How housing illustrates the nature of the multiple crises we face
By Mike Treen
August 31, 2021 — Links International Journal of Socialist Renewal reposted from Converge — Probably only one number is needed to explain the current housing crisis. Total mortgage lending increased 50% in the year to June 2021 to reach $97,797 million compared to $65,129 million for the June 2020 year. Most of the new lending went to speculators rather than new home buyers. This is all a direct consequence of Government policies that give almost complete free rein to banks to create and allocate debt without almost any control. This has been compounded by the Reserve Bank printing money to buy bonds and drive down interest rates. It offers banks virtually free money to lend to whoever they want.
Despite the pandemic and associated economic downturn it has created an extraordinary feeding frenzy by the property speculators. Prices as a direct consequence went up 12.3% in 2019 and 19.3% in 2020 and have continued to surge at around 20% in the first half of 2021. The month of March 2021 saw record lending of $10 billion bringing the total mortgage debt to $305.9 billion.
At the end of March 2021, the Government announced measures to tweak this system by capturing some of the capital gain of some of these speculators with changes to the so-called "bright line" test for tax liability, and reducing the ability to deduct interest off their loans against rental income over the next four years. Other measures included a few billion dollars more to help open up new land for private housing but this was described as so small it was almost a rounding error. And of course, any new private housing just becomes part of the market for future speculation. These measures will only marginally impact the extraordinarily inflated market.
Rescuing the wealth of the owners of big business
The Reserve Bank emergency measures to rescue the economy from the threatened economic collapse was directed at rescuing the wealth of the owners of Big Business not meeting the needs of the big majority of working people. To a large extent, the same can be said for the economic rescue package being carried out by the Government which has largely involved giving money to businesses just to stay in business. There are no limits imposed on executive salaries, shareholder returns, or keeping on staff long-term so the owners of those businesses just carry on as their normal greedy selves.
There will be problems down the road from the Reserve Bank simply printing the currently planned $128 billion dollars and then lending it to the Government to run budget deficits or giving that money directly to the banks at zero interest to loan on to speculators in the property market. We are already seeing the surge in property prices as one obvious negative that has occurred almost immediately.
"House prices nationally are now 12.4 times the average wage. Home-ownership is at a 70-year low. Rents are at record highs, rising by an average 4.5% a year in the last decade," reports Stuff. Renters continue to be driven into poverty. Statistics NZ had already reported that "The proportion of renting households that spent more than 30% of income on housing costs rose from below 20% in 1988 to over 40% in 2019". Widespread homelessness is a direct consequence.
Declining home ownership
The escalating house prices have however made owning a home increasingly unattainable for many. Homeownership rates are now in a steady decline from 73.8% of homes in 1991 to 62% today. Total mortgage debt is now at $305 billion - up over 50% in the last five years. Overall household debt has gone from the equivalent of 50% of gross domestic product (GDP) in the late 1970s to over 160% today. Household debt to income ratios is also extremely high and dangerous at 165% - double the level of the mid-1990s.
Households with mortgages have on average three times their disposable income in debt. But 40% of recent borrowers have more than five times their income in debt. This level of banking debt can become a problem with an economic shock. This is what the International Monetary Fund (IMF) told the Government in 2017. As Thomas Coughlan reported in Newsroom (9/5/17):
"In March (2017), after one of its regular visits to New Zealand, an IMF mission concluded while the immediate outlook for the New Zealand economy was good, housing affordability and the stress this placed on the banking system was a problem. If there was a significant global shock, it warned, the high levels of household debt held by New Zealanders (an astronomical 168% of disposable income) risked destabilising the economy should a global shock lead to conditions that made it difficult for New Zealanders to repay their mortgages".
The so-called housing market has very little to do with the laws around supply and demand. It is almost entirely a question of the banking system's ability to create and sell mortgages and make enormous profits doing so. A period of declining interest rates has allowed the New Zealand banks to seduce people into believing that this will remain the situation forever and all we have to worry about is servicing the debt not the amount of debt. A significant economic shock, like we are currently experiencing, will put incomes at risk and interest rates could easily start moving up as a consequence of the increased risk attached to the borrowing or the inflation generated by the money-printing spree which most pro-capitalist economists are in denial about.
New York taxi licenses
This is perhaps easier to see when looking at bank lending in another entirely unrelated sphere - New York taxi licenses. The city had a cap on licenses of around 13,500. The cap made the license a tradeable commodity that drivers, fleet owners and, nowadays, hedge funds can buy and sell. A New York Times article (19/5/19) headed "They Were Conned: How Reckless Loans Devastated A Generation Of Taxi Drivers" explains how banks' predatory lending helped drive license prices up to $US1 million each by 2014 and then the prices collapsed and hundreds of drivers were ruined and bankrupted.
This heart-breaking story is a real risk of being rerun in this country because of excessive bank lending in pursuit of profit. With land, there is always a limit to the amount available. Land can be left idle, but it can also be used to earn income - from housing, agriculture, factories or warehouses. The bank's job is to ensure that any increase in income or potential income over time gets capitalised in the price for that property that can then be demanded when sold. The bank's job is to encourage a buyer to get a loan or mortgage that can be used to purchase that income stream.
