transnational corporations dictating policy to national governments both directly and via global agencies like the International Monetary Fund and from 1995 the World Trade Organisation.

Lobbyists for corporate interests demanded that regulation and control on the movement of capital be eliminated for all practical purposes, accompanied by an assault on workers’ income and conditions. Civil war conditions were launched against British miners in 1984. The benchmark for wages was set by the transfer of much manufacturing to China where the rate was reduced to as little as a dollar a day. Profits soared.

A series of worsening crises from the mid-nineties onwards gave warning that the years of credit-led growth were reaching their limits and that overproduction was unsustainable. As we said in A House of Cards – from fantasy finance to global crash published in November 2007:

“Then on 9 August 2007, the long period of corporate-driven globalisation of the world economy came to an abrupt end. That Thursday, major banks suddenly refused to lend to each other and a ‘credit crunch’ hardened the arteries of the global financial system.”

(free download - http://www.aworldtowin.net/about/HouseOfCards.html)

Losses from the financial crisis alone are colossal. Bank write-downs and losses currently total more than $1,500bn. The IMF has predicted losses across the financial services industry could eventually total $4,000bn, or nearly one-third the annual value of US production.

The effects on the real economy are more devastating. As the scale of the worsening crisis unfolds, millions more families are being driven from their repossessed homes, reclaimed by their owners, the banks and other mortgage lenders. Industry after industry is emulating the collapse of car-making worldwide because consumption has shrunk. Today will show that unemployment in the UK has soared to record levels, with young people making up more than a third of those without work.

This dramatic decline in the fortunes of capital changed the role of states once again, obliging them – those that aren’t yet bankrupt – and their central banks to launch a series of attempted rescue packages and the large-scale printing of money. The new bursts of credit designed to enable production to continue will have to repaid by as yet unborn generations of taxpayers, but the best that has been achieved is a temporary slowdown in the rate of deterioration.

The true cost of engineering a return to growth involves the elimination of not just failed banks, but huge swathes of no-longer profitable credit-dependent factories, farms and software houses. Workers facing the consequences will find the cost too great to bear. The system – the capitalist system of production – is broken and the cost of fixing it would be counted not just in closed factories, but in the elimination of rights, of human lives and an inhospitable planet.

This is the moment to prepare the ground for a revolutionary transformation to a society where property is held in common and goods and services are produced to satisfy needs not profits, according to priorities determined through a new democratic process.

Gerry Gold
Economics editor
A World to Win
http://www.aworldtowin.net/index.html

Darling deludes no-one except himself

The measures set out in the New Labour government’s emergency budget yesterday were designed to set pulses racing and induce a collective sigh of relief across the country. Instead, the record amounts of borrowing required will not only reinforce the economic and financial crisis but also point towards the possibility of state bankruptcy in the not too distant future.

At any other moment, the unprecedented scale of government borrowing, mostly aimed at stimulating consumption, would have seemed beyond imagination. But, even with £20 billion more now and £118 billion by end of next year, the best that Chancellor Darling said he could hope for was to lessen the severity of the downturn!

To put it bluntly, the emergency budget will not stop the avalanche of company failures, job and pension losses, personal bankruptcies and house repossessions. Initial reactions from the high streets and businesses to a 2.5% cut in VAT were dismissive and rightly so.

As Jeremy Warner, business editor of The Independent put it:

“The … reduction in VAT, which accounts for the bulk of the giveaway, will make no difference at all to low and moderately earning households, virtually all of whose disposable income is being eaten up by essentials unaffected by the VAT tax changes. Even on petrol, alcohol and cigarettes, the VAT concession is all clawed back again through a compensating rise in excise duty.”

The real problem that New Labour is incapable of tackling is that the global production overcapacity induced by 30 years of credit-led investment generated tsunamis of consumer goods which overwhelmed the market. Inevitably, consumers reached the limits of their ability to repay the debts they’d amassed under intense pressure to buy. Consumers eventually had to stop buying ever more products. Under capitalism, if people don’t buy, companies can’t sell. So the global corporations that were the result of the growth hysteria needed to sustain profits are tumbling one by one. And with the promise of future profits disappearing over the horizon, the whole house of cards is crashing to the ground. Neither Darling’s emergency measures, nor US President-elect Barack Obama’s massive stimulus package to be financed by very large deficit spending announced virtually simultaneously, can put Humpty back together again. The previous packages have failed and so must these. Remember those bank bail-outs that were supposed to get lending going again?

There is worse, far worse to come. In a research report published last week, the International Monetary Fund warned that the failure of a single major financial institution could result in losses to the derivatives market of $300-$400 billion. “What’s more, since such a failure would likely cause cascading failures of other institutions, the total global financial system losses could exceed $1,500 billion." That’s a big number by anyone’s standards.

Darling is predicting – gambling is a better word – that the record borrowing can be repaid in seven years through higher taxes derived from an economy that has returned to buoyant growth. This is delusional behaviour because a) there is a global recession in place and b) the future tax increases and public expenditure cuts needed to repay the borrowing will stop any hint of recovery dead.

The Financial Times was dismissive: “The UK consumer is now too stunned by the housing crash, stagnant wages and fears of unemployment to be coaxed into resuming the insane credit-fuelled binge of yesteryear. The government’s belief that output will contract by just 0.75-1.25 per cent next year will, therefore, prove too optimistic.”

What the paper doesn’t say is that restarting the economy after every previous crash has required the destruction of productive capacity – factories, offices, transport infrastructure, employees. It’s in the nature of the capitalist system. It’s what “boom” and “bust” means. But this time the scale and severity of the crash will be far greater than at any previous time in history. New Labour’s policies of promoting free-for-all, corporate driven globalisation and the fantasy financiers of the City have made certain of that.

Gerry Gold
Economics editor
A WORLD TO WIN