A lot of emphasis is being positioned on the role of central banking institutions in stopping the current financial market accidents, as well as in preventing economies slipping into recession. Actually, it’s been the action of central banks, over the last 30 years, in placing a floor under those financial and property markets – the so called Greenspan Put – that has generated this condition.
30, at Bretton Woods – in 1971, when Nixon, solved De Gaulle’s requirement to have France’s obligations paid in gold, by removing dollar convertibility to silver, and which makes it illegal for US citizens to hold gold. It appeared that money magic can cure all ills after all, as Milton Friedman and the Monetarists acquired claimed just.
But, rather like a game of whack-a-mole, having ended the currency markets crash by devaluing the money, the result was, in Britain, to simply inflate another bubble. Between 1988-90, house prices pretty much doubled. Then, in 1990, with inflation rising, and the UK getting into another recession also, house prices crashed by 40%, taking them back right down to where they had been in 1988! Thousands of people were evicted, at the same time when also Thatcher’s policy had prevented the provision of alternative housing to support them.
But, that set the scene for the time until now. In 1994, as the Federal Reserve attemptedto raise official interest rates, it sparked yet another currency markets crash, as the price of bonds off sold, and interest rates spiked. Central banks have a job in providing liquidity into the economy to avoid a credit crunch similar to that which arose in 2008, or as Marx identifies as occurred in 1847 and 1857. But, that is all.
They need to supply the currency required to enable the real economy to function, so that goods can continue to circulate. But, they haven’t any requirement to keep pumping liquidity in to the overall economy to reflate crashed financial markets, and also to the extent they actually, they undermine both their own function, and the true economy.
On the one hand, by reflating property and financial marketplaces, they prevent the proper working of the marketplace in clearing out excesses. There is certainly clearly no rational basis for either stocks or property to be at the ludicrously high levels to that they have been forced during the last 30 years. That reality alone has intended that workers’ casing and pension costs have been massively increased, which boosts the worthiness of labour-power, and slashes the rate of surplus value and earnings. But, it also, as Haldane has noted, leads to a predicament where in fact the owners of fictitious capital are led to think that this is a constant upward spiral.
As Haldane puts it, “capital eats itself”. QE was justified on the foundation that it was had a need to prevent global economies entering recession, but it might have achieved that never. The best it might do was to avoid a credit crunch sending the global economy into a recession. But, the amount of liquidity necessary for that, and the period of such involvement, is very limited, whereas the extent of QE has been pretty much unlimited.
Had central banks allowed stock and property markets to crash in 1987, rather than repeatedly intervened to reflate them, on every following occasion, when they inflated, the current financial crisis wouldn’t normally have arisen. QE could prevent recessions never, it could only act alongside Keynesian fiscal stimulus to boost the known level of aggregate demand in the economy.
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In the 1980’s and 90’s, monetary plan and the encouragement of additional private debt acted to counter the drop in income that Thatcher’s economic model required, and the reduced productivity overall economy that followed from it. So, the policy of trying to market aggregate demand by loose monetary policy and an encouragement of debts, alongside an insurance plan of austerity, under current conditions, will fail, and it is failing. In fact, the development that does exist in the global economy is despite rather than because of central bank or investment company and government procedures.
On the main one hand insurance policies of austerity take demand from the overall economy, and cause doubt. Within the other, monetary plan is encouraging speculation and draining money from productive investment, which would add both capacity and demand, provide careers and income and earnings. Furthermore, not only is the monetary policy damaging real financial growth, but it isn’t with the capacity of even reflating financial bubbles now. The Chinese central bank has cut official rates of interest five times this year, but the Shanghai Composite continues to crash.