Mortgage debt has been encouraged for speculative purposes by even relatively modest income households because there are few capital gains taxes and New Zealand hasn't suffered a severe downturn in the property market within anyone's living memory. It seems a "safe" investment. This also makes it politically difficult to impose capital gains taxes on homes.
Decline in state house building
The perfect storm of housing availability and affordability was compounded by the decline in State house building in recent decades. A peak of 70,000 State homes existed in the early 1990s despite the neglect of the National governments which were in power for most of the period from 1950 to 1984. State housing ceased to be a right and was turned into something only suitable and available for the desperately poor or needy. Since Labour was elected in 2017 the number of State house rentals available has remained largely static (2016 - 67,041 rentals; 2021 - 67,858) while the State house waiting list has soared from 5,000 to over 23, 000.
This was in part the result of real needs being better reflected when the new Government stopped simply refusing to allow people to register. There are another 3,500 desperate people in emergency hotel stays with the owners being paid a million dollars a day. Many of the people forced into these hotels are on a benefit and their benefit is deducted 25% of their income as if they were in an actual home. A few thousand more "social housing" units in partnership with churches and other providers has been the limit of the Government's ambition.
The privatisation of land for speculation in state house suburbs
While the Government has only very modestly increased the number of "social housing" houses, it has allowed most of the land in the traditional State housing suburbs to be privatised. Each new development in a working-class suburb like Glenn Innes (Auckland) is handed over to private developers who can buy the land and put three homes on for each one being taken out. Only one of the three remains a State house. The others are to be sold privately (one possibly at a so-called "affordable" price).
When these original State house suburbs were created those of us who grew up in them were proud to say we live in a State house. It meant a home of good quality with a flush toilet and a gas stove. These were working-class suburbs with nearly everyone having a job and active union, sport and social activities. You had tenancies for life and could apply to move from one city or suburb to another into another State house that became available. The first Labour government built 30,000 between 1936 and 1949 as well as fighting in a world war for five years. When it left office there were 40,000 people on the waiting list and the intention was just to keep building until everyone who wanted one could have one.
This is actually what was achieved in Sweden under its Social Democratic Party government. Sweden's Social Democrats, in Government from 1932 to 1976, did not favour "social" housing directed specifically towards those in need, but universal public housing, via tenant-owned cooperatives, municipal-owned building companies, and rigorous rent control, under a specialised housing department.
The Spinoff (19/12/19) has a good article that is headed "Good Housing Is Considered A Privilege In New Zealand. In Sweden, It's A Human Right". It explains that 15% of Swedes live in municipally owned social housing with tenant unions that collectively bargain with the State and private owners.
The housing crisis in New Zealand has also been compounded by the creation of a landlord subsidy in the form of the accommodation supplement. Stuff reported (22/5/21) that: "Accommodation supplements are paid to people who need assistance with their housing costs, and are tied to incomes. In the March quarter of this year, there were 360,549 receiving the accommodation supplement, up 43,023 on the year before. The amount paid each week in December last year (2020) was $31.5m, compared to $17.02m at the end of 2016. That was slightly down from the $37m paid last September." That's over $1.6b a year.
By making it easier for low-income people to access a benefit that could only be received if you proved you had high rent then the inevitable happened. Landlords increased rents to suck up the full value. The increased guaranteed income stream is also then inevitably capitalised into higher house prices by the banking system. This is no different than higher dairy prices getting capitalised into higher dairy farm prices.
How to fix the housing problem
The Government could fix this problem by building 10,000 State houses each year and renting them to people at no more than 25% of their income until everyone has a home that wants one. It could use the money it is printing to do that. It chooses not to do so. The same argument is true when the Government chooses not to implement fully the Welfare Expert Advisory Group's report which would genuinely boost the incomes of the most in need and eliminate child poverty.
The cost of the steps needed to genuinely confront the climate crisis - like free and frequent public transport with electric vehicles and cycleways everywhere - could be implemented virtually overnight. These steps could be made to happen if the money being printed was used for those purposes. But even a pro-market, capitalist economist like Bernard Hickey is shocked by the lack of ambition in the Government's approach. He wrote (17/11/20):
"My view: The Reserve Bank is just a third of the way through its programme and mortgage rates could fall to just 1.5% next year, unleashing another 20-30% rise in house prices. That is politically unsustainable at a time when property owners just got $100b richer through the value of their homes and Jacinda Ardern is refusing to spend $5.2b more to raise benefits more because she says the Government is short of money. The Reserve Bank should be directly funding a $100b programme of Government infrastructure spending over ten years to massively improve housing affordability and address climate change by flooding the housing market with 100,000 new homes and building the public transport and water infrastructure needed to reach carbon net zero by 2050".
"The post-1989 era of focusing the Government on having an independent inflation-targeting central bank and limiting the size of Government (to around 30% of GDP in NZ) by targeting net debt of 20% of GDP is politically unsustainable when the fallout of Covid-19 is hitting young renters, Māori, Pacifica and women hardest, while property and share owners celebrate hundreds of billions of unearned and untaxed wealth".
