Public Sector Union Bashing Special Edition - This Week's Economist

[Gone baby gone]

If Greenspan and Brown had kept a responsible and competent Monetary policy, we would not have had this huge credit bubble/crisis.

It wasn't low interest rates that allowed banks to offer 100% (or even 125%) loans to people with poor credit histories.

It was securitisation, coupled with a healthy dose of fraud.

IRs are a small piece of the puzzle, but only a small one.

[Tired of Waiting]

So you are agreeing with me - "the light touch, leave it to the market to sort things out" championed by the Economist in the 90s has failed spectacularly. The banks have been left to their own devices by governments who swallowed the Milton Friedman-esque style policies of non-intervention. Sorry, I mean only not intervening until the banks need a taxpayer funded handout, and then of course any level of intervention is permissible

Only when they had someone outside of the companies - like a government and/or a union looking out for their interests. When you leave it to corporations, all you end up with is exploitation at both ends <-- You are here.

Friedman was a monetarist. Competent monetary policy would not have allowed such a credit bubble.

In the long term, it is only productivity and the labour market (employers competing for employees) that increases real wages. You can't legislate for it. Latin America has been trying that since the 1930s.

[Tired of Waiting]

It wasn't low interest rates that allowed banks to offer 100% (or even 125%) loans to people with poor credit histories.

It was securitisation, coupled with a healthy dose of fraud.

IRs are a small piece of the puzzle, but only a small one.

A mortgage rate increase of just 1%, say from 5% to 6%, is a 20% increase. In a mortgage this means monthly payments almost 20% higher. Or, a total budget almost 20% lower. This alone would have reduced the peak by almost 20% - AND eliminated most of the pain.

That is why IRs are the most powerful tool in monetary policy. Brown knew this. An IR raise would take the heat out of the economy in 2004, slowing it down, HP included. But hat was exactly why he (or Balls) tampered with it.

Sorry What's'isname, I feel your pain. I mean it. But Labour did feck things up seriously. These are facts. This is history now.

[Gone baby gone]

A mortgage rate increase of just 1%, say from 5% to 6%, is a 20% increase. In a mortgage this means monthly payments almost 20% higher. Or, a total budget almost 20% lower. This alone would have reduced the peak by almost 20% - AND eliminated most of the pain.

That is why IRs are the most powerful tool in monetary policy. Brown knew this. An IR raise would take the heat out of the economy in 2004, slowing it down, HP included. But hat was exactly why he (or Balls) tampered with it.

Sorry What's'isname, I feel your pain. I mean it. But Labour did feck things up seriously. These are facts. This is history now.

You are, I presume, unaware that UK interest rates ranged from 3.5% to 8.5% (averaging around 5%) during the period 1997-2007, they were only reduced to 1% AFTER the banks almost collapsed.

http://www.propertyinvestmentproject.co.uk/property-statistics/interestrates.php

Like, I said, interest rates played a small part in the boom. But only a small part. Lax lending was a much bigger cause. When you can lend as much as you want, the resulting surge in property values means that people are less sensitive to IRs as they will be prepared to invest increasing amounts of their income into their mortgage, believing that they will reap the rewards as the value increases even more. This is exacerbated when banks are offering IO loans. "Teaser" mortgages are another mechanism that banks have used to completely circumvent the power of IR rises, and fuel the bubble that even now hasn't burst.

IRs are of course playing a larger role in the resilience of the current property market.

[wonderpup]

If Greenspan and Brown had kept a responsible and competent Monetary policy, we would not have had this huge credit bubble/crisis.

Brown even went out of his way, tampering with the inflation index in Dec 2003 (removing housing costs from it), to prevent the BoE from raising IRs in 2004 - "coincidentally", a pre-electoral year.

Cue, then, a loud clamouring from the economics profession denouncing this irresponsibility? Er no. It seems the economists were too busy 'servicing' the needs of their paymasters in the think tanks and universities to take time out to offer a serious critique of the neo liberal bullshitters who were paying their salaries.

