Foros de la Plataforma por una Vivienda Digna

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The fall of the house of finance
We must rebuild our economic system so that it works in the interests of society and the ecosystem.
Things are not looking too good in the house that Big Brother finance built. As Larry Elliott wrote in Saturday's Guardian, financial markets are gyrating. Interest rates in both the US and UK look set to rise (painful for the over-borrowed, such as first-time buyers, students, General Motors, the NHS, Man United etc.)

The dollar is volatile and likely to fall further, if not "plummet" (painful for US hedge fund managers who have borrowed other people's money in non-dollar currencies in order to gamble with it: for every notch the dollar falls, the cost of repaying those billions rises.) Daredevils on stock markets (including pension fund managers?) are likely to make losses, and speculators in commodities are taking a hit.

But then, what would you expect from the unregulated house built by finance? As a sector, its players are careless of the interests of what can broadly be defined as industry, labour and the ecosystem (not their problem, guv), but most of all, they are careless of the interests of the poor and poor nations.

Since the 1970s, when Conservative and Republican administrations, urged on by neoliberal monetarists and apparently cautious central bankers, began lifting controls over capital and removing controls over the creation of credit, Big Brother finance has been in charge. By removing capital controls, central banks gave away a power crucial to our finances and economic health; to the health of labour and industry, debtor nations, such as Turkey, companies such as Manchester United government bodies such as the NHS: namely, the power to set and control the whole range of interest rates - short and long, safe and risky. For this crucial power to be exercised by the Bank of England or the government depends on capital controls - controls over the movement of stocks and bonds.

But it was given away, transferred to Big Brother - the "invisble hand" in the international capital markets. This weekend, Paul Tucker, director of markets at the Bank of England, complained in the Financial Times, in language designed to befuddle you and me, of "an explosion in the use of structured financial products, such as credit derivatives, [that] may have distorted market interest rates and left investors mispricing risk"(my italics).

"Market interest rates" are not rates set in the interests of society. So why should the markets care?

What should be done? Between 1944 and 1971, central banks and elected governments governed finance. Thanks to Keynes, finance had been sidelined, removed from the disastrous Big Brother role it played in the 1920s and 1930s. The power to fix interest rates - a social construct, after all - was returned to the democratic sphere. The power to create money and credit (another social construct) remained in the public sphere and was controlled and regulated until the 1970s.

Those were the good times, times the historian Barry Eichengreen described as "a period of tranquillity in international financial markets". Interest rates were set at 2% for most of the duration of the war (when Britain probably borrowed more than it had ever borrowed before) and stayed that way for some years after the war. These rates were set by institutions that had a democratic mandate: they fixed rates in the interests of industry and labour.

Since Nixon, Thatcher and Reagan began the process of deregulation and liberalisation, the economy has been governed by the private sphere - Big Brother finance. And its house (to which the name "globalisation" has been given) is about as solid as a showbiz set.

Big Brother finance makes all the key decisions. Market players decide whether capital should flood China, rush out of the US; dally with Brazil or play around with Iceland. Finance decides whether long-term rates (the rate for mortgages or long-term investments) should be high (as they have been, in real terms, for most of the period since deregulation) or whether after a crash (as in 2001) they should be low. (Applying low interest rates to markets dwelling in property, stock market and other bubbles encourages yet more lending and borrowing, and is like fuelling a fire with oil.)

As a result, the world is in a financial mess. Worse, Anglo-American economies could be heading for the kind of prolonged period of debt deflation that Japan is just emerging from: 15 years of economic pain, unemployment, family breakdown, social unrest and rising nationalism. As the US and UK economies have been "engines" of global growth for the past decades, a similar crisis to Japan's will have a far worse impact on the global economy. In a book published by the new economics foundation in 2003, we gave due warning. But like Cassandra, were not believed.

Mervyn King, the governor of the Bank of England, who did not create this mess but inherited it from his predecessors, is well aware of the risks and is issuing stark warnings. Too late. We moved into the house long ago, allowed gamblers in credit derivatives to "distort market interest rates", built up huge debts, which we exploited land and labour in order to repay, and borrowed from the future.

Now big cracks are beginning to appear. And as long as finance is in control, ungoverned and ungovernable, there is little that can be done. Instead we must await the coming first world debt crisis (the title of my new book).

When the crunch comes, the finance sector (whose players have an aversion to the "nanny state") will pass the losses and liabilities to the state - that is to us, the taxpayers. We will pay, over and over again, to clear up the mess. Both humanity and our ecosystem will suffer immense degradation and pain.

Society will then be given the task of rebuilding the financial system. Industry and labour will, in my view, have to overcome their differences, unite, subordinate the finance sector to their interests and lay new foundations. And this time we must rebuild the financial system in the interests of society and the ecosystem as a whole, not just of a small, usurious financial elite.

http://commentisfree.guardian.co.uk/ann_pettifor/2006/05/the_house_that_big_brother_fin.html