Knee-Jerk Toryism: inflating asset and property bubbles and then crashes

The Financial Times reminds us today that 2015 has been a vintage year for the finance sector and lists twelve of the “choicest gifts” bestowed on the sector, including “the unexpected Conservative party election win… a win for the numerous hedge funds and financiers who donated to the campaign in the hope of pro-business policies”.  Chancellor Osborne gifted the sector by calling  “time on the era of heavy fines following financial scandals that had blighted the City’s reputation, such as the Libor and foreign-exchange rigging scandals”. Another “choice gift” was George Osborne’s decision to cut the bank levy.

Before euphoria engulfs the City, it might do to remind the sector that while Conservative governments may periodically enrich the already-rich by inflating the value of their assets, and bestow upon them the choicest gift of tax breaks – they have also regularly adopted policies “with terminal consequences” for British banks.

I’m reading Duncan Needham’s excellent book: UK Monetary Policy from  Devaluation to Thatcher, 1967 – 1982 (Palgrave Studies in the History of Finance).  Its difficult not to be struck by the parallels between the 1970 Conservative government of Edward Heath and his Chancellor, Anthony Barber and today’s Cameron government.

The book is about how flawed monetarist and ‘free’ market economic dogma – as dictated by both the IMF, Tim Congdon and others – influenced changes made to Credit rationing by the Bank of England, and led to the introduction of Competition and Credit Control (CCC). The result was that in 1971 rationing credit creation by Bank of England control was replaced by rationing by cost –  in other words by higher expected market rates of interest.

Unfortunately for the Bank of England’s monetary theorists, neither the then Chancellor Anthony Barber nor his Prime Minister, Ted Heath, fully understood the implications of targeting the money supply and rationing credit by cost. Unfortunately too, the Conservative manifesto for the 1970 election had called for an ‘end to the tax nonsense…[that] disallowed the interest on many loans as a deduction from income for tax purposes’.  John Nott (remember him?) insisted that tax relief for interest was a manifesto pledge and was therefore ‘inescapable’. So it was included in the 1972 Budget.

Needham: “This could hardly have come at a worse time for monetary policy. Just six months after predicating monetary control on the interest rate weapon, that weapon was blunted by making interest payments deductible against tax. For a basic rate taxpayer, the cost of servicing a loan was immediately reduced by 30%. For the highest rate taxpayers it was reduced by 90%. (My emphasis).  This measure alone meant it would take much higher interest rates to control bank lending to the private-sector and therefore, M3. It also meant that, far from generating the investment boom the PM was looking for, the dash for growth would produce an asset and property boom that would crash in 1973 with terminal consequences for a number of British banks.”

British bankers cannot say they have not been warned.


Incorrect speech, the Ku Klux Klan and Cecil John Rhodes

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From: South African history online.

I am South African born. My father was an Afrikaner Theodorus Potgieter,  and my mother, Olive Grace Smart, of English descent. As a child I was often witness to arguments between my more progressive father and my grandfather, Edward Nelson Smart (b.Hunt – an ‘illegitimate’ child)  as the latter was an English nationalist and royalist.  My father, unemployed after playing a heroic role in the Second World War as a captain in the RAF, moved his family to a small town, Odendaalsrus, in the ‘outback’ of South Africa – the Orange Free State, where gold had recently been discovered.

All through my childhood in these backwoods we referred to African male adults encountered at for example petrol stations, as “boys”. Africans were widely known as “kaffirs”. So I have extensive experience of the application of what the Financial Times bewails as “incorrect speech”. While I have no doubt that such language is still in use in South Africa, it is now no longer acceptable to use such speech in polite company. Indeed it has been “banned” – thanks to the struggle and sacrifices made by progressive, black-led liberation movements in Southern Africa. I have no doubt that such terms are even “banned” in right-wing publications such as the Daily Telegraph and the Financial Times.

The idea that a British so-called Liberal, Nick Clegg should argue in the Financial Times “this trend of banning people whose views you don’t like is getting seriously out of hand” in relation to Cecil John Rhodes is but a reflection of how reactionary British politics has become.

Rhodes was not only a racist, but a white supremacist. As a British imperialist he can correctly be compared to members of the Ku Klux Klan.  Like the Ku Klux Klan he advocated white supremacy, white nationalism and racism, as the following well-known excerpt from his writings testifies:

“I contend that we are the finest race in the world and that the more of the world we inhabit the better it is for the human race. Just fancy those parts that are at present inhabited by the most despicable specimens of human beings what an alteration there would be if they were brought under Anglo-Saxon influence, look again at the extra employment a new country added to our dominions gives.”

