GOING FOR BALLOONING DEBT AND THE David Coen looks at the growth of the British economy. Brown's claim that we have experienced the longest period of sustained growth in history and asks how this is related to the rather shaky foundation of a house price boom. ne of Gordon Brown's proudest boasts as Chancellor is that he put an end to 'boom and bust' economics. Just as well then that he got out while he was ahead and handed the hot potato that is the British economy to someone else because, as every ballooning enthusiast knows only too well, what goes up must come down. And engineering a soft landing requires that the working class work longer, forego pay increases and tolerate higher unemployment. The main factor in the growth of the British economy, the basis for Brown's claim about the longest period of sustained growth in history, has been the rather shaky foundation of a house price boom. Not that the British economy is alone in this: it's a feature of the global economy.' Which is why commentators in the financial press constantly warn about the dangers of a collapse in high-risk mortgage lending in the US - the so-called 'sub-prime' sector and the dangers if the contagion of collapsing mortgage lenders spreads to Britain. Of course creating and sustaining the housing boom was (and is) principally a political act rather than something emerging simply through the operation of economic laws. While the tide of cash and credit that built arises from the THE RESULT IS A GROWING DEPENDENCE ON BUSINESS FOR FINANCIAL SUPPORT AND A MORE OR LESS COSIPLETE CAPITULATION TO THE FINANCIAL MARKETS WHEN IT COMES TO ECONOMIC POLICY. sea of money capital seeking profitable investment opportunities across the globe, the house price bubble deserves examination in its own right, not just because of its importance within the British economy, but for the way in which it shapes the political landscape in Britain. 2 The housing boom, though initially engineered by Tory Chancellor, Nigel Lawson in the late 1980's, which came to a end with the deep recession of 1991, is both an aspect of a new phase in the dominance of finance capital in Britain and the political compact between it and New Labour. On one side is the attempt to shift Party funding away from the trade unions and towards business, though this has been slowed by the so called 'cash for honours' affair; on the other a determined attempt to open hitherto state or local authority run services to private capital, usually special purpose service or facilities management companies backed by banks and finance houses. Alongside this, the policy-induced housing boom has induced a huge growth in profitable lending to house purchasers at a much lower risk to the banks than, say, lending to foreign governments which repeatedly defaulted in the 1980's and 1990's.2 The result is a growing dependence 1. http://www.moneyweek.com/file/3075/hous- ing-boom.html 2. http://www.bbc.co.uk/blogs/thereporters/ robertpeston/2007/02/hsbc_us_troubles.htm
BROKE: HOUSING CRISIS on business for financial support and a more or less complete capitulation to the financial markets when it comes to economic policy. The meaning of 'reform' in New Labour is not to try to mitigate the worst aspects of capitalism but a conscious effort to reshape the economic and political landscape in the interests to finance capital. Debt is a growth industry Total UK personal debt at the end of April 2007 stood at £1,325bn, a 10% increase on the previous year. Most of that (E1,112bn) was in the form of mortgages. The average debt per household is £54,771, including £8,816 per household for non-mortgaged lending such as credit cards and hire purchase. Personal debt increases by E1 million every 4 minutes. House prices have risen at more than 11% a year since New Labour came to power in 19973 with prices in London accelerating faster than anywhere else. The real cost of rebuilding houses, the bricks and mortar, has risen by only 15% over the same decade.4 The difference between the real cost of building and the money value shows the extent of the Not surprisingly, handling the growth of the financial bubble has led to a rapid growth in the workforce in this sector. Over the last 10 years, Financial Services have grown from 6.5% to 8.5% of British GDpS and employs nearly 5% of the working population, concentrated in London. But allied to the growth in brokers, advisers and dealers of all 3 kinds, has come an explosive growth in services relating to the property market: everything from builder's suppliers to interior designers, furnishings and bathrooms. ' In fact it has been this growth rather than manufacturing or exports which has driven the economic growth which Brown boasts about.? Origins of the housing boom The Housing Act of 1980 put the sale of council housing at the heart of the Thatcherite agenda. Allowing the banks to enter the mortgage market and encouraging the growth of 'low cost' endowment mortgages linked to performance on the stock market resulted in a flood of borrowed funds into the stock market via bank and mortgage lending.