I realised that on reading my essay through there was a repetition of themes in my writing. It is not the bad behaviour of the banks that drive me to write, but the attempt to explain why, in spite of the economy growing have we all become poorer, that is apart from a tiny elite. When I started work in the 1960’s there was full employment and everybody had the benefit of being housed well. Now that world has disappeared and neither of the last two statements are true. Why? I think an analysis of the housing market explains how this change occurred. When what was once seen as a necessity of the good life housing, is now seen as a commodity to be exchanged on the money markets. There has been a devaluation of human life.
After years of housing booms and busts it is impossible to believe that governments once took action to suppress house price bubbles. Their intention was to keep house prices at affordable levels. All these controls on the price of houses were scrapped by the Conservative governments of 1970 and 1979. Now the governor of the Bank of England is talking again of reintroducing such regulations to rein in future housing price bubbles.
The ending of any controls was in part a consequence of a long campaign by the banks and the rest of the financial community that chafed at any controls that limited their ability to make money. They could guarantee negative press headlines about credit squeezes, so making their cessation much easier. one phrase coined at the time of controls, was mortgage famine. The public were easily persuaded to that credit controls only had a negative impact. At the same time Social Democracy was going out of fashion in the political classes. This meant that controls and regulations that were an integral part of social democracy had to go. It was easy to claim that al the crisis’s of the 1970’s were consequent on having a Social Democratic system and the system that was the source of all our problems should be replaced by something better.
Why did the banks so hate directives and all the other controls that limited price inflation in the housing market? These self same banks at the same time campaigning for a control of inflation in the wider economy. The reason is quite simple, money was the asset in which bank’s traded and they wanted some stability in that commodity. Also inflation in the wider economy added to their costs, unlike house price inflation from which they could directly benefit.
What the banks wanted was the freedom to manipulate the housing market to benefit themselves. They wanted a rapid turnover of the housing stock at ever increasing prices. It was the activity of the usurer, buying and selling the same product over and over again at higher and higher prices. More houses were built each year but the number built fell far short of the ever increasing demand for them, so in it seemed as if same house was sold over and over again. The demand for houses was constantly pushed ever upward by the banks providing more and more money for ever higher mortgages. If this seems to be an over statement consider this example. I lived as a teenager in a small Sussex village and I can remember being told by an awestruck fellow villager in the mid 1960’s that certain new build houses were now selling for prices in excess of £3,500. Now such houses are selling for prices in excess of £250,000. The house in which I lived as a game keeper’s son was sold recently for a £1 million. I do not know how many times the houses on the village green changed hands.
Unfortunately the bankers greed led them to taking a series of foolish actions that led to the crash. In what were now the outdated building societies it was the savers money that was lent to out borrowers, but unfortunately relying upon savers meant that the money for loans was limited, much more was needed to finance the house price bubble. The banks had the solution which was to borrow on the wholesale money markets. If it had not been taken to extremes it would not have been a sound policy. The money borrowed had to be at a lower rate of interest than that lent out for mortgages to be profitable. Cheap money is that lent for short periods of time, sometimes for as short as overnight. To finance the ever expanding mortgage market the banks borrowed increasing large amounts of money from the short term money markets, while the banks lent out the same money for periods of up to 25 years. The banks were reliant on the short term money market to constantly replace the loans they repaid to finance their mortgage lending. Surprisingly this is not as irresponsible as it sounds, what was irresponsible was borrowing such disproportionate amounts in this way. The problem with financing mortgages in this way was that the profitability of such transactions is dependent on the price differential between money borrowed and money lent. The narrower the differential the less profitable was the mortgage business. At the height of the housing boom I was told by a banker that the banks did not make much money from the mortgage business. At first I was baffled, but I realised that the banks profit margins were being squeezed in two ways; first the huge demand for short term loans were forcing up the price (interest rates) of these loans and that competition in the mortgage market meant the banks could not increase their mortgage rates to compensate for higher loan charges for fear of losing customers to other lenders. Banks such as HBOS were having their profit margins squeezed and were at the same time over dependent on borrowed money. They were a catastrophe waiting to happen.
Banks such as HBOS depended for their survival on their ability to borrow billions on the short term finance markets to finance their mortgage trade. If they were denied those funds the bank would collapse. This happened in the period 2008 to 2009. The housing bubble burst and banks were suddenly unwilling to lend to each other, as they did not know which banks were financially viable. In the event no British bank was viable, but none were so indebted as HBOS. The rest of the story is well known, the government rescued the banks by giving them billions to keep them viable.
For the millions already impoverished by the banks playing the housing market it was a double whammy. Now not only did the ‘excluded’ have to pay exorbitant private high rents but they were further impoverished by the government’s austerity programme that reduced their incomes.
Having a nominally Social Democratic Party in power made no difference as Neo-Liberalism was so firmly entrenched as the governing political philosophy. Any action to regulate the banks to put them on a sound financial footing was deemed much worse than almost bankrupting the nation to bail them out. Without any justification the latter was deemed the better option as the default assumption is that the government is incompetent in economic matters and management of them such be best left to those ‘who know’, the bankers. It was no surprise when Gordon Brown appointed a banker, Lord Myner to clear up the mess left by other bankers.
Given that the financial sector seems to have effectively bought up Parliament; E.P. Thompson’s words are very prescient. He thought contemporary politicians are as corrupt and self interested as those of the eighteenth century. Parliament then was was part of the ‘old corruption’ in which the landed interest purchased control of government and he thought current parliaments should be viewed as part of the ‘new corruption’, as control of Parliament has been purchased by the financial interest, ‘the City of London’.
Unlike the majority of my fellow economists I believe than the solutions to economic problems lies with politics not economics. What is needed is political reform that removes the hands of ‘the City of London’ from around the throat of government.