"These should be bipartisan targets where independent authorities (RBNZ, KÄinga Ora, NZTA and the Climate Commission) pull the infrastructure, tax and spending levers to achieve that. We should be targeting just a tenth of poor families spending more than 30% of their income on housing (it trebled to 55% over the last 30 years) and getting on track for net carbon zero by 2050".
The broader crisis that housing is feeding into
Instead, the Reserve Bank has said it will print up to $100 billion for the Government to use and another $28 billion that it will simply give to the banks at no cost and with no restraints on how it should be used. They can choose who to loan it to. And profit is their sole master. That is the nature of a privately-owned banking system. Their greed leads to criminal behaviour on a vast scale for which they only ever receive a slap on the wrists if it gets out into the public arena.
The NZ Reserve Bank, and similar banks all over the world lead by the US Federal Reserve, are doing this and similar in almost every country, because their system, the capitalist system, is in the deepest crisis it has faced in 200 years. The US Fed is naturally number one in the international pecking order because the US dollar is at one or both ends of 90% of international financial transactions.
This is a crisis of the system that is not just a product of the Covid-19 pandemic. It is part of a cyclical crisis that happens every decade or so under capitalism but they seem to be getting more synchronised internationally and more severe in their consequences for working people. To understand what has gone wrong and why we need to explore the changes to world capitalism since World War Two.
Coming out of World War Two the US was the pre-eminent economic and military super-power. The new world empire was based on the US dollar functioning as the world currency. The dollar in turn was guaranteed to be "as good as gold" by having a fixed exchange rate to gold. Capitalist ideologues thought they had suppressed the business cycle by adopting policies associated with the theories of British economist John Maynard Keynes. This involved the Government deficit spending to counter a recession. US President Richard Nixon famously declared "We are all Keynesians now" in 1971.
However, financing the budget deficits needed to run its wars in Korea and Vietnam, saw US dollars being accumulated abroad and foreign holders starting to lose confidence that the US would be able to maintain price stability. Some demanded gold in return for their dollars. The first casualty of the weakening US dollar was its link to gold being severed. The US, and therefore the world, went off the gold standard altogether during 1971-73.
This policy was applauded by both Keynesian economists and their "monetarist" critics around Milton Friedman and the Chicago School. But the immediate effect was to feed the inflationary tendencies already besetting the US and its allied currencies around the world. US inflation moved from 1-2% a year in the 1950s and late 60s to over 5% then over 10% a year in the 1970s before hitting a high of over 13% in 1980. In New Zealand, it was, if anything, even worse.
Stagflation hits in the 1970s
An economic recession hit the US in 1973-75 that turned into a combination of stagnation and inflation dubbed stagflation. Printing more dollars to combat the recession simply fed the inflationary beast. The dollar price of gold soared as money traders started to dump dollars for gold. Hyperinflation threatened which would have ended the US's role as the economically dominant empire. The US rulers were determined to protect their dominance at almost any price, including doing whatever was needed to break the inflationary spiral and restore the stability of the dollar as the pre-eminent world currency.
The man given the job by US President Jimmy Carter was Paul Volker who was appointed to head the US Federal Reserve Bank in August 1979. Volker had also been involved in the earlier decision to go off the gold standard under former President Nixon. What was dubbed the "Volker Shock" required pushing the official cash rate up to a peak of 20% in 1981. Inevitably a deep recession ensued in 1981-82 pushing unemployment up to 10%. Saudi Arabia and other Gulf states also played a critical role by depositing their hundreds of billions of petro-dollars into US banks directly. If you wanted to know the secret behind the "unbreakable" US-Saudi alliance, that is it.
The dollar was restored, inflation was broken, dropping from 14.8% in March 1980 to below 3% by 1983. The era of financialisation and deindustrialisation also ensued over the following decades. General Electric became GE Money because it was easier for capitalists to make money by being financial capitalists than it was by being industrial capitalists. The deep recessions alongside shifting production in key industries to China and other Third World countries also helped break the back of the insurgent labour movements in the advanced capitalist world.
Financialisation followed as industrial companies made more money from lending than making things. GE Money was more important than General Electric. Manufacturing fled to cheaper countries like China, which now produces 30% of world manufacturing. It took decades for interest rates to return to more normal levels. This helped account for the very moderate nature of the business cycles during the decades after the 1980s. Business investment and therefore, growth, is constrained by the higher interest rates in the advanced capitalist world and encouraged investment shifting to China and other places where labour was cheaper.
Free trade and free markets and inequality glorified
A new ideology that glorified free markets, free trade, and declared the resultant wealth accumulation and inequality as necessary and beneficial to society. Profit-seeking above all else was deemed the driver of capitalism and promoted productivity and efficiency because only the most efficient could win. The fact it also created a small class of billionaires dominating global production through their vast monopolies was again just a necessary evil at worst and something to be glorified in reality. "Greed is good" became the capitalist mantra.
This system is ruthlessly efficient. But it is also a system that requires uninterrupted growth and maximum exploitation of labour and the environment. It is also a system that requires an endless growth of debt of all sorts to keep the next few decades of growth from ending in a new deep recession or depression. The 1980s was the decade of the election of US President Ronald Reagan and UK Prime Minister Margaret Thatcher. Both were aggressive union-busters and promoted an ideological return to a reactionary promotion of individual self-interest over the collective interests of society. In fact, "there is no such thing as society" declared the pathological Thatcher.