Cecil John Rhodes regarded black people as “despicable specimens of human beings.”  His role in setting black workers “apart” in “compounds” from white diamond diggers in Kimberley marks him out as one of the first architects of “apartheid”. He upheld the abhorrent idea that black people were natural thieves that had to be imprisoned to prevent them obtaining diamonds. By contrast, white imperialists, guilty of thieving these valuable African assets by the use of force, were of the “finest race in the world”. Afrikaner nationalists were to learn a great deal from their imperialist overlords, as they built on the racist foundations laid at Rhodes’s Kimberley diamond mine.

The profits made from apartheid enabled Rhodes to dictate the legacy made concrete at Oriel College. By raising a statue to him the Oxford college was not just celebrating the donation of his wealth, but also his role in entrenching apartheid. If Harvard’s establishment had erected a statue in the grounds of the University to a wealthy donor member of the Ku Klux Klan one can only imagine the furore – the stink – that would have caused.

So the Oxford students are right. They must be supported. Rhodes must fall from the elevated status he tried vainly to guarantee for himself, and wrongly accorded today by the British political and media establishment.

Central bank policy rates and the real economy

A version of this letter was published in the Financial Times today. 

Dear Sir,

Larry Summers is right to point out how few tools central bankers have to “delay and ultimately contain the next recession”. (FT, 6 December, 2015). We share his pessimism. However his analysis of the so-called “neutral rate of interest” being lower in the future than in the past” is based on the flawed notion of a “growing relative abundance of savings relative to investment”.

As Keynes explained and understood, in an economy based on credit, investment is not constrained by savings (and vice versa). Many of those who lay claim to his theories still do not accept this basic principle of a credit-based economy – applied in the UK since the founding of the Bank of England in 1694.

This flawed analysis leads Summers to misunderstand the direction of interest rates for those active in the real economy – rates often distinctly higher than prevailing central bank policy rates.

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Thatcher: should we pay out all that money for Trident?

There is a fascinating review by David Runciman in the LRB of Charles Moore’s: Margaret Thatcher: The Authorised Biography, Volume ll: Everything She Wants.

In it Runciman recites the tale of Mrs T, the Labour leader Neil Kinnock’s support for nuclear disarmament, and President Reagan’s sudden conversion (in 1986) to nuclear disarmament. It turns out that at a meeting in Reykjavik in the autumn of 1986 Reagan and President Gorbachev, backed by George Shultz Reagan’s Secretary of State, agreed to eliminate nuclear weapons. The implications of this sudden meeting of minds were… ‘cosmic’ writes Runciman.

Mrs Thatcher was not happy. Suddenly the Labour Party’s position on nuclear disarmament appeared credible…”in line with the unfolding logic of superpower politics and….(where) the Tories would be the ones out on a limb.”

So Mrs Thatcher began to work to change Reagan’s mind, and “bring him back into line.” A note was written to the American President, with the emphases made by Mrs T herself:

“You will cause me very real political difficulties if you pursue your proposal for eliminating ballistic missiles too actively. In our people’s mind it will raise two questions: isn’t Labour right after all in wanting to get rid of nuclear weapons….? And why on earth should we pay out all that money for Trident, if its going to be abolished in 10 years? The next British general election could ‘turn’ on these points, so you must help me deal with these arguments.”

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The Autumn Statement: a comment

Has George Osborne stopped beating up the economy? Certainly many are nervously relieved at having evaded the big stick he waved earlier. Others have noted that he was helped in his more benevolent approach by optimistic forecasts from the Office of Budget Responsibility (OBR).

Despite this apparent benevolence, the Chancellor still plans to cut public spending and increase taxes. The OBR forecasts that “fiscal consolidation (will) continue to depress the level of GDP, while acting as less of a drag on growth over the past four years.” (OBR)

However even this bit of cheer is predicated on the global economy expanding, and inflation rising. While we can speculate that the additional stimulus applied to the private property sector may cause asset prices to rise (if house builders are confident of selling new properties at a profit, and do build) the fall in CPI has far more to do with weak domestic and global demand.

The OBR would have us believe that falls in consumer prices mainly reflect “falls in commodity prices”. But falling commodity prices reflect weak global demand or spare capacity, and take the form of gluts and rises in inventories.

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“What are the economic possibilities for our grandchildren?”


Kings College, Cambridge, David Loggan, 1690

Kings College, Cambridge, David Loggan, 1690

Notes for a speech given by Ann Pettifor at an event commemorating Keynes and the completion of Kings College Chapel, at Kings College Chapel, Cambridge, on the 16th November 2015. The full version of the paper, co written with Geoff Tily, is available on PRIME.

