Why we are creeping towards a crisis of the system

A few weeks ago the Reserve Bank governor made the extraordinary claim that house prices were unsustainable but that the Reserve Bank was only “a bit player” in the problem

That is simply nonsense. House prices went up over 30% last year. This had nothing to do with supply and demand or cost pressures. The only thing that changed in New Zealand last year was the Reserve Bank’s decision to print $57 billion to buy government bonds and drive down interest rates and hand another $28 billion on to the banks virtually free to on-lend to the housing market.  

As a consequence total mortgage lending increased 50% in the year to June 2021 to reach $97,797 million compared to $65,129 million for the June 2020 year. Most of the new lending went to speculators rather than new home buyers. 

“House prices nationally are now 12.4 times the average wage. Home-ownership is at a 70-year low. Rents are at record highs, rising by an average 4.5% a year in the last decade,” reports Stuff. Renters continue to be driven into poverty. Statistics NZ had already reported that “The proportion of renting households that spent more than 30% of income on housing costs rose from below 20% in 1988 to over 40% in 2019”. Widespread homelessness is a direct consequence.

The so-called housing market has very little to do with the laws around supply and demand. It is almost entirely a question of the banking system’s ability to create and sell mortgages and make enormous profits doing so. A period of declining interest rates has allowed the New Zealand banks to seduce people into believing that this will remain the situation forever and all we have to worry about is servicing the debt not the amount of debt. A significant economic shock, like we are currently experiencing, will put incomes at risk and interest rates could easily start moving up as a consequence of the increased risk attached to the borrowing or the inflation generated by the money-printing spree which most pro-capitalist economists are in denial about.

It is no surprise then that banks have been engorging themselves on the huge profits that they have been able to extract.

Westpac reported late that cash earnings were up 56 percent to $1.01 billion for the 12 months ending September 30, 2021. ANZ New Zealand has seen a 44 per cent increase in its profit rising to hit $1.92 billion for the year to September 30. Bank of New Zealand has reported an after-tax profit of $1.32 billion for the year to September 30 – up a whopping 76% or  $560 million on last year.

The Reserve Bank emergency measures last year to rescue the economy from the threatened economic collapse were directed at rescuing the wealth of the owners of Big Business not meeting the needs of the big majority of working people. To a large extent, the same can be said for the economic rescue package being carried out by the Government which has largely involved giving money to businesses just to stay in business. There are no limits imposed on executive salaries, shareholder returns, or keeping on staff long-term so the owners of those businesses just carry on as their normal greedy selves.

The economic crisis that was expected did not happen to the extent feared. This allowed big business to hoard much of the money they have received. Bernard Hickey from The Spinoff has explained what happened in an article on August 27 headed “The rich got richer in last year’s lockdown – and now it’s set to happen again”. It deserves to be quoted at length. I think he is the only journalist to point out what happened.

During last year’s lockdowns the government gave businesses billions of dollars they didn’t eventually need and deliberately boosted asset owners’ wealth by even more – all while the poor were left behind. Ready for version 2.0?

How on earth is this happening again? Last March’s scramble to stop the collapse of our economy meant all sorts of boondoggles and scandals got through the policy system, through cabinet, through the media, and into the bank accounts of the already rich. Fair enough. It was a chaotic and desperate time and any public servant or politician could be excused for policies that were dumb in retrospect, but worked in the moment.

And they did work as intended to stave off 30% unemployment. The government’s emergency economic measures gave over 900,000 businesses employing as many 1.76m people a $14b shot of cash into their current accounts to stop a cascading series of job losses. At one point, 62% of workers were in theory supported by the wage subsidies. That included 240,000 sole traders who got $2b of the $13.8b paid out in total as of the end of September 2020.

Within weeks, the eftpos terminals were beeping away merrily again and the economy rebounded faster than just about anywhere else in the world. By mid 2021, business owners were actually short of staff and worried more about product shortages than a shortage of demand. Unemployment fell to 4.0%. Job done.

So why wasn’t the money that was needed in a hurry paid back in a hurry? Or at all? Some businesses were shamed into repaying their wage subsidies through mid-2020, including The Warehouse, Briscoes, Ryman Healthcare and Vector. Others hastily repaid the money slightly earlier when they realised their customers, staff, regulators and competitors could find out here the names of which large companies were paid and how much. There were some embarrassingly high-end names who had to scramble to give the money back, including blue-chip law firms such as Bell Gully, Simpson Grierson, MinterEllisonRuddWatts, Meredith Connell and Lane Neave.