Monetarists were put in charge of economic policy everywhere and they tended to discourage the accumulation of public debt but be rather indifferent to the expansion of private debt. Rightwing governments didn't necessarily follow their prescriptions, however, especially when it came to budgets for war and tax cuts for the rich causing deficit spending and debt accumulation. Reserve Banks were given "independence" from Government policy control with a policy prescription to target a low and regular inflation rate of 1-3% by targetting a steady expansion of the "money supply" which they incorrectly conflate as including both Government-issued token money and bank-created credit money.
They promised that such policies would eliminate recessions and allow for the uninterrupted expansion of capitalist production. Stability was restored, but the next three decades saw three business cycles that were anaemic compared to capitalism's glory days after World War Two. And they seemed to require ever-larger doses of debt to keep expansions going or prevent even deeper recessions from hitting.
Great Recession of 2007-08
Every form of debt grew enormously over the three decades from 1980 to 2010 - Government, household, and corporate and yet we ended that period with the "Great Recession" of 2007-8 which was the deepest crash in the capitalist system since the 1930s' Great Depression. This has now been followed by what could be the "Great Depression" of 2020. The 2007-08 crisis that had its origins in the US sub-prime mortgage market and swept the globe because much of the debt that had been created over the previous decade proved to be worthless. When a huge player in the market like AIG Insurance could collapse overnight no one was safe. No one trusted each other anymore. Credit froze.
To stop the system from collapsing at that time trillions of dollars were printed by the US Fed, along with European, UK and Japanese central banks. This was simply handed to the financial oligarchy that controlled the banks, pension funds and insurance companies so they could rescue themselves from their self-inflicted disaster. The Reserve Banks essentially used the accounts these institutions have at the respective Reserve Banks for settling transactions between them and credited them with tens of billions of dollars each in their balances so there was no risk of default by any one of them in the short term.
This is explained well in "The History And Significance Of QE In The UK" (22/11/20). In the UK and the rest of Europe austerity policies were imposed on working people to bring the budget deficits required back from deficit to surplus. But the US Fed which led this process hasn't been able to unwind the quantitative easing (QE) policies without threatening a new recession since the 2008 crisis.
Getting out of the Great Recession required the application of monetary and fiscal measures that had not been ever applied on that scale before and the abandonment of monetary orthodoxies imposed in the 1980s to protect against a new inflationary crisis as we saw in the 1970s to save the US dollar and world empire. The US Treasury brought US government debt instruments directly to support the banks during the 2007-08 crisis and maintain liquidity in the system. This is an electronic version of "printing money". As the crisis continued to deepen the Treasury began buying distressed debt instruments connected to the housing market from banks and other financial institutions as well.
Why significant inflation was avoided in 2008
What is remarkable and needs explaining is why there has not been an immediate inflationary surge followed by a surge in interest rates following that binge of money printing. Mindful of the lessons of the 1970s, the Federal Reserve held off on intervening until the fourth quarter of 2008 when the crisis was already underway and panic had already broken out. This meant that there was a huge demand for US dollars as a means of payment in the world's financial system. Most debts in the world are denominated in US dollars. Everyone wanted dollars to settle the debts that were being called in rather than rolled over.
Capitalists all over the world were also desperate to build up their cash reserves as much as possible to protect against future risk. The US dollar became a preferred means of hoarding. The Fed made it clear it would create whatever amount was needed to stabilise the system. It even agreed to pay interest on the massive reserves now being held by commercial banks in their Federal Reserve Accounts.
There has not been a generalised inflation as a consequence because the money was absorbed and used as a means of payment during the crisis and after as a means of hoarding. The Fed also committed to returning to monetary normalcy by reducing the increased money supply as quickly as possible. The huge increase in the money supply also pushed down interest rates to historic lows. This should have given added impetus to the recovery that followed.
The rescue of the banks and broader credit systems in 2008 has meant that there hasn't been a proper cleansing of the rot in the system. But the US Fed had promised to stop the quantitative easing and begin to withdraw the extra dollars from the system as soon as normality was restored. A return to orthodoxy was considered inevitable. But every time they moved in that direction the market reacted by deflating the stock market and threatening a new recession. US President Trump also reacted by trying to browbeat the Fed to maintain an upturn through to his (failed) re-election in November 2020.
The end result was the longest but weakest post-war recovery ever in a business cycle. Industrial production at the end of the recovery was at 80% of capacity which was the number associated with the bottom of the downturn, not the peak of the boom, in the first three decades after World War Two. This is the chief reason the cycle is longer than usual. The development of overproduction was limited and the outbreak of a new crisis was delayed.
This partial "recovery" had also needed the re-emergence of massive new levels of Third World debt, corporate debt, household debt. Government debt had also radically expanded to finance the 2007-08 bailout in the US, Japan and across Europe. Trump also doubled down by also providing new tax concessions to the super-rich in the US which drove up the ongoing deficit in Government spending. Before the latest crisis, US corporate debt has doubled to $US9 trillion since 2008. Government debt has doubled to $US21 trillion. US consumer debt at $US13 trillion also exceeds the 2008 level again.
