Crisis – what crisis?

The call this week by Lynda Blackwell, Head of Mortgages at the Financial Conduct Authority, for older people to downsize their homes in order to alleviate the housing crisis demonstrates just how out of touch the ruling class have become. Her employer quickly distanced itself from her lame attempt to blame the housing crisis on ‘last time buyers’ refusing to shuffle off to the care home quickly enough but it was unable itself to come up with anything better to solve the housing crisis than to “look at the products and markets that are developing to ensure they work for consumers.” This regulator’s gobbledygook translates as ‘Crisis – what crisis?’ I doubt, however, whether we have heard the last of Ms Blackwell’s analysis. After all, it is already being applied as the bedroom tax in the fast diminishing social housing sector. Ineffective as that policy has proved in solving the housing crisis, it does help the ruling class (or the 1% if you prefer) to stir up inter-generational strife and thereby draw attention away from the real cause of the housing crisis.

It is certainly true that the generation born immediately after the end of the Second World War have been exceedingly fortunate. Benefitting from free education and full employment, they were offered secure social housing to rent or could buy their homes with cheap, tax deductible loans from building societies. The next generation were deprived of access to such cheap finance – the government having abolished the tax relief on mortgages and allowed the banks to gobble up the building societies (the few that remain being forced to adopt the same profit driven strategies). Many in the next generation were, however, also able to build up significant equity in their homes, but this was more the result of escalating house prices than any sustainable policy. For the current generation of young people other than those born into the privileged 1%, conditions are much harsher. While some will benefit (eventually) from inheritance inflated by the sale of their parents’ homes, this benefit is eroded by too many siblings and step-siblings, increases in life expectancy and exorbitant care home costs. In the longer term this benefit too will melt away. For young people today, facing a ratio of national house prices to male average full-time earnings of 5 and average house prices in London of 33 times the annual full time earnings of £7 an hour, the first rung of the so called housing ladder is completely out of reach.

From the perspective of the 1%, this doesn’t matter. Housing is simply a valuable and valued part of their capital. Provided the rest of us can afford to rent in the private sector, however inadequate and insecure this may be, topped up where necessary with subventions to landlords to house those who cannot afford the ‘market’ rent, what’s the problem? These are secure investments, underpinned as they are by interest rates manipulated by an unaccountable Bank of England. Provided the rich on the way to the opera can still step over the homeless or, failing that, have them washed away with Mayor Boris Johnson’s water cannon, who cares?

One way to analyse the mess we are in is to compare it with how things would be done in a socialist society – one on the way to building communism where society is rich enough to meet everyone’s needs and class antagonisms and exploitation has melted away. In a socialist society, housing would be assessed by its usefulness, not as an investment to owners seeking a profit. An adequate stock of housing would be a social priority and provided by collective effort. Security of occupation would be ensured; and democratic control would be exercised by those living in a local community, whether it be a tower block or local neighbourhood. The continuity of local communities and familial ties would be prioritised.

What could be achieved under the existing social and economic structures? A massive programme of council house building, financed, as Jeremy Corbyn has proposed, by a peoples’ quantitative easing would be a start. Tough regulation of the private rented sector and more security of tenure for tenants would help. A ban on foreign ownership of London housing would help. Perhaps most important of all, attention should be given not to “looking at the products and markets that are developing to ensure they work for consumers” as the FCA fatuously proposed but to removing the props that underpin sky high prices in UK property and ensuring that when prices come down we are not asked once again to bail out the banks who were responsible for these prices in the first place.

If this cannot be achieved under capitalism, there is always the alternative solution.

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How to avoid the next banking crisis

Banks have been seen as at the heart of capitalism through their ability to create new purchasing power out of nothing and to direct funds into the most profitable areas. They can also be seen as machines for making money: every £1 deposited with them can be re-lent and re-deposited many times – provided the bank has the backing of a central bank or a government (i.e. taxpayers) to bail them out if, as in 2007, there is a run on the bank. This why the government resorted to quantitate easing following the banking crisis in 2007. Quantitative easing is a slightly more sophisticated version of printing money, the principal difference being that, instead of using this money to pay the government’s debts, it is given to the banks in the hope that the banks will use it to finance economic development. As if! It has been estimated that only 25% of bank lending in the UK is currently used to support businesses, and half of that is used to buy commercial real estate rather than support truly productive economic activity. Given that of the 12.5% going to businesses non-property investment, only a small proportion will be for truly productive investment, it’s clear that the sacrifices that ordinary working people have been required to make since 2007 in terms of cuts in services and wage freezes have yielded them a very poor return.

So what are the banks doing with ‘our’ money following their near collapse in 2007 and subsequent, and continuing bailout?

In addition to continuing to pay huge salaries and bonuses, much of it has been misused, as revealed in a series of post-2007 scandals such as:

• Fruitless speculation such as JP Morgan’s loss of $6 billion from trading activities of which CEO was blissfully unaware.

•Price fixing at LIBOR. The London Interbank Offered Rate has been manipulated by banks for their own profit.

• Market abuse by ‘flash trading’ underpinned by the big banks whereby security prices paid by ordinary investors have been manipulated using ultra-fast software and communications.

•Money laundering: Accusations of illegal, clandestine bank activities are also proliferating. Large global banks have been accused by U.S. government officials of helping Mexican drug dealers launder money (HSBC), and of funnelling cash to Iran (Standard Chartered).

•Tax evasion: In just one example, UBS helped 20,000 U.S. taxpayers with assets of about $20 billion hide their identities from US authorities. In the UK, the banks are unapologetic about being up to their necks in tax “avoidance”.

•Misleading clients with worthless securities: Only after the financial crisis of 2008 did people learn that banks routinely misled clients, sold them securities known to be garbage, and even, in some cases, secretly bet against them to profit from their ignorance.

The most serious abuse of all has, however, been that our banks continue to trade in derivatives in many of the same ways they did before the crash, but on a larger scale and with precisely the same unknown risks. Derivative trading now totals more than $700 trillion. That is more than ten times the size of the entire world economy.

It is a myth to believe that under capitalism we can have responsible, honest and transparent banks. They wield too much power in a capitalist society to be tamed. The capitalist parties, including Labour, have no intention of interfering with them. If the next, inevitable financial crisis, which is likely to be far more damaging than that of 2007, is to be avoided, not only do we need to bring the banks under democratic, public control, but this reform has to be accompanied by fundamental changes to our entire economic and political structure if it is to succeed. What are these changes? In a word: socialism.