by Alex Porter, Economy Editor
With concerns about rampant inflation around the corner some members of the Bank of England’s Monetary Policy Committee (MPC) have begun arguing for a rise in interest rates. However, the replacement of Andrew Sentance, who recently voted for an increase in interest rates by 0.5%, by Ben Broadbent – a senior Goldman Sachs economist – will shore up the case for holding base rates at their historic low of 0.5%. The move raises worrying questions over the influence of the global banking elite over the UK Treasury.
Given that the Bank of England controls the value of the citizen’s money it is sometimes useful to remind ourselves of what the objective of the MPC is. Its key objective is ‘price stability’ which is defined by an inflation target of 2%. If price rises go above 2% then that’s a fundamental issue for the MPC who then raise interest rates to bring prices down below that target. Except they don’t. Officially inflation is now 4% yet interest rates remain at their historic low level. Why?
During the 2008 financial crisis when governments transferred private bank debts to the public, some observers suggested that the sum wasn’t nearly enough. In November 2009, the then Chairman of the Treasury Select Committee John McFall admitted on the BBC that the entire UK banking sector was under water.
What the banks needed then was lots of cheap dosh. The MPC were very helpful. For public consumption lowering base rates were reported to be about stimulating the economy by giving the banks money to lend. Lending is still contracting and many businesses in Scotland have folded or cut operations because they can’t get access to loans and so are cash-starved. Consumers received loans, but although the banks got money from the Bank of England at 0.5%, their customers sometimes paid as much as 50% APR on their cards which sucked more money out of the real economy.
Low interest rates in reality were never about stimulus they were about giving money to the banks who were broke. If a bank has £1 in capital it can lend out ten times that amount. What they do with the cheap Bank of England money is anyone’s guess but let’s speculate that they use it to buy and sell financial products such as derivatives to each other over and over again and each time they do it claim a commission which then generates a bonus. The entire system would then be entirely extractive. By not lending, nothing productive happens with that money.
Having passed much of their debts on to the taxpayer, the Government is now broke and borrowing at unprecidented levels. In the single month of November 2010, Government borrowing reached a staggering £23.3 billion according to the Office of National Statistics (ONS). Much of this will have been borrowed from the banks, who themselves borrowed the money from the Bank of England, but at a lower rate of interest.
The levels of Government debt then create a huge disincentive for politicians to raise interest rates as that would mean crippling interest payments and so there would be a need to raise taxes to meet the repayments which would be, in effect, another bank bail out. The gravy train simply keeps chugging away.
Surely, you might think, all these facts would come out in the banks’ accounts? Eh no. Banks are not obliged to value their assets in any verifiable or objective way. They value them according to models they themselves control. Regulators do not even have oversight of the models. Yes, they have to report their earnings, but any losses and taxes do not have to show the profits or losses of any subsidiaries. In effect, banks are not regulated and so they could be irretrievably in the hole, ‘pretending and extending’ whilst hoovering up whatever cash the Bank of England prints for them.
The problem for Joe Public is that none of this printed money goes directly to him. With more money in the system, Joe Public’s wages lose value as he is diluted. However, given he has very low interest rate payments on his mortgage he doesn’t realise his and the nation’s assets have been diluted.
It’s only when the inflation, which results from all the creation of new money, hits that Joe Public feels the pinch but he doesn’t really know he’s been fleeced until interest rates finally rise to bring inflation down. Mortgage payments then increase and those who benefitted during the period of low interest rates finally have to cough up. Well, people with mortgages do, not the banks. Oh, and repayment of Government debt becomes a little more problematical as well.
Much the same system exists in the US. Goldman Sachs, known by some as Government Sachs, have a very cosy relationship with the Obama regime. At the time of the financial crisis, Hank Paulson was Treasury Secretary. Hank was CEO at Goldman for decades. Many trace the origins of the financial crisis back to the abolition of the Glass-Steagall Act during the Clinton era when Robert Rubin was Treasury Secretary. Our Robert, who mentored the current Secretary of the Treasury Timmy Geithner, is an ex-Goldmanite having spent some 26 years with the firm. The revolving door between Goldman and the government goes on and on. Many European Governments have now told Goldman they are no longer welcome, but not the UK.
In Britain, as in the US, the ‘too big to fail’ mantra is wearing thin. If the concern was that letting a bank go under would cause an unacceptable systemic risk then why were banks amalgamated after the crisis? Clearly these banks should be broken up into pieces which pose no systemic risk. This solution is being increasingly called for by industry experts, such as Ben Thomson of Inverleith Capital, but there is no sign that the policy makers will make any meaningful changes to the way the financial sector is regulated. Mervyn King now appears to favour this approach but there’s a long way to go before serious reform is on the agenda.
‘Too big to fail’ is another way of saying the taxpayer will be behind you no matter how you gamble your bank’s money. With such a guarantee the incentive is to gamble wildy, as that’s when profits can be juicy, and if you can’t lose then the more speculative your bets the better. This insanity is overlooked because of the phrase ‘too big to fail’.
In 2008 we saw the bursting of a credit bubble. When looking for parallels people point to the South-Sea Bubble in 1720, but the key difference between then and now is that then the Government offloaded the nation’s debt onto the private sector. This time, for whatever reason, they’ve assumed the debt of the financial sector. What was a financial crisis is now financial, sovereign debt and currency crises. That’s what ‘too big to fail’ really means.
Austerity. It sounds moral. We have to tighten our belts and make a sacrifice for yesterday’s profligacy. Well, we didn’t have to, but again we come back to this expression ‘too big to fail’. Historians will look back and may record that this expression opened the way for the largest transfer of wealth and destruction of capital in the history of the world.
To cover their tracks and keep the money tap running they had to stuff the organs of Government with their placemen. Call me cynical, and you will, but news of the Treasury appointing a Goldman Sachs economist to the MPC should set alarm bells ringing.