The actual economic decline during the 2008-09 recession was far more severe than any other recession since the Great Depression of the 1930s. Normally there is a strong relationship between the speed and strength of the recovery and the preceding depth of the recession. Not this time. In fact, the record weakness in the economic recovery has led to this stage of capitalism being dubbed a period of "secular stagnation".
Partly because capitalists have hoarded dollars rather than invested them, the recovery was so slow that the Fed was forced to continue quantitative easing until October 2015 rather than return to monetary normalcy quickly. The Fed then began to shrink the monetary base by a modest 5.6% annual rate for five years after a 20% annual growth for seven years. The Federal Reserve funds rate also crept up from zero to 2.5%. But these policies had to be quickly reversed as the credit system threatened to stall economic activity again. Interest rates were pushed back down and money printing resumed.
Recession threatened and repo market freezes in 2019
But before the coronavirus pandemic hit in March 2020 the world was already entering a new recession with durable sales like automobiles down significantly. Then, in September 2019 and March 2020, what is called the "repo market" froze up. This market is never meant to freeze. However, it did in 2008 and twice more recently. The repo market is an overnight settling of accounts between banks, financial institutions, and major players that uses only the safest instruments like Government bonds. If this market freezes it is saying that no one trusts each other anymore - even for 24-hours.
Brookings explains: "In September (2019), a disruption in the market in which banks and others lend and borrow for very short periods of time, the repo market, led to a sharp spike in short-term interest rates and prompted the Federal Reserve to inject tens of billions of dollars of reserves into the markets".
This was a signal that a new crisis was on the way. The Covid-19 pandemic unfolded and the repo market froze again. Liberty Street Economics explains: "he repo market faced extraordinary liquidity strains in March (2020) amid broader financial market volatility related to the coronavirus pandemic and uncertainty regarding the path of policy. The strains were particularly severe in the term repo market, in which borrowing and lending arrangements are for longer than one business day. In this post, we discuss the causes of the liquidity disruptions that arose in the repo market as well as the Federal Reserve's actions to address those disruptions".
It was obvious from the unfolding Covid-19 crisis that a major economic downturn was happening and it would hit some sectors of the economy very harshly. Bankruptcies would be inevitable and a broader debt crisis provoked that could take down major banks and finance companies. The pandemic accelerated the impacts of the recession, required closedowns, blew up various bubbles (at least temporarily), and threatened to bring the whole house of debt cards tumbling down.
So, the US Fed simply guaranteed every transaction in these markets to ensure "confidence" was restored and the market didn't collapse altogether and take down a whole series of debt-laden companies unable to refinance even short-term debt as needed. This time the US bailout of the system required gargantuan sums of money for all sorts of markets. Essentially any form of debt would be guaranteed by the US Treasury. Initially, all US government debt instruments were guaranteed and purchasing them undertaken by the Fed to keep interest rates low and drive them lower if possible. This was followed by promising to buy almost any debt instrument, even private corporate debt. Printing money is becoming privatised.
US Fed leads coordinated money printing response
The US Fed led a coordinated response across the globe to print and deliver even greater amounts of dollars than they did in 2008 and encouraged other central banks to do likewise. The US Fed admitted in the November 2020 Financial Stability Report in the US that there has been $US7 trillion increase in G7 central bank assets in just eight months in contrast to the $US3 trillion increase in the year following the collapse of Lehman Brothers in 2008.
The US Fed began buying any form of debt held by their banks and other financial institutions that came under pressure including corporate "junk" bonds. One measure of the US money supply, US M1, has increased by 55% since February 2021. What that means is that 35% of all US dollars in existence have been printed in just the last ten months. Take a minute to think about that fact and how scared you should be as to why that is happening.
New Zealand soon followed suit with guarantees for Government and city council bond purchases as our own form of quantitative easing. This was not required in 2008 in New Zealand because the banking system was less exposed to some of the financial chicanery perpetrated elsewhere and the recession less severe because of export support from China and Australia.
The scale of what has been done is truly breath-taking: "Central banks have been reinvented over the past decade, first in response to the financial crisis, and then as a consequence of Covid-19. While trying to maintain monetary stability and promote economic recovery, their balance sheets have ballooned. In 2007, the central banks in the US, euro area, UK, and Japan had total assets ranging from 6% to 20% of nominal GDP. By the end of 2020, the Fed's balance sheet was 34% of GDP, the European Central Bank's (ECB) 59%, the Bank of England's 40%, and the Bank of Japan's 127%â€.
One echo of the 2008 crisis is that BlackRock, the world's largest asset manager, and other financial wizards in the US had started to group together non-investment grade corporate bonds together and relabel them as investment-grade because grouping them together allegedly reduced risk. The same argument was used with US mortgages which were repackaged and resold as investment-grade credit default swaps with allegedly low risk in 2008.
And in true US-style one of the companies responsible for creating the new bonds is put in charge of buying them. "BlackRock... will earn relatively modest fees for helping the Federal Reserve run a bond-buying program to steady markets unsettled by the pandemic". It is no surprise that two former BlackRock executives were on Joe Biden's transition team to continue to manage economic policy for the 1%.