Lets face it- for the past couple of decades economics has been the PR wing of the neo liberals and corporates- peddling whatever snake oil made their masters the most money. A total failure of integrity is what happened here.

I'm not saying economists caused the problem- but they supplied the intellectual cover that allowed it to escape serious criticism and allowed the bubble to inflate unchallenged for a decade. For all their pretensions to hard science they failed the most basic test of empirical thinking and instead just cheered the madness on.

[Tired of Waiting]

Cue, then, a loud clamouring from the economics profession denouncing this irresponsibility? Er no. It seems the economists were too busy 'servicing' the needs of their paymasters in the think tanks and universities to take time out to offer a serious critique of the neo liberal bullshitters who were paying their salaries.

Lets face it- for the past couple of decades economics has been the PR wing of the neo liberals and corporates- peddling whatever snake oil made their masters the most money. A total failure of integrity is what happened here.

I'm not saying economists caused the problem- but they supplied the intellectual cover that allowed it to escape serious criticism and allowed the bubble to inflate unchallenged for a decade. For all their pretensions to hard science they failed the most basic test of empirical thinking and instead just cheered the madness on.

I agree with you there. Very few economists came out in public warning against this credit/debt/assets price bubble. I also agree with your suggested reason - the majority works for companies/banks etc. Only a minority were giving public warnings, such as Martin Wolf (FT) and Vince Cable, and The Economist.

I was not defending economists, I was defending Economics. The problem (bubble) was clear, and the Treasury/BoE/FSA should have done their duty. They failed.

[shipbuilder]

I agree with you there. Very few economists came out in public warning against this credit/debt/assets price bubble. I also agree with your suggested reason - the majority works for companies/banks etc. Only a minority were giving public warnings, such as Martin Wolf (FT) and Vince Cable, and The Economist.

I was not defending economists, I was defending Economics. The problem (bubble) was clear, and the Treasury/BoE/FSA should have done their duty. They failed.

I think you've missed wonderpup's point here - despite decades of economic theory - no-one put it into practice - no-one.

The government (and indeed banks) here can only be seen as part of a wider economic school of thought - which utterly failed at the very basic level to implement or even argue for its own theories to be put into practice, basically because of greed.

Would a hard-line Austrian economist, given the power, have implemented what they preached? I would bet all the money I have against it.

Edited January 9, 2011 by shipbuilder

[Tired of Waiting]

I think you've missed wonderpup's point here - despite decades of economic theory - no-one put it into practice - no-one.

The government (and indeed banks) here can only be seen as part of a wider economic school of thought - which utterly failed at the very basic level to implement or even argue for its own theories to be put into practice, basically because of greed.

Would a hard-line Austrian economist, given the power, have implemented what they preached? I would bet all the money I have against it.

That is factually wrong. Monetarism has been applied since the 70s in most of the west, developed countries, and worked very well for decades. The credit bubble was mainly a USA and UK thing, and mainly since 2002 or 03.

What I made clear already was that it was not a "school of thought" that failed, but the implementation of it, mainly by 2 major economies, mainly since 2002 or 03.

Greed is centuries old. High interest rates curb it.

Yes, politics is a problem, hence the independence of central banks.

It is all old knowledge, basic really. Nothing new here.

Edited January 9, 2011 by Tired of Waiting

[shipbuilder]

That is factually wrong. Monetarism has been applied since the 70s in most of the west, developed countries, and worked very well for decades. The credit bubble was mainly a USA and UK thing, and mainly since 2002 or 03.

What I made clear already was that it was not a "school of thought" that failed, but the implementation of it, mainly by 2 major economies, mainly since 2002 or 03.

Greed is centuries old. High interest rates curb it.

Yes, politics is a problem, hence the independence of central banks.

It is all old knowledge, basic really. Nothing new here.

How do you conclude that it has worked well? Were booms and busts avoided in that time? The easy decisions according to economic theory are implemented and the difficult ones ignored - I would argue that success has happened despite economic theory. Bubbles are blown, they bust and as always the producers bail out the spivs, theorists and speculators.

