by ANN PETTIFOR
So much has happened this past week… and there’s more to come. The following post is a reflection on recent events. I am aware that much of what has gone on is expressed in arcane and often inaccessible language. If readers have specific questions about the current financial turmoil they want me to address, please post your questions in the comments. And don’t be shy. You probably know and understand more than many presiding over the current upheaval…
Tightening pain
After tightening Bank of England monetary policy and raising rates in February, 2022, the £575,000-a-year BoE governor, Andrew Bailey, was asked whether he wanted to inflict more pain on workers? His answer was direct:
“Broadly, yes – in the sense of saying: we do need to see a moderation of wage rises. That’s painful – I don’t want to in any sense sugar that message, it is painful.”
Earlier in December, 2021 the TUC outlined the context in which Mr. Bailey argued for futher cuts in the real wages of workers. British workers were already enduring
….the longest period of pay stagnation since the Napoleonic wars. Real wages for millions are less than they were before the bankers’ crisis in 2008.
While gripped by the financial crisis of these last ten days, I’ve been slow to write about the predicted and deplorable outcome of recent decisions by central bankers – so called ‘guardians of the nation’s finances’.
The fact is I found it hard to face up to what central bankers are doing, not just by raising rates, suppressing demand, and lowering wages, as Jon Stewart so emphatically explained in his interview with Larry Summers.
But as importantly, through lack of analysis, regulation, oversight and foresight – central bankers have shown this last week they were prepared to use high rates to risk and even precipitate bank failures and global financial instability. They have done so, and continue to do so by deliberately tightening monetary policy into heavily indebted economies, with falling real incomes. Economies that have still not fully recovered from both the GFC and the pandemic.
I found it hard to get my head around that reality. Namely that together with their Boards and staff, the civil servants that head up central banks seem willing to sacrifice private banks and global financial stability in their rush to raise rates, crush demand, discipline workers and shrink the nation’s income .
In other words, their effective preference is for class war over financial stability.
The proof for what might seem an outrageous accusation is in the ECB’s recent decision-making.
On Wednesday last week, and at the height of US financial instability, the European Central Bank (ECB) Board set out to prove my point.
Ignoring the bank failures caused by the Fed’s too-rapid rate rises, and well aware that a crisis in one part of the system ricochets across the world – the ECB defiantly lifted all three of the their key rates by a whopping 50 bps.
Were they blind to the risks higher rates posed to European banks like Credit Suisse? Just as they are careless of the impact on employment and workers wages?
Or did ideology which elevates inflation above all other indicators trump common sense?
Answers on a postcard please.
Why are banks and the finanical system “collateral damage”?
Like the failed Silicon Valley Bank (SVB), US and European banks and financial institutions have long gorged on government and corporate bonds issued at very low rates of interest. Investors (think Silicon Valley billionaires, asset managers, hedge funds, private equity etc.,) acquired these assets and used them as sound collateral to leverage higher borrowing.
Private debt ballooned as a result.
Central bankers did little to discourage such borrowing by toughening up on regulation and supervision. Instead, after more than a decade of ‘easy money’, increased borrowing and rising debts, they tightened the monetary policy noose.
As is well understood, when central banks raise interest rates, then new government and corporate bonds are issued at higher rates. These higher rates increase ‘returns’ (the yield) on newly issued bonds. The ‘returns’ on these bonds are even more valuable if fewer new bonds enter the market, creating a scarcity of profitable rents. The new higher rated bonds are then more valuable to investors than the multitude of bonds issued under the low rate regime. As a result ‘older’ bonds are sold off as wise investors make a dash for the higher ‘returns’ on scarcer, newer bonds.