The 2020 crisis of capitalism has resulted in the socialisation of all risks for the capitalists. Markets are not being allowed to "work their magic" in terms of allocating risk and rewards according to any economic rules. Government spending more than it gets in income, deficit spending, is now the rule. And the numbers are big, often about 10% of GDP equivalent.
Combined, the USA, the ECB, Japan, Germany, France, Italy, Spain, UK, Canada and Australia have announced $US2.2tn in central bank measures and $US4.3tn in central government measures. This is the equivalent of 17% of the combined GDP of these countries, or 7.3% of world GDP. The Chinese central government has announced $US587bn worth of measures, which is around 5% of its GDP.
The invisible hand of capitalism
There are laws that capitalism must obey. The first great economic thinkers associated with the birth of this system were Adam Smith and David Ricardo. They explained how the system worked. Smith coined the term of the "invisible hand" that guided the system and made it so revolutionary. As the pro-capitalist site Investopedia explains: "The invisible hand is a metaphor for the unseen forces that move the free market economy. Through individual self-interest and freedom of production as well as consumption, the best interests of society, as a whole, are fulfilled. The constant interplay of individual pressures on market supply and demand causes the natural movement of prices and the flow of trade."
This invisible hand is based on the law of labour value that Smith and Ricardo both accepted and that Karl Marx incorporated into his writings and took to their final most scientifically developed form. Marx showed in "Capital" that prices (exchange-values) are the form that labour values take. But as always there's a contradiction between appearance and essence. Aggregate market prices can diverge from aggregate labour values (or at least what they would be if they accurately represented labour values). During a boom, prices drift above values.
Marx corrected the classical labour theory of value to show that a commodity's price did not oscillate around a "natural price" based upon actual labour time, but around a "price of production" that took account of the ratio of labour and capital relative to the average, and the turnover time. An individual commodity goes to the market to see what claim it can make on society's finite amount of labour time. In total aggregate values equal aggregate production prices, however, the credit system divorces the act of purchase from the act of paying.
Lenders can lend more than they have - they leverage. This pushes up aggregate market prices above their labour values. Claims are being made on future labour time that may never be realised. In a boom everything appears to be going swell, leverage continues to increase until the "Minsky Moment" when some lenders start to panic that they may not get their money back. We then get credit crunch, financial crisis and recession. The law of value acts. Marx's theory contrary to myth, fully integrates the market, as the value of a commodity cannot be known until it comes to the market. That is, it isn't the actual amount of labour time inherent in the commodity that gives it value, rather the amount of society's finite labour time it can claim in the marketplace.
Before fiat money, the capital devaluation was obvious in price deflation. With fiat money, we get currency devaluation, as in the 1970s, 2008 and again today. In all three periods currency prices in gold rocketed. In "gold price" terms there was deflation. And the reason gold still features in financial markets is that it takes a certain amount of labour time to produce an ounce of it. It is still a measure of value, as distorted as it may be due to speculation.
The role of money
To understand what is happening we need to understand the interaction of three types of money in existence today.
One form is gold which as a product of human labour has emerged as the universal equivalent of all other commodities as a measure of value. All societies with a developed system of commodity production and exchange need a universal equivalent to function. Gold can also be hoarded for its intrinsic value, especially in times of monetary disorder. Gold does not disappear. It always retains its value through any crisis. Capitalists and central banks hold a portion of their wealth or reserves in gold because of these special properties.
The second form of money is token money issued by the State, dubbed "fiat" money by economists. So long as the currency is not "over-issued" relative to the existing quantity of gold the currency - whether it be dollars, pounds, yen, or rupees - can retain its value so long as it is backed up by a State power which can impose taxes and use force on those it wants to do its bidding.
But if the currencies are "over-issued" they lose value in proportion to the over issue. A doubling of token currency will in normal circumstances result in a halving of its individual value. In other words, the currency price of gold will double. This is the origin of general price inflation we saw during the 1970s and early 1980s. The first casualty of this policy was for the US dollar to cut its link to the gold at $US35 an ounce in 1971. Being "free" of the gold "shackle" as it was dubbed by opponents of the gold standard, only encouraged further devaluation. The price of gold hit $US120 an ounce in 1976.
By the late 1970s, there was a flight out of the US dollar into gold that saw the "price" of gold soar to nearly $US600 an ounce. To prevent a total collapse of the currency the US Federal Reserve had to refrain from further accelerating the rate of growth of the dollar it was creating, which boosted interest rates to record levels of 20% for the Federal Funds Rate and drove the economy into a deep recession.
Bad as inflation was - especially for real wages of the working class, which was being paid in debased currency - from the viewpoint of the capitalist economy the worst result was this rise in the rate of interest. These policies were dubbed the "Volker Shock" after the then Federal Reserve Chairman Paul Volker. As they took effect, inflation dropped from 14.8% in March 1980 to 3% by 1983. By the mid-1990s gold stabilised for a period at around $US400 an ounce.
The amount of token money that can be issued is governed by the total amount of gold bullion in existence in the world. This usually expands at a relatively steady pace of say 2% a year so it is a relatively safe bet that token money can also be increased proportionately. But gold production also has its own cycle which runs counter to the normal industrial cycle and impacts interest rates and places objective limits on token money and credit creation.
