Rejoice ! Rejoice ! (Tentatively...)

I must confess to having been a tad depressed by the Cadbury sale. It was all of a piece with the 'Globalisation In One Country' strategy which Labour have been so keen on, and it also brought to mind the deeper currents of the last 20-30-odd years in which British capitalism forgot all about the 'British' bit, in a mirror-image of what was happening to British socialism.

Capitalism is a very fine thing. But too much of a good thing can kill you - and more to the point, there is always a cultural setting within which capitalism operates. I mentioned the cultural setting of Adam Smith's time way back.

That fine blogger and canny investor CityUnslicker wrote of the Cadbury deal :

No doubt there will be plenty of harumphing about another UK company being sold abroad. People seem to forget the effect is a net inflow of money in the UK, to staff, to banks, to pension funds; all of which can be re-invested in new companies.

Invested in new companies. Like the 'new products and services' that the redundant Longbridge workers would soon ('perhaps') be producing, 'for which the UK can find ready markets'.

All through the 80s/90s/00s I kept hearing how trickle down would work - yacht manufacturers would expand on the Hamble and riven slate shower cubicles would be produced in Bethesda to feed the expenditure of the new rich. But what actually happened was that property prices soared. Assets were the thing.

On consideration, this desire for safety, to preserve value, reflected a real, though unexpressed, crisis of confidence. The new City money, and the doubled then quadrupled relative pay of top executives ('The chief executives of the UK's 100 largest companies will earn 81 times the average pay of all full-time workers in 2009') didn't think of a home in hi-tech start-ups outside of a few dot-coms- after all, where were these start-ups ? All the top UK physics and maths grads were at the next terminal in your office working on trading algorithms, not soldering cables together in some small industrial unit. That sort of thing happened in other countries - by strange chance, the ones whose markets were the most exciting (and volatile).

So our rich guys bought houses and land (no inheritance tax on land), and the countryside rapidly became unaffordable. Where I live, average house prices are now nine times average local wages. Like many of my neighbours, I live in a house that I could never afford to buy at its current market value.

I came to the conclusion some time ago that what we'd been seeing over the last twenty years was a vast transfer of assets from the working and middle class to the rich and super-rich. Individual working people (the old lady in the idyllic but crumbling cottage, the canny local builder who snapped it up and made it some director's weekend bolt-hole) made some money, but the end result was that a whole generation grew up for whom even a small house was either way beyond their reach or required two full-time incomes ('we can't afford to have kids').

I could never understand the media assumption over this period that rising house prices were A Good Thing. Didn't these people have any children ?

So I was interested to read the words of one of my favourite economic commentators this morning, Albert Edwards, chief global strategist at French bank Societe Generale, quoted at the FT Alphaville blog :

Mr Bernanke’s in-house Fed economists have found that the Fed wasn’t responsible for the boom which subsequently turned into the biggest bust since the 1930s. Are those the same Fed staffers whose research led Mr Bernanke to assert in Oct. 2005 that “there was no housing bubble to go bust”?

The reasons for the US and the UK central banks inflating the bubble range from incompetence and negligence to just plain spinelessness. Let me propose an alternative thesis. Did the US and UK central banks collude with the politicians to ‘steal’ their nations’ income growth from the middle classes and hand it to the very rich?

The US and UK have seen a huge rise in inequality over the last two decades, as growth in national income has been diverted almost exclusively to the top income earners. The middle classes have seen median real incomes stagnate over that period and, as a consequence, corporate margins and profits have boomed.

Some recent reading has got me thinking as to whether the US and UK central banks were actively complicit in an aggressive re-distributive policy benefiting the very rich...

Indeed, it has been amazing how little political backlash there has been against the stagnation of ordinary peoples’ earnings in the US and UK. Did central banks, in creating housing bubbles, help distract middle class attention from this re-distributive policy by allowing them to keep consuming via equity extraction? The emergence of extreme inequality might never otherwise have been tolerated by the electorate... it is clear in my mind that ordinary working people would not have tolerated these extreme redistributive policies had not the UK and US central banks played their supporting role. Going forward, in the absence of a sustained housing boom, labour will fight back to take its proper (normal) share of the national cake, squeezing profits on a secular basis. For as Bill Gross pointed out back in PIMCO’s investment outlook ‘Enough is Enough’ of August 1997, “"When the fruits of society’s labor become maldistributed, when the rich get richer and the middle and lower classes struggle to keep their heads above water as is clearly the case today, then the system ultimately breaks down”. In Japan, low levels of inequality and inherent social cohesion prevented a social breakdown in this post-bubble debacle. With social inequality currently so very high in the US and the UK, it doesn’t take much to conclude that extreme inequality could strain the fabric of society far closer to breaking point.

I've quoted before Simon Johnson, former IMF chief economist who believes that 'the finance industry has effectively captured our government' - that the US and UK are not so very far from post-Soviet Russia, or say 1980s Argentina.