& The effect was to drive up share prices and to lay the foundations for the housing boom, which really took off while Nigel Lawson was Chancellor in the mid to late 1980's. Sales of council housing had the explicit aim of creating, alongside the privatisation programme of the early Thatcher years, a 'property owning democracy', the reasoning being that the militancy of the previous ten years would be curtailed if a layer of workers had a property owning stake in the system, or alternatively, that workers who had mortgages to pay would be less likely to strike. Between Thatcher coming to power in 1979 and 1995, 2. 1 million council-owned properties were sold off. Alongside sales of council housing, the Conservatives, as part of a general attack on local government, prevented councils from using either capital receipts or rental income to fund new building. The effect of this combined with low interest rates and tax advantages for buy-to-let speculators (introduced by New Labour) have led to the current housing crisis in London and the South East of England. Labour and the House Price Boom One of the real ironies of neo- liberalism is that, while its ideologues 3. http://www.communities.gov.uk/index. asp?id=1156110 4. http://money.guardian.co.uk/news_/sto y/0,,2133283,00.htm 5. http://www.rogersmithifa.co.uk/services_ files/Counsel_200701_smith.pdf 6. See Chris Harman at: http://www.isj.org. uk/index.php4?id=335&issue=115 7. http://investing.reuters.co.uk/news/arti- cleinvesting.aspx?type=economiclndicatorsNe ws&story 8. Will Hutton: The State We're In Vintage Books 1994
in the trink tanks. such as the Adam Smith institute. denounce government intervention in the economy at every turr. Susiness has been quietly insinuating itself into every corner of government activity. Years of low interest rates at a global level indicate a surplus of capital seeking whatever returns it can achieve. So, while extolling 'risk', large banking and other financial interests have been desperate to find long term, secure investments, hence their interest in taking over operations which receive long term government funding. The privatisation process begun by the Tories and continued by New Labour is designed for the same purpose, to maintain profits by channelling public funds to big business. A classic example of this is Private Finance Initiative (PFI) schemes in the NHS, where the financiers are guaranteed virtually fixed returns over 30 to 35 years.º Because the returns are known to be safe for long periods, the financiers involved can sell them on or use them for other financial 'engineering' purposes. Even this still doesn't go far enough for the capitalists who want to replace state provision altogether with a system of private health insurance along the lines of the US, a system generally seen as a licence to print money. Privatisation of council housing has the same effect. New Labour won't interfere with the 'right to buy' schemes introduced by the Tories, and neither will they, despite Gordon Brown's recent tweaks, allow councils to build more houses. Their solution - trying to force tenants into the hands of ALMO's, PFI schemes or Registered Social Landlords - is designed to hand the 'income stream' from the rents paid by the tenants to the financiers who provide the funds. The result is higher rents and government subsidies to the lenders that enables them to earn at least a commercial return on their investment, while maintaining the pretence that somehow they are different from straightforward commercial landlords. We are likely to hear a lot more about the benefits of such 'third sector' providers such as charities, voluntary groups and religious organisations in the future. The tax benefits for buy-to-let speculators introduced in the 2006 Budget were specifically designed to benefit the rentiers, even while the effect was to put houses further beyond the reach of many. Apart from providing safe long term returns to finance and property companies, New Labour will do nothing to rein in the property boom BY TO LET LONGEE 72 6337 because, in spite of Gordon Brown's much proclaimed dislike of 'boom and bust' economics: the fact is that without the property bubble, both New Labour and the Tories would be without any serious claim to have brought about economic growth. '° With manufacturing output showing no growth at all" and growing trade deficits, it was only the earnings from services and particularly financial services that stopped a further THE TAX BENEFITS FOR BUY-TO-LET SPECULATORS INTRODUCED IN THE 2006 BUDGET WERE SPECIFICALLY DESIGNED TO BENEFIT THE RENTIERS, EVEN WHILE THE EFFECT WAS TO PUT HOUSES FURTHER BEYOND THE REACH OF MANY slide into the red. While a discussion of the role of the City in the political economy of Britain is not possible here beyond making a few obvious points about the influence of finance capital, more than 50% of the earnings of the top 100 companies on the Financial Times Share Index - the FTSE - come from overseas. Little wonder then that New Labour, like Thatcher and Major, ties itself so closely to the US global military 'reach' in order to protect its global interests. Normally a balance of payments deficit - export earnings falling short of spending on imports - would cause pressure on sterling because there would be more 4 FORSALE LAING 8511331 LOLET 47 bon 749 005 sellers than buyers. A weak pound in turn weakens British capital vis-à-vis capital in stronger currency areas and so there is pressure to increase interest rates