If there were no objective limits to the creation of token and credit money there would never be a crisis of generalised overproduction every ten years or so like we have seen throughout the 150-year history of developed capitalism. These crises have been analysed and explained by Karl Marx as being generalised crises of overproduction relative to the ability of the market to absorb these commodities at prices that guarantee the producer at least the average rate of profit. Overproduction is reflected in growing inventories, factory shutdowns and unemployed workers. If token money or credit could be expanded at will forever then there could be no such crises. That is why pro-capitalist economic writers can't explain why the crises happen.
Monetary authorities don't really understand what exact total of token money they can issue without devaluation. They operate to a great degree on trial and error. They don't know what they are measuring the currency against but the consequences of over-issuing become apparent very quickly in a rising price of gold, a broader leap in commodity prices in terms of the devalued currency and then a general rise in prices. This forces the central bank to increase interest rates, cut back on the currency being issued or purchasing previously issued currency to neutralise it. Failure to take action can lead in some extreme circumstances to hyperinflation and a currency collapse.
The third form of money is credit money. Under a developed system of finance and credit this credit money is created and centralised by the banks through making loans. They are able to use deposits of token money created by the central bank as a base from which to expand lending many times over the amounts of customer deposits. So long as everyone doesn't want their money back at the same time the merry-go-round can continue. This is called fractional reserve banking.
But banks are profit-making competitive businesses. They have a built-in tendency to seek more and more creative ways to create and extend credit to maximise their returns. Derivatives that serve as a kind of insurance against loans going bad are the latest example of that. Eventually, as inventories of unsold commodities pile up and credit tightens a breakdown happens which will begin at the weakest links of the credit chain. A credit crisis and collapse of at least the most over-extended institutions then follows.
Credit money is not "real" money like gold and can disappear completely without a trace. In fact, the over-issuance of credit must be periodically neutralised for the system to restore balance. If there is no reduction in credit money then credit money is essentially being converted into token money. This will fuel an inflationary surge sooner rather than later with the inevitable consequences of a spike in interest rates leading to a deeper credit contraction, the very thing that conversion of credit money into token money is designed to avoid.
Crises bring values and prices into line
The point of capitalism's recurrent crises is to bring aggregate market prices back into line with aggregate values. Prices that have been inflated by leverage. Before 1971 crises took the form of price deflation. Since the decoupling with gold, currency prices can increase, but capital still gets devalued in terms of "gold prices" as the currency itself depreciates. The 2007/08 debt deleveraging was short-lived, as the ruling class bailed itself out and passed austerity onto everyone else. The debt bubble, and so the discrepancy between aggregate market prices and aggregate values, remained and grew.
Pro-capitalist economists can't understand capitalism's recurrent crises when they have the wrong, subjective, marginalist theory of value. Price and value are always equal in marginalist theory. The operation of the law of value under capitalism leads to industrial cycles of boom and bust that ultimately produced a larger and more powerful system of production that conquered the globe. The system would rebound more strongly during periods of recovery if the laws of motion governing that system are allowed to do their magic. That continued to be true after World War Two for three decades because of the depth of the Great Depression and the suppressed demand for consumer goods as a consequence of the War itself.
Since then, both the Keynesians and the monetarists have attempted to stop the law of value operating with full force by using fiscal or monetary policies to stop a deep recession happening that would clean out the least productive capitalists (industrial or financial) and reward the most efficient and productive capitalists. The only results possible by these policies have been either an inflationary crisis or an explosion of debt that can never be repaid. Today, protecting that debt from the operation of the market to reveal its true value, drags the entire system towards permanent stagnation and depression.
In part, this has been a consequence of the financialisation of economic activity over the last three decades following the Volker shock. This has created a tiny financial oligarchy that controls most economic activity on the globe. Financialisation was also associated with an explosion of all forms of debt - personal, government, and corporate debt. But rather than this debt being used to accelerate growth under capitalism, the greed and predations of the dominant financial oligarchy appear to have become a brake on the system. Growth over each of the last three decade-long cycles has been progressively weaker each cycle despite (or maybe because of) the ever-growing debt.
But this financial oligarchy calls the shots on what type of government policies are considered acceptable. The debt market and interest rates are used to police those governments when necessary. This is especially true when it comes to monetary policy. After the inflationary 1970s it was an article of faith that no government would be allowed to simply print money and spend it - especially on social programmes that benefited working people. Tax cuts for the rich were OK because that caused the governments to be even less able to spend money on anything useful.
Central banks were removed from government control and made "independent" to prevent inflation beyond 2-3%. Many governments, including both Labour and National in New Zealand, turned the need to always run budget surpluses into a religious dogma. All those dogmas have now been abandoned without explanation. Pushing back against complaints about their policies, the Reserve Bank Governor Adrian Orr simply asserted that booming house prices were a "first-class problem" and that the alternative is "recession or depression" (13/11/20). That may be true but we have a right to discuss alternatives to how the money being created should be used.
Essentially the world has gone through two crises over the last few decades where it became necessary to print money on a vast scale and simply hand it to the 1% who control the banks and other financial institutions to use to facilitate payments between themselves. No alternative policies have been allowed by the "independent" Reserve Banks and governments serving the 1%.