Others took the money, recovered to make good profits, and then refused to repay all or, in some cases, any of the money, including Hallensteins Glassons, Fletcher Building, Harvey Norman, the Norman family’s James Pascoe Group (Pascoes the Jewellers, Stewart Dawsons, Goldmark, Whitcoulls and Farmers) and Fulton Hogan. Some refused to pay the money back on both sides of the Tasman, including Michael Hill Jewellers, Kathmandu and Harvey Norman. Then there were the luxury product and services businesses, often owned by rich-listers, that took the money and never repaid it, including The Wellington Club, The Northern Club, the Kauri Cliffs golf course and the Millbrook resort and golf course in Queenstown. The luxury lodges, wineries and golf courses owned by US hedge fund billionaire Julian Robertson claimed more than $1.2m in subsidies and didn’t return them, despite making hefty profits by the end of the year.

In the end, the total repaid by last month was just $730m. That’s despite IRD figures showing businesses were 19% more profitable overall in the first nine months of 2020 than the same period a year earlier. That’s despite Reserve Bank figures showing the deposit accounts of non-financial companies rose from $89.8b at the end of February 2020 to $106.0b at the end of February 2021.

Let that sink in. Businesses had $89b of cash in the bank for a rainy day. Instead, taxpayers at large gave them $14b, they made bigger profits, and had $17b extra in their accounts a year later.

Seems unfair? Many people agree. And not just those who work the closest with beneficiaries, renters, students and the working poor, who received around $50 a week extra in benefit increases and winter energy payments over the year — which was easily gobbled up by a 5% increase in rents and drops in part-time and odd-job income.

The government’s handing over a net $13b in cash and its approval of the Reserve Bank’s $62b of money printing to deliberately inflate asset values by $400b has dramatically widened inequality and has sent tens of thousands more children into poverty and homelessness.

Now it’s happening all over again, and without any apologies to beneficiaries, the young, the working poor and renters in general who lost out over the last year. They received comparatively little help from the government and had to watch their remaining hopes for rental security and the “Kiwi dream” of home ownership shattered under the weight of a 30% surge in house prices and a 5% rise in rents.

Facebook founder Mark Zuckerberg had a saying that he wanted to “move fast and break things” to build his social media network, and that it was better to ask forgiveness than permission.

The government hasn’t asked for forgiveness before doing it again, let alone permission.

The 2020 crisis of capitalism has resulted in the socialisation of all risks for the capitalists. Markets are not being allowed to “work their magic” in terms of allocating risk and rewards according to any economic rules. Government spending more than it gets in income, deficit spending, is now the rule. And the numbers are big, often about 10% of GDP equivalent.

Combined, the USA, the ECB, Japan, Germany, France, Italy, Spain, the UK, Canada and Australia, have announced $US2.2tn in central bank measures and $US4.3tn in central government measures. This is the equivalent of 17% of the combined GDP of these countries or 7.3% of world GDP. The Chinese central government has announced $US587bn worth of measures, which is around 5% of its GDP.

The point of capitalism’s recurrent crises is to bring aggregate market prices back into line with aggregate values. Prices that have been inflated by leverage. Before 1971 crises took the form of price deflation. Since the decoupling with gold, currency prices can increase, but capital still gets devalued in terms of “gold prices” as the currency itself depreciates. The 2007/08 debt deleveraging was short-lived, as the ruling class bailed itself out and passed austerity onto everyone else. The debt bubble, and so the discrepancy between aggregate market prices and aggregate values, remained and grew.

Pro-capitalist economists can’t understand capitalism’s recurrent crises when they have the wrong, subjective, marginalist theory of value. Price and value are always equal in marginalist theory. The operation of the law of value under capitalism leads to industrial cycles of boom and bust that ultimately produced a larger and more powerful system of production that conquered the globe. The system would rebound more strongly during periods of recovery if the laws of motion governing that system are allowed to do their magic. That continued to be true after World War Two for three decades because of the depth of the Great Depression and the suppressed demand for consumer goods as a consequence of the War itself.

Since then, both the Keynesians and the monetarists have attempted to stop the law of value from operating with full force by using fiscal or monetary policies to stop a deep recession happening that would clean out the least productive capitalists (industrial or financial) and reward the most efficient and productive capitalists. The only results possible by these policies have been either an inflationary crisis or an explosion of debt that can never be repaid. Today, protecting that debt from the operation of the market to reveal its true value, drags the entire system towards permanent stagnation and depression.

Neither Keynesians nor monetarists are friends of working people. Keynes has a cost-plus view of inflation. The inflationary 1970s was blamed on the significant oil price rise at that time and workers’ wage demands not their policies of money creation through budget deficit financing. Their solution, therefore, was wage controls to reduce costs. The policy faied and we had a combination of inflation and economic stagnation dubbed “stagflation”.

The Keynesians in authority were pushed aside and in the US Paul Volker was made head of the Federal Reserve by President Carter. It required a massive increase in interest rates that drove the US economy into a deep recession in the 1980s to beat down inflation before it destroyed the value US dollar and its role as a world currency. Volker’s policies destroyed the Carter presidency but saved the dollar.