to attract money capital from abroad which then tends to raise the value of sterling. But high interest rates are unpopular with borrowers, particularly those with mortgages. However, since Thatcher's efforts to use high interest rates to squeeze inflation out of the economy and the Tories efforts to shadow the EMU, the forerunner of the Euro, interest rates have been lower, and latterly much lower, than any time since the 1950s. Despite such low interest rates the pound has been relatively strong, mainly because of the inflow of capital from areas such as the Middle East - boosted by high oil prices and from Russia as the oligarchs funnel their assets out to avoid a clampdown. So New Labour has been under less pressure from financial interests to put interest rates up and low interest rates have encouraged the house price boom. The rise in house prices has meant that many house and flat owners have been able to get additional mortgages, which 9. Allyson M Pollock NHS Plc Verso 2004. See esp. Ch. 3. Under the General Agreement on Trade in Services (GATS) there is a global attempt to destroy public services and to pipe the health and pension contributions of millions of workers into the coffers of private busi- nesses. There are many examples of successful struggles against privatisation of water and electricity services. See for example, http:// www.cpsa-acsp.ca/papers-2006/Spronk.pdf,for an account of one such struggle in Bolivia. For a particularly bizarre example of the use of the Adam Smith Institute by the Dept for International Development to promote water privatisation in Africa, see http://www.source- watch.org/index.php?title=Adam_Smith_Inter- national 10. See Chris Harman at: http://www.isj.org. uk/index.php4?id=335&issue=115 11. http://www.econ.cam.ac.uk/faculty/coutts/ Structural 20Change%20under%20New%20Labo ur_27_mar07.pdf 12. http://www.housepricecrash.co.uk/
they. tend to spend not on the property itself but on consumer goods - a kind of mortgaged-backed credit card. Under previous Labour governments such a boost to the economy would have come from Keynesian-inspired government spending, funded by borrowing, leading to the 'evils' of inflation that the neo-liberals complain of. In effect, what has happened is that the boost to the economy has come from private rather than public debt. In the free- marketeer's view it is clearly preferable to have the debt scattered among millions of private individuals rather than being the responsibility of the state. Their assumption is that if these millions of debtors pursue their own interests, the sum of their decisions will be in the greater good, which the market will correct for errors and equilibrium will be restored. However, it is by no means clear that this pile of debt is less susceptible to a crash than a state sponsored one. In fact it seems more likely that, as in past IN THE FREE- MARKETEER'S VIEW IT IS CLEARLY PREFERABLE TO HAVE THE DEBT SCATTERED AMONG MILLIONS OF PRIVATE INDIVIDUALS RATHER THAN BEING THE RESPONSIBILITY OF THE STATE financial meltdowns, the state will be forced back into the arena to regulate, and in some cases compensate for losses. Interest Rates and Aspirational Voters The first thing Gordon Brown did on becoming Chancellor in 1997 was to hand control of interest rates to the financiers as represented by the Bank of England. The clear message to the City was that New Labour would keep inflation in check. Government spending is held by the financiers to be inherently inflationary and inflation is anathema to holders of money capital because its eats away at its value. But the 'battle against inflation' is also code for a demand to discipline the working class and increase profitability. It was the Tories' war cry as they used high interest rates to rein in spending during their years in office. The high unemployment resulting from the poverty, operates within the same suppost and suit ese the grote to falter, as spending falls. If we can characterise New Labour as an attempt to tie in a better off layer of the working class - the so-called 'aspirational' voters - behind a political project which partly relies on inflated property prices, then the dangers of 'ising interest rates and the potential of falling house prices are plain. Apar from demolishing the financial gains resulting from house prices having risen well above the sums borrowed, the sharp cutback to consumer spending which has been fuelled by the boom in the housing sector, could easily trigger a wider recession, undermining Brown's claim to promote steady economic growth and bringing the whole New Labour project into disrepute. Whether the outcome of this bubble is a recession along the lines of 1991 or the property crash, which occurred in Japan in the same year, remains to be seen. The government will try to head off a crash by means such as lowering interest rates and easing lending regulations. Because debt is a claim for a share of profits, it will aid attempts by the capitalist class to increase profitabilit ill else fail, it will resort in the end t lationalising bankrupt banks or financia institutions. 5 itself lead to a growth in demands for radical change. While both of those are disputable, there is much less dispute that, whatever triggers it, sooner or later a crash will come.