The following warning from Nouriele Roubini shouldn't be dismissed out of hand: "For now, loose monetary and fiscal policies will continue to fuel asset and credit bubbles, propelling a slow-motion train wreck. The warning signs are already apparent in today's high price-to-earnings ratios, low equity risk premia, inflated housing and tech assets, and the irrational exuberance surrounding special purpose acquisition companies, the crypto sector, high-yield corporate debt, collateralised loan obligations, private equity, meme stocks, and runaway retail day trading. At some point, this boom will culminate in a Minsky moment (a sudden loss of confidence), and tighter monetary policies will trigger a bust and crash" (2/7/21).
Huge growth in inequality
The direct consequence of handing the financial oligarchy trillions of dollars in the midst of one of the worst economic crises in human history is that the 1% has hugely expanded its wealth and power with inflated asset prices, and stock market values over the past years. Michael Roberts reports: "The top 1% of households globally own 43% of all personal wealth while the bottom 50% have only 1%. The 1% are all millionaires in net wealth (after debt) and there are 52m of them. Within this 1%, there are 175,000 ultra-wealthy people with over $50m in net wealth - that's a minuscule number of people (less than 0.1%) owning 25% of the world's wealth!".
Working people across the globe are caught in a dilemma. We don't want an economic collapse because we know we will be the worst affected. So, actions by governments to "rescue" the entire capitalist system of finance and production and trade are needed. But if we are going to do that, why don't we place the commanding heights of the economy, especially in the area of finance and money creation, into the hands of a publicly-owned and democratically controlled entity rather than simply hand the 1% our cash as if they have some God-given right to it? We have socialised all risk associated with private banking, so why not socialise banking itself?
The immediate crisis and recovery have now passed. We must now build for a future that involves putting people and the planet before the pursuit of private profit. When inflation returns - and it will under current policies - bringing under control again under a market system of private banking requires a steep rise in interest rates and consequential deep recession like occurred in the 1980s.
The current combination of policies to combat the pandemic and associated economic crisis - which involves both a monetary and fiscal explosion - will sooner or later lead to an implosion of the entire credit and monetary system and along with it the system of capitalist production itself. The alternative is not to let capitalism operate without any limits in terms of subjecting all labour and the planet to its uncontrolled passion to exploit all and everything for the private benefit of a tiny class of owners. The planet cannot survive another few decades of the same old shit.
Working people need to put forward solutions in the here and now that protect our class and the planet we live on in an immediate sense. Those immediate demands can form part of a Green New Deal to transform the way we produce and live with each other. But we should do so with our eyes open to the fact that this system cannot accommodate what we need without generating new forms of crises. We must be prepared to go beyond a system based on private greed towards one based on human needs.
Take banking and money creation out of private hands
That is why a socialist answer to the crisis is not just to spend more but to take money creation out of private hands. The banking system in New Zealand is based on maximising the creation of debt to enable profits in the form of interest. The profits of the top four banks in New Zealand have doubled in the last decade and between them make around $6 billion in profits a year. The return on equity is one of the highest levels for any similar banking system in the world.
Banking profits alone dwarf the combined profits of almost every other publicly listed company in New Zealand. For example, in 2017 the ANZ made more than Fonterra, Spark, Fletcher Building, The Warehouse, Air NZ and the major supermarkets combined. These banks' profits are equivalent to 2.5% of New Zealand's entire GDP compared to only 2% in Australia - their home country for all four.
Their greed knows no limit and extends to cheating the taxman through elaborately designed tax avoidance schemes. Public ownership and control of banking is the only way we can guarantee that the desperate search for profit by the criminals who own and control banking in New Zealand is ended and we can direct investments away from property speculation towards the social and environmental needs of people.
The big four actually have their presence in New Zealand through taking over previously publicly or community-owned banks during the privatisation mania that swept the country in the 1980s and 1990s and wreaked so much economic havoc. The BNZ used to be State-owned. The ANZ took over the old Post Office Savings Bank before it was privatised. The ASB used to be owned by a community trust that paid returns to the community.
The creation of money, in all its forms, should be a publicly controlled process without capitalist greed periodically putting entire financial systems at risk and that we end up having to bail them out because of their greed and that they are "too big to fail". This is effectively what happened in Ireland, the UK and US after the 2008 crisis and we should make sure we do not repeat this time as we face the economic dangers ahead.
For a Green New Deal
As part of a Green New Deal to deal with the crisis we should
- Nationalise the banking system without compensation for their crimes against the taxpayer and working people of New Zealand.
- Start a massive State house building programme of 10,000 a year until everyone who needs a home has one.
- All rents should be no more than 12 hours of a person's income
- Empty homes to be made available to rent.
- Tenants should be empowered to create a union to represent them. This should begin to everyone in social housing.
- All wealth over $5 million should be subject to an annual 1% wealth tax. This could increase to 2% for wealth above $50 million and 3% for wealth above $1 billion.
- All income up to a living wage a year should be tax-free and new higher tax bands established on income over $150,000 a year, with a 100% tax on incomes over $250,000 a year.