The monetarists were partially correct in their critique at that time by saying that inflation is a monetary phenomenon. But they don’t recognise any difference between token money issued by central banks and credit money created by banks.  That is why every Central Bank in the world has failed to achieve its objectives since gaining “independence” of government controls under the monetarist counter-reforms in the 1980s. 

The monetarists in charge of Central bank policy seemed to have largely abandoned their resistance to money printing to save their system from collapse in both 2008 and 2020.

The first time around this did not lead to widespread inflation because the money was handed straight to the one percent to settle debts between themselves and hoard. This time, however, the crisis that loomed in 2020 was deeper than ever and the money printing required was doubled again. This time, however, a lot was used to maintain or even increase direct spending power in the economy. It was inevitable that this would lead to widespread inflation. We are now around the 5% inflation mark in most advanced capitalist countries and if the economy recovers more broadly inflation will go higher. To break inflation again Central Banks will need higher interest rates to depress economic activity. Working people will be the victims again. Inflation is not the friend of working people. Economic policies that create inflation are also not our friend. 

Any tightening of credit and increase in interest rates threatens to turn the debt mountain toxic.

Ruchir Sharma, Morgan Stanley’s chief global strategist, wrote in the November 22 Financial Times that the world was now in a “debt trap” which explained why, despite rising inflation, interest rates remained low. He wrote:

“Over the past four decades, total debt more than tripled to 350 per cent of global gross domestic product. As central banks dropped interest rates to their recent lows, easy money flowing into stocks, bonds and other assets helped boost the scale of global markets from the same size as global GDP to four times larger. Now the bond market may be sensing that the debt-soaked and asset-inflated global economy is so sensitive to rate increases that any significant rise is just not sustainable.

These increases mean that financial markets become increasingly fragile and whereas in the past major central banks could increase rates by significant amounts, today “much milder tightening could tip many countries into economic trouble.”

Working people across the globe are caught in a dilemma. We don’t want an economic collapse because we know we will be the worst affected. So, actions by governments to “rescue” the entire capitalist system of finance and production and trade are needed. But if we are going to do that, why don’t we place the commanding heights of the economy, especially in the area of finance and money creation, into the hands of a publicly-owned and democratically controlled entity rather than simply hand the 1% our cash as if they have some God-given right to it? We have socialised all risks associated with private banking, so why not socialise banking itself?

The immediate crisis and recovery have now passed. We must now build for a future that involves putting people and the planet before the pursuit of private profit. When inflation returns – and it will under current policies – bringing under control again under a market system of private banking requires a steep rise in interest rates and consequential deep recession like occurred in the 1980s.

The current combination of policies to combat the pandemic and associated economic crisis – which involves both a monetary and fiscal explosion – will sooner or later lead to an implosion of the entire credit and monetary system and along with it the system of capitalist production itself. The alternative is not to let capitalism operate without any limits in terms of subjecting all labour and the planet to its uncontrolled passion to exploit all and everything for the private benefit of a tiny class of owners. The planet cannot survive another few decades of the same old shit.

Working people need to put forward solutions in the here and now that protect our class and the planet we live on in an immediate sense. Those immediate demands can form part of a Green New Deal to transform the way we produce and live with each other. But we should do so with our eyes open to the fact that this system cannot accommodate what we need without generating new forms of crises. We must be prepared to go beyond a system based on private greed towards one based on human needs.

That is why a socialist answer to the crisis is not just to spend more but to take money creation out of private hands. The banking system in New Zealand is based on maximising the creation of debt to enable profits in the form of interest. The profits of the top four banks in New Zealand have doubled in the last decade and between them make around $8 billion in profits a year. The return on equity is one of the highest levels for any similar banking system in the world.

Banking profits alone dwarf the combined profits of almost every other publicly listed company in New Zealand. For example, in 2017 the ANZ made more than Fonterra, Spark, Fletcher Building, The Warehouse, Air NZ and the major supermarkets combined. These banks’ profits are equivalent to 2.5% of New Zealand’s entire GDP compared to only 2% in Australia – their home country for all four.

Their greed knows no limit and extends to cheating the taxman through elaborately designed tax avoidance schemes. Public ownership and control of banking is the only way we can guarantee that the desperate search for profit by the criminals who own and control banking in New Zealand is ended and we can direct investments away from property speculation towards the social and environmental needs of people.

The big four have their presence in New Zealand through taking over previously publicly or community-owned banks during the privatisation mania that swept the country in the 1980s and 1990s and wreaked so much economic havoc. The BNZ used to be State-owned. The ANZ took over the old Post Office Savings Bank before it was privatised. The ASB used to be owned by a community trust that paid returns to the community.

The creation of money, in all its forms, should be a publicly controlled process without capitalist greed periodically putting entire financial systems at risk and that we end up having to bail them out because of their greed and that they are “too big to fail”. This is effectively what happened in Ireland, the UK and US after the 2008 crisis and we should make sure we do not repeat this time as we face the economic dangers ahead.