Here's a condensed pdf presentation that he posted at Baseline Scenario:

How the U.S. economy will fare over the next few years will depend on the outcome of a likely power struggle between politics and finance, an outspoken economist said Monday.

The U.S. economy could face a similar financial crisis to the one it’s emerging from unless the government tackles the problem that some banks remain too big to fail, Simon Johnson, economist at the MIT, told a panel at the American Economic Association.

The U.S. Congress has proposed legislation to drastically overhaul financial sector regulation, including measures to seize control of troubled big banks and to cut the powers of the Federal Reserve, the U.S. central bank.

The crisis that ended in 2009 has only exacerbated the problem because of the resulting financial sector consolidation, Johnson said. There are now six big banks that could soon engage in the sort of excessive risk-taking that led to the recent crisis because of a belief that the government would bail them out if they’re in trouble.

“Goldman Sachs has become the world’s largest hedge fund underwritten by the U.S. government,” the MIT economist said. The other five banks he mentioned as posing system risks to the economy are Bank of America, Citibank, J.P. Morgan Chase, Morgan Stanley and Wells Fargo.

It will be harder to deal with any new crisis because the U.S. Federal Reserve has likely exhausted its ammunition to counter a financial meltdown after it cut rates close to zero and took other emergency lending steps, Johnson warned.

“A crisis strengthens the oligarchs who survive,” Johnson said.

Well, cometh the hour, cometh the man. Or at least it's a start. Johnson's 'power struggle between politics and finance', which appeared up to now to be a total walk-over for the oligarchs, has kicked off in earnest with Obama's 'Glass-Steagall III' proposals - effectively a reinstatement of some Depression-era legislation obliging banks taking retail deposits to avoid the kind of gambling which dropped them in deep doo-doo - from which the taxpayer is pulling them.

Bank shares and the QE-inflated stock markets are down - and the questions now are two.

First - can Obama actually do it ? Will the banks shimmy round him as they've shimmied round so many other rules ? And second, what will the Republican view be, buoyed as they are by the gain of Edward Kennedy's Massachusetts seat ? They have the power, should they wish, to shaft his legislation.


On the first, I dinna ken. Those Goldman Sachs guys are clever. Too clever. Will they be clever enough to knuckle under ?

On the second - well, some idiot commentator in the Guardian (where else) said :

Watch the reaction of the Republican party, which probably be squealing with rage and fear right now

I'd have thought Republican voters would be pleased but suspicious that Obama's all mouth and no trousers. For the Republican leadership - they may be paid lots of dosh by Wall Street but even they could see that any attempt to defend the banks would see them strung up by their own voters. As RBS Bob Janjuah (again at Alphaville) put it :

The Obama defeat in Mass is HUGE…….even a freshman can figure out that ‘Obama’s’ defeat in Mass is a move towards a lame duck president AND, most seriously, is a move that will directly and indirectly cause de facto FISCAL TIGHTENING – the Republicans have seen some serious and seriously UNEXPECTED gains in Washington since Obama’s inauguration and are now at the point where they COULD block Obama’s fiscal recklessness….

most seriously, the message out of Virginia, New Jersey and now Mass is that the Republicans will do really well in the mid-terms…they will do ‘really well’ because they are going on the tkt of anti-big govt, anti-bailouts to all, & anti-big deficits, all of which is clearly hitting the sweet spot with the US electorate….

I don't see the tea-party crowd coming onto the streets to defend Goldman's bonuses, do you ?

furthermore, Obama has become a guy who folks either perceive or believe (I’m in this latter camp) has merely bailed out Big Wall St & Big Corporate America, all at the expense of the lower strata of the US economy (the youth, Black and Hispanic people, the SME sector, regional banks) – Yes, that’s right, the very folks who voted Obama in

Well, that's what remains to be seen. But there can be little doubt that what he's attempting to do is the right thing. He's shutting the stable door after the horse has bolted, all right - but the horse has been enticed back into the stable at the cost of billions of taxpayer bucks . He might have been better advised to shoot the horse and buy another one with the money, but we are where we are. Shutting the door is the right thing.

Can he do it ? I wish him luck. Never knew he had it in him. It's a hell of a volte-face for him, too. Bernanke and Geithner have been more in the print-money and inflate away the debt "Gordon Brown mode". Paul Volcker don't like inflation. I don't either.

'Sing now ye people of Minas Anor
for the age of Bernanke and Greenspan is ended for ever
and the Dark Tower is thrown down.

Sing and rejoice, ye people of the Tower of Guard
for your watch hath not been in vain,
and the Black Gate is broken,
and Obama hath passed through,
and he is victorious.

Sing and be glad, all ye children of the West
for Paul Volcker shall come again,
and he shall dwell among you,
all the days of your life.

And the Tree that was withered shall be renewed,
and he shall plant it in the high places,
and the City shall be blessed.

Sing all ye people!'