We hear all about, for example, Keynesian approaches to this or that, but when all the b*llsh*t is stripped back, the corporatocracy has simply used the tools available to suit itself.

Edited January 9, 2011 by shipbuilder

[Tired of Waiting]

How do you conclude that it has worked well? Were booms and busts avoided in that time? The easy decisions according to economic theory are implemented and the difficult ones ignored - I would argue that success has happened despite economic theory. Bubbles are blown, they bust and as always the producers bail out the spivs, theorists and speculators.

We hear all about, for example, Keynesian approaches to this or that, but when all the b*llsh*t is stripped back, the corporatocracy has simply used the tools available to suit itself.

You are probably thinking about Britain there. In this case I agree with you. But most of the continent and the USA did very well since the 70s. Britain had a serious problem of political economy. That is why I was very happy with Blair/Brown giving independence to the BoE. That had been Britain's main problem, now solved! Alas, Brown tampered with the inflation index, and we were back in the sh!t.

[shipbuilder]

What I made clear already was that it was not a "school of thought" that failed, but the implementation of it, mainly by 2 major economies, mainly since 2002 or 03.

I agree, but the point I was making was that no matter what the school of thought, they are never implemented fully i.e. when the difficult decisions need to be made. This is a complete failure of the entire edifice of economic thought - unless the difficult/unpopular decisions called for by theory are made, then the entire school of thought is effectively worthless. Human nature/politics says that the difficult decisions will never be made, and the VI of economists will make sure they never call for them to be made, so where does this leave economics as a 'science'?

[shipbuilder]

You are probably thinking about Britain there. In this case I agree with you. But most of the continent and the USA did very well since the 70s. Britain had a serious problem of political economy. That is why I was very happy with Blair/Brown giving independence to the BoE. That had been Britain's main problem, now solved! Alas, Brown tampered with the inflation index, and we were back in the sh!t.

It could be argued that monetarists in the US have never had to make an unpopular decision since the 70s - extend and pretend. Can you give an example of one?

[Tired of Waiting]

I agree, but the point I was making was that no matter what the school of thought, they are never implemented fully i.e. when the difficult decisions need to be made. This is a complete failure of the entire edifice of economic thought - unless the difficult/unpopular decisions called for by theory are made, then the entire school of thought is effectively worthless. Human nature/politics says that the difficult decisions will never be made, and the VI of economists will make sure they never call for them to be made, so where does this leave economics as a 'science'?

Exactly! You are absolutely right there. But that is precisely why an essential pillar of modern good governance is an independent central bank. But Brown (or Balls?) found a loophole, a back-door, and tampered with the index.

Actually I think we need a public inquiry about that.

[shipbuilder]

Exactly! You are absolutely right there. But that is precisely why an essential pillar of modern good governance is an independent central bank. But Brown (or Balls?) found a loophole, a back-door, and tampered with the index.

Actually I think we need a public inquiry about that.

I agree, but no matter how independent an organisation is, I don't believe that they will ever prematurely end a boom - I believe that had the MPC continued to raise rates in 2005, their careers would have been over. I think that what wonderpup was getting at originally was that there is a deeper malaise here.

[needsleep]

That is factually wrong. Monetarism has been applied since the 70s in most of the west, developed countries, and worked very well for decades. The credit bubble was mainly a USA and UK thing, and mainly since 2002 or 03.

What I made clear already was that it was not a "school of thought" that failed, but the implementation of it, mainly by 2 major economies, mainly since 2002 or 03.

Greed is centuries old. High interest rates curb it.

Yes, politics is a problem, hence the independence of central banks.

It is all old knowledge, basic really. Nothing new here.

