Home—Blog—You've been robbed by the Bank of England
Jan 22, 2010, 09:11
Posted byMerryn Somerset Webb
Comments (16)
Have the citizens of the US and the UK been ripped off by their central banks? SocGen's Albert Edwards thinks they might have been. Ben Bernanke has spent a lot of time over the last year making it clear that he does not consider the Federal Reserve to be responsible for the financial crisis still engulfing the world. I imagine Mervyn King feels the same about the Bank of England.
But it isn't really true. The main factor behind the ever increasing bubbles has been cheap money: the central banks kept interest rates too low for too long.
Few people who don't work for the Fed or the Bank of England bother to dispute this anymore. However the question we still don't really know the answer to is why they did it? Were they negligent? Were they incompetent? Or were they just too spineless to be prepared to put up rates and let the economy take a little pain in the short term in order to avoid a huge credit bust and its consequences later?
I've always assumed the answer was the latter (spinelessness). But Edwards has an alternative thesis. He thinks that the central banks might have deliberately – knowingly – inflated the housing bubbles in the UK and the US in a effort to distract the attention of the middle classes from the huge rise in inequality going on around them.
Over the last decade, the bulk of real income growth has gone to the already rich while the average worker has seen their income stagnate, at best, in real terms. Over 20% of US income now goes to 1% of the population. One in eight Americans now gets food stamps. That's shocking in itself but it also isn't good for economies: the rich don't need more money so they tend not to spend it when they get it – that means that grossly unequal economies tend to have under-consumption problems.
But rising house prices were, for a time, the perfect solution to both these issues. They made the middle classes feel as rich as the really rich, and, via mortgage equity withdrawal, they give them the ability to spend as though their incomes were rising. "Deliberate unspoken collusion"? Or a happy side effect that stifled potential complaints and meant central bankers were able to keep keeping rates low and hope for the best?
We won't ever know. But, as Edwards points out, what we do know is that high income inequality rarely goes hand in hand with stability. So this decade, "in the absence of a sustained housing boom, labour will fight back to take its proper (normal) share of the national cake." That will "squeeze profits on a secular basis." More seriously however "with social inequality currently so very high in the US and the UK, it doesn't take much to conclude that extreme inequality could strain the fabric of society far closer to breaking point."
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(22 January 2010, 01:04PM) Complain about this comment
Edwards is right, the central banks were neither spineless, incompetent nor negligent. The powers at be have for decades been complicit in a massive Ponzi scheme whereby banks created more and more credit to inflate the housing market which in turn produced more and bigger loans. The middle classes were duped into thinking that the rise in asset values was related to something real - as Ponzi scheme punters always believe. Gross interest payment has ballooned, and interest payments only go one way - from the cash poor to the cash rich. Hence the rise in inequality. The Fed is owned by the American banks and has simply served their interests by allowing cheap unregulated money. The Bank of England has just followed the Fed’s lead as it was instructed to by New Labour
(22 January 2010, 01:31PM) Complain about this comment
The boom and bust is a natural and inevitable consequence of capitalism. It is a little conspiratorial to believe central bankers were out to misdirect the populace - they would after all be then just deceiving themselves to a large extent. Their inability to raise rates when they should have was more down to global imbalances (China, India etc) that hid the threat of any inflation.The hard decisions were ducked by politicians.
(22 January 2010, 02:57PM) Complain about this comment
The link that rising house prices keeping the prols happy while real incomes fall is not a new response to the crisis. See Paul Krugman, NY Times. It is a strong case, but does MW want to accept its deeper meaning? The economy since the 1980s has not been a boon for the majority, despite its near-universal acceptance by the economics profession.Neither is it fair to purely blame central banks or New Labour, which shed its past to embrace the post-Thatcher settlement. The BoE was made independent. Government control was diluted if not lost. The conspiracy to government level seems far-fetched. Government may have wanted prices to keep rising, but so did the press and the people. They believed it possible. That was why I was saddened to read MW's Ms Webb recently write, Markets are never wrong. They are. The conditions that Adam Smith set for them do not exist - all people are rational? Utter nonsense. Markets boom and bust. It's down to psychology not just government.
(22 January 2010, 03:32PM) Complain about this comment
It would have been very difficult for the BoE to tackle the houding boom in the UK without explicit political support, given their restricted mandate.Political support was never likely to come. The UK economy has been kept artificially afloat by rising house prices and financial services 'profits'. Both of these are illusory sources of wealth in the long term, except to the limited extent to which property/ services are sold to overseas buyers. Without these two props it is likely that living standards for blue collar workers would have fallen noticeably, as they have in the US for over 20 years. It is not clear that this problem is fixable.
(22 January 2010, 03:45PM) Complain about this comment
Yes, central banks kept interest rates too low for too long. But I'm not sure they were spineless or negligent.Let's not forget inflation had been low for a long time and the central bankers were supposed to target consumer or retail inflation. Those inflation figures stayed low thanks to cheap Chinese imports. The central bankers' mistake was not to focus on asset prices especially property. But, in fairness, that wasn't part of their brief - certainly not in the UK.You could argue the central bankers were incompetent, but not spineless or negligent.
(22 January 2010, 04:18PM) Complain about this comment
The aggregate demand shortfall may be worsened by workers lacking the bargaining power they once had (now agreeing to wage cuts to save their jobs) while politicians think too short-term for an effective industrial strategy for jobs and may not have the will to implement a more progressive fiscal stance for fear of upsetting the rich and powerful vested interests on whom they depend.These problems are not confined to the UK or USA and the issue of inequality, house price inflation and the resulting potential for instability is recognised elsewhere, not least by the Chinese authorities who may have an unlimited capacity for repression but not without huge cost to their economy.