Ideas and Power

It is a great honour to speak at this celebration of Kings and Keynes. The greatest honour I can do to both Keynes and Kings College is to get down to business and speak frankly.

The world desperately needs to recover Keynes, but to do so it also needs to confront some deeply uncomfortable truths about the nature of power and the acceptance or otherwise of ideas.

In his 1902 Imperialism, John Hobson observed:

“No one can follow the history of political and economic theory during the last century without recognizing that the selection and rejection of ideas, hypothesis, and formulae, the moulding of them into schools or tendencies of thought, and the propagation of them in the intellectual world, have been plainly directed by the pressure of class interests. In political economy…….we find the most incontestable example.” (Hobson, 1902, pp. 218-19)

Given the pressure of class interests on today’s economic ideas and on the economics profession, the long-standing neglect of Keynes’s ideas, most significantly here in Cambridge, comes as no surprise.

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On brilliant, neglected women economists – for Woman’s Hour.


Joan Robinson

Yesterday I was invited on to Woman’s Hour to talk about outstanding women in economics that have never properly been recognized and acclaimed for their contributions.

The context is the Virago/New Statesman women’s prize for new, young writing on politics and economics. The prize was launched in late October to address the underrepresentation of women in non-fiction publishing  “and most particularly in the vital, society-shaping fields of economics and politics”.

At first, the producer of Woman’s Hour (Helen Fitzhenry) had asked if I wished to put forward a list of women economists and writers. I did so with alacrity. At the top was Emeritus Professor Victoria Chick, a formidable and outstanding monetary theorist and macroeconomist. She is best known for the integrity and rigour with which she evaluated both Keynesian and monetarist traditions in her book, The Theory of Monetary Policy (1973). And for her magnum opus: Macroeconomics after Keynes, published in 1983. (Listen to her here on the subject of “why economists don’t understand money.”)

Then there was Susan Strange (no longer with us sadly) one of the architects of the field of political economy and author of the prescient Mad Money – when markets outgrow governments in 1998 and Casino Capitalism in 1997. Cheryl Payer’s The Debt Trap: the international monetary fund and the third world – had a significant impact on many economists working in the field of sovereign debt – but her work and insights go largely unrecognized. Then there is the wonderful Yves Smith, editor of the website naked capitalism, and author of Econned: how unenlightened self interest undermined democracy and corrupted capitalism. Yves’s fearless commentary on finance, economics, politics and power makes her a proper and courageous role model for any young women writers on economics. Finally, I was very keen to promote the outstanding work and writing of Professor Mariana Mazzucato and her book, The Entrepreneurial State.

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Ann on BBC World at One

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Ann is a member of the newly-formed committee of economic advisors to the leader of the Labour party. Today she was interviewed on her views on Osborne’s Fiscal Charter, and Labour’s response.

Listen to Ann Pettifor on BBC’s World at One.

It’s time to escape “Stockholm syndrome”

Child in escape chute, US National Archives, 1924

Child in escape chute, US National Archives, 1924

Mr Osborne’s most striking political achievement, with the connivance of the economics profession and media, is to reframe the debate about the most severe crisis in living memory away from finance and towards the welfare state – identified as causal of the crisis.

In reframing the debate he has succeeded in ‘capturing’ some of his opponents and convincing them of his framing and narrative.

He has done so by accusing Labour of reckless management of state finances.

Now Labour, egged on as it was under Gordon Brown by orthodox economists in both the Treasury and academia, does share responsibility for ‘light touch regulation’ of the City. But in no way can the Labour government be found guilty of “overspending”.

The opposite is true.

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Ending ‘life support’ (QE) for western economic model underlies China crisis

After two days of trouble and strife in global stock markets, the Federal Reserve’s New York President William Dudley said in remarks to reporters that a September interest rate hike seemed “less compelling” now than in recent weeks. These two words alone calmed global financial markets, and pushed up the price of oil.

So everything’s going to be all right then? That is what some would have you believe. “Relax. Its just a correction” say the analysts. “The stock market always goes up and up and up. Hang on in there.”

However, I do worry. Where there’s volatility and instability, the causes are ultimately fundamental. Given this week’s events what can they be? Is it all to do with China?

I doubt it. When the governors of the People’s Bank of China announced a cut in interest rates – stock markets continued to fall. When a Fed governor uttered two words off the cuff – markets rallied. So when looking for a cause we need to look west, not east.

Most agree that the panic was sparked by a slowdown in China. The question then becomes: why is China slowing down? Some put it down to China’s credit binge, and the rise in debt hobbling local governments and property developers. Demographic change is another. Others believe that China’s extraordinary investment levels will now dive lower.

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