I don't think it has worked well at all. In fact in a curious way it was sidestepped by the rise of the shadow banking sector in the US and the UK. The fact is that shadow banking has increasingly expanded credit outside the control of central banks. And when those shadow banking organisations screw up the (bad) credit they created has to be monetized - in the UK maybe up to £850bn of it. The US and UK both had credit bubbles in the 80s by the way. The early 80s were the real start of the problems we face now and since 2008 we've been seeing the endgame brought about by financialisation, unregulated shadow banking and a deliberate decision to focus away from manufacturing. In the UK the process has been embraced by all governments since 1979 wqhether Tory or Labour and in the US by all governments since 1980, whether Republican or Democrat. History will judge this period as one of almost complete economic policy failure

[Tired of Waiting]

I agree, but no matter how independent an organisation is, I don't believe that they will ever prematurely end a boom - I believe that had the MPC continued to raise rates in 2005, their careers would have been over. I think that what wonderpup was getting at originally was that there is a deeper malaise here.

Higher interest rates would surely have meant a lower bubble.

The UK gov. can't fire MPC members or the governor.

The bubble could and should have been curbed. But Brown put his own personal political ambition above the national interest, and even above the Labour Party's long term interests. History will put his mismanagement on the Labour Party's record.

[Tired of Waiting]

I don't think it has worked well at all. In fact in a curious way it was sidestepped by the rise of the shadow banking sector in the US and the UK. The fact is that shadow banking has increasingly expanded credit outside the control of central banks. And when those shadow banking organisations screw up the (bad) credit they created has to be monetized - in the UK maybe up to £850bn of it. The US and UK both had credit bubbles in the 80s by the way. The early 80s were the real start of the problems we face now and since 2008 we've been seeing the endgame brought about by financialisation, unregulated shadow banking and a deliberate decision to focus away from manufacturing. In the UK the process has been embraced by all governments since 1979 wqhether Tory or Labour and in the US by all governments since 1980, whether Republican or Democrat. History will judge this period as one of almost complete economic policy failure

Compared to the huge bubble of 2002/03 to 2007 all the previous were just minor fluctuations, controlled in time. This last gigantic bubble grew out of criminal negligence, mainly in the USA and UK.

[alexw]

A mortgage rate increase of just 1%, say from 5% to 6%, is a 20% increase. In a mortgage this means monthly payments almost 20% higher. Or, a total budget almost 20% lower. This alone would have reduced the peak by almost 20% - AND eliminated most of the pain.

That is why IRs are the most powerful tool in monetary policy. Brown knew this. An IR raise would take the heat out of the economy in 2004, slowing it down, HP included. But hat was exactly why he (or Balls) tampered with it.

Sorry What's'isname, I feel your pain. I mean it. But Labour did feck things up seriously. These are facts. This is history now.

errr no. Interest rates are the easy scapegoat for the banksters to finger for the cause of the bubble, as a means of saying it wasnt their fault. But the fact of the matter is that interest rates played a relatively small part. You only need to look at how base rates varied to see that during the bubble growth period interest rates while somewhat lower than the previous decade were not massively below trend.

What instead happened was that mechanisms were used to avoid or dampen the effect of interest rates, such as the UK's interest only mortgages with no repayment plan. Thus in 2002 10% of all mortgages were interest only, in 2005 25% were, in 2007 35% were. Interest rates are only effective if they are felt.

[onesmallstep]

Labour were a massive disappointment to me, they could have sorted this country out, but instead wasted 13 years and a lot of money.

The Tories only know how to cut and save money, no investment.

I blame the boe the fsa and the labour govt, before that I blame the tories.

fundamentally it is the class structure that causes the problem.

[needsleep]

Compared to the huge bubble of 2002/03 to 2007 all the previous were just minor fluctuations, controlled in time. This last gigantic bubble grew out of criminal negligence, mainly in the USA and UK.

UK:

1981-89, 115% growth in bank lending

2003-07, 31% increase in bank lending

These figures are from a BoE MPC discussion paper from 2009. I'm not clear whether the figures include non-bank lending to households and firms. Probably not and maybe why the figure for the 2003-7 credit boom seems a little low. But on the face of it they are surprising figures - a sustained and historically significant credit boom in the UK through most of the 80s. Quite a few of us will be old enough to remember how that boom ended I'm sure. The processes that allowed that boom to develop are very clear.