(22 January 2010, 06:15PM) Complain about this comment
In hindsight without a shadow of a doubt interest rates were left a little too long and too low, for sure, but a property cycle inevitably does lead to bust after a boom every 17 years or so. I worked in the industry over the last ten years and was very concerned but had little control over "the market!" The momentum on the upside was incredible, I am not sure raising the rates a little would have made a whole load of difference in the post codes surrounding the Olympic Site (E15, E2, E3, E5, E8, E9, E14, E16). It would have made more sense to lend to credit savvy investors as opposed to anybody who could pass the money laundering provisions. This was a real problem in the States and the UK, there were too many brokers pushing through cheap money (which turned out to be an expensive mistake).We should not be tinkering with rates too frequently since it takes time for the market to catchup and find its level.
(22 January 2010, 07:47PM) Complain about this comment
How to defuse the tensions resulting from social inequality? There are far too many laws and regulations, but here are a few extra ones which may make a real difference. 1. In any company or organization the top paid employee, director, owner cannot be paid more than five times the rate of the lowest paid. This is ensures that high flyers always drag the less fortunate along with them. 2. No one can own a property, domestic, civic, industrial, or commercial that they do not actually use. This stops the accumulation and ruthless exploitation of land and property, which is always quantitatively limited, as a means of unearned income for individuals, companies, banks, insurance firms, and even governments etc. This gives more people the chance to be owner occupiers of both houses and businesses. Small is beautiful. Small is more equal.
(23 January 2010, 01:58PM) Complain about this comment
To Comrade JohnAs well as everybody only owning each property they own, I think it would be a good idea to make them fly a red flag on it emboldened with the moto"Peace, bread, land - we have nothing to lose but our chains"To everyone else - I often find that incompetence, inefficiency and spinelessness are often a smokescreen for corruption so I think that Merryn and Mr Edwards could well be onto something here
(24 January 2010, 09:24PM) Complain about this comment
"...the rich don't need more money so they tend not to spend it when they get it"Maybe the rich have no need to spend much of their income, but they don't store their wealth as cash under their mattresses. Even if their monies are in bank accounts, they are being lent to the poorer 99%.You might have thought that some level of inequality was useful for stimulating personal borrowing.
(25 January 2010, 06:51AM) Complain about this comment
Rufus,This has naff all to do with Capitalism, where's the Capital, eh!?It is all regulated Corporatism, in bed with corrupt Socialist Governments, and international bankers playing the whole lot through the network of central banks they control.It's all a Socialist Ponzi scam, designed by bankers, to ratchet you towards poverty, with each boom & bust!
(27 January 2010, 03:12PM) Complain about this comment
Mister BIf you really believe that bank lending and the availability of credit is linked to deposit and savings accounts you should either :-a. google >money creation (hey here's a link to a simple explanation http://www.michaeljournal.org/moneytrick.htm) b. give up reading and commenting on financial articles
(27 January 2010, 07:52PM) Complain about this comment
It was deliberate government policy in the US and the UK to keep the middle classes happy by maintaining low interest rates and subsidized mortgages which inevitably proved unsustainable. The US has been able to do so without weakening the dollar because of its world reserve currency status. We, the rest of the world, have effectively been financing the US spending spree and gross self indulgence. There has apparently been serious talk of changing this arrangement to a basket of currencies which would force the US to be more responsible. Some people even believe that one of the US motives for invading Iraq was in response to the threat from certain Arab oil producers to demand payment for oil in Euros instead of dollars. Just imagine what that would have done to the value of the dollar and its purchasing power. Reform is urgently required in the banking and corporate world in general.
(28 January 2010, 12:39AM) Complain about this comment
1 of 2 "We won't ever know" !!!!!!!!!!!Get any book on bubbles and crashes & around 60 mins on the internet & "You will now".Then start with origins of the US Fed - Privately Run & Funded - is not audited & generates money out of thin air. Now who's interests will be No One Priority ?Intervenes in the markets "to stabilise" - read manipulate (Cheers Mr Reagan).Follow the families behind it - financing both sides of wars was a tidy money spinner.Check which big US Bank - has its employees moving to and from and top government adviser positions/Fed Positions (Kinda having the inside track on everything gives you a bit of an edge).cont ..
(28 January 2010, 12:40AM) Complain about this comment
cont 2 of 2Ask yourself why a big bank can package duff sub prime, make huge profits from selling them, then make a boatload from derivative betting against their sales.If you still haven't found them - find out who benefited from AIG being rescued - enabling them to get paid out 100% & taking out most of their competition along the way.Yawn - now either the people who"officially" run our countries have never read a bubble/crash book, or they are stupid or you are hearing a penny start to drop perhaps.So where did the money from your endowment shortfall go, where did your wipe out of your personal & Co pensions go, your house equity & future old age pension. Go back to paragraphs 1 & 2 - handy to control the media too, by the way (check a whole weeks viewing schedule or tabloid newspaper - banaal & mind numbing stuff ??)Scoff if you wish - ignorance is bliss & there are non so blind...
(30 January 2010, 06:36PM) Complain about this comment
It is odd to still see these debates about the bubble being accidental or deliberate.Please read this.http://www.independent.co.uk/news/business/news/exgovernor-george-says-bank-deliberately-fuelled-consumer-boom-441160.htmlEddie George, governor of the Bank of England, openly fessed up to a treasury select committee that he knew exactly what he was doing and the problems he would cause, but did it anyway.
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