[wonderpup]

I agree, but the point I was making was that no matter what the school of thought, they are never implemented fully i.e. when the difficult decisions need to be made. This is a complete failure of the entire edifice of economic thought - unless the difficult/unpopular decisions called for by theory are made, then the entire school of thought is effectively worthless. Human nature/politics says that the difficult decisions will never be made, and the VI of economists will make sure they never call for them to be made, so where does this leave economics as a 'science'?

Yes- there was a moment there a few years back when the neo liberals had their chance to fall on their swords and take the medicine their free market had proscribed for them- instead they began bleating 'bailout, bailout' and ran around with much wailing and gnashing of teeth proclaiming that if they were not saved from their own religion the sky would fall.

Somewhere on You tube is a priceless interview in which bernie sanders points out to some neo con moron that his bleating for a bailout was socialism in it's purest form- the resultant incoherent response was high comedy of the finest vintage.

Economics was never nor ever will be a science- it's more a fashion of thought with mathematical window dressing- the role of the economist is that of the witch doctor casting the bones of prophecy and then reporting the outcome the tribal Chief needs to hear.

[punter]

Let me guess - a magazine that pushed for more and more deregulation of the financial sector, that championed globalisation, and regards people as resources to be exploited, and national resources best served by being owned by multi-nationals - blames the public sector for the mess the policies they push created?

our financial sector is/was one of the most regulated industries in the world. The FSA has over 1,000 employee's regulating - is that not enough ?

it's not a lack of regulation that is too blame, it's the Bank of England and their low interest rates, QE and the corrupt politicians of both parties in parliament.

What has happened over the last few years and what is happening now is deliberate British government policy to make us all poorer. More regulation won't change this policy only when people wake up and string the ******* up will it change

Edited January 10, 2011 by punter

[punter]

Yes- there was a moment there a few years back when the neo liberals had their chance to fall on their swords and take the medicine their free market had proscribed for them- instead they began bleating 'bailout, bailout' and ran around with much wailing and gnashing of teeth proclaiming that if they were not saved from their own religion the sky would fall.

Somewhere on You tube is a priceless interview in which bernie sanders points out to some neo con moron that his bleating for a bailout was socialism in it's purest form- the resultant incoherent response was high comedy of the finest vintage.

Economics was never nor ever will be a science- it's more a fashion of thought with mathematical window dressing- the role of the economist is that of the witch doctor casting the bones of prophecy and then reporting the outcome the tribal Chief needs to hear.

Apart from predicting the "unexpected" crisis with alarming accuracy and timing proper free marketers(austrian economists) did not call for a bailout, they called for bankruptcy and liquidation of the government connected banks

no one can call themselves for the free market and support a bailout of an industry that puts the very nation's economy in peril and rips off the population.

These people are evil and most of them are in parliament and the Bank of England

[wonderpup]

Apart from predicting the "unexpected" crisis with alarming accuracy and timing proper free marketers(austrian economists) did not call for a bailout, they called for bankruptcy and liquidation of the government connected banks

no one can call themselves for the free market and support a bailout of an industry that puts the very nation's economy in peril and rips off the population.

These people are evil and most of them are in parliament and the Bank of England

I agree- the bailouts revealed clearly that the entire neo con project was not in fact ideologically driven at all- they merely dressed themslelves in the free market brand as it offered them the greatest opportunities to loot the system.

[mightytharg]

The Tories only know how to cut and save money

Not this lot. They plan to in crease taxation and spending each year.

Simple to cut too. They could stop buying houses for the oldies with SMI, stop paying for cripples to fly to Amsterdam to visit prostitutes. Cut housing benefits like they promised. Add an equal tax on public sector pensions to the amount Labour added to the tax on private sector pensions.

They're not finding it hard to cut, they're not even trying.