If this is a democracy, save some of your fury for this lot…

by | 30 Aug 2022

Among the many legitimate targets for public ire at the current situation, few are more deserving of it than the Bank of England - and yet you can be certain they will remain untouched.

It would seem to be a statement of common sense (hah!) that in a democracy there should be some kind of repercussion for those who do inordinate damage to the public good, some kind of reckoning, payback or at least programme of major reform. After all, is that not the theory of democracy (and indeed markets) proffered by the liberal establishment?

It is through a process of enough people feeling that too much harm is being done to allow a situation to continue that is meant to be the underpinning, self-righting feature that makes democracy better than the alternatives.

So in saying that there must be a reckoning after the cost of living crisis is over, I have a very particular target in mind. Sure, the big energy companies – but there our strategy should be a straightforward one of aggressive taxing their scandalous windfall income and accelerating their redundancy. The faster we get off our addiction to oil the better. (When the oil majors say they’re a key partner in energy transition, that’s just like carrier pigeons telling you they should be responsible for broadband role-out.)

It’s another target I have in mind, a target which nominally works for you and me but appears to do absolutely everything else except improve our lives – the Bank of England.

(Please don’t write in to say I’m simplifying what follows – I know I am and its because the various codewords and complexities that banking policy uses are why people don’t understand the drift of what is being done – read this if you want some more detail, though its about the US. To get a sense of how egregious has been its behaviour in recent decades it is worth just spelling it out in plain language.)

In 2007 a bunch of criminal banks almost crashed the global economy – so the central banks stepped forward. What it did was magic immense sums of money out of the air in precisely the way they had previously been saying couldn’t be done.

This money flooded into the very banks who had done the damage – but with nothing more than blind faith that this would make it out of the banks and into the wider economy. That blind faith was misguided; the banks didn’t increase lending into the economy, they pocketed the money. While it is not the Bank of England which regulates banks, nevertheless the banks got away with this scott free.

But a price always has to be paid, and so soon afterwards it became a consensus view (lead by the Treasury and the Bank of England) that a period of ‘fiscal tightening’ was necessary. That is a way of saying ‘cut public spending’, generally understood as ‘austerity’.

That was the official position of the Bank of England – when powerful crooks crash the economy, stuff their mouths with gold, and when the bill for this arrives, pass it straight onto the people; the poorer they are, the bigger the burden to be faced. At this point it is worth reminding you again that the Bank of England is a part of our civil public infrastructure, there to serve the people of Britain.

So tell me this; is there any circumstance at all to which the response of the Bank of England isn’t to take money from ordinary people and then transfer it in enormous volumes to the rich?

The period between crises was marked by austerity but little or no real action on the part of the Bank of England to interfere much in the part of the economy where the implications of their actions were seeing perverse outcomes. Those perverse outcomes are best understood by thinking about stock buyback.

This is the process where corporations have so much money they buy back their own shares from the market. Basically that converts their massive balance sheets into share-based capital which they can also hoard without spending into the real economy.

But this isn’t being used as a secure saving method, it is being done specifically to inflate the share value of the corporation. It is very simple; if there is a market demand for something and the market demand increases sharply, the price of the something rises sharply. So if there is suddenly more money chasing your shares then the value of those shares goes up.

Which instantly makes it look like the company is worth much more than it was before, without any real-world or productive reason for that value increase. The real purpose is that the senior executives and board members pursuing this strategy all have major shareholdings in the company, and will have share-value-linked remuneration and bonus packages.

So their decision-making is increasing their own wealth sharply not by doing anything but by having money, much of which was initially flooded into the system to try and save ordinary people from a banking collapse.

This has been described as the greatest transfer of wealth from the poor to the rich in modern history – because it is. And the Bank of England was all over it. So when Covid hit there was a pattern to follow. Money creation (sort of – let’s leave more complex explanations of Quantitative Easing for now) to bail out corporations was now a key part of the arsenal.

And that is what happened. The Government used the money to underwrite business’s salary bills to sustain their staff compliment at no cost to them while at the same time large bailouts were given to corporations to help them ‘weather the storm’.

Weather it they did – in fact against all the logic of market theory, the stock values of corporations hit a new high during the pandemic. It makes zero economic sense and could only happen because the bailout money was yet again used in stock buy-back, inflating shares again and transferring money from the poor to the rich again.

You will see a pattern here, but what happens if pressures move in the other direction? What happens when external conditions require the bank to pull in money supply rather than expand it? What do you know – the strategy looks quite different.

This time what we get are utterly tone-deaf statements from the Governor of the Bank of England about how we should all accept below-inflation pay rises and accept higher interest rates to make it harder for us to spend.

If we really existed in a democracy then the Bank of England (and the whole cartel of other agencies and bodies that make up the regulation of the economy) would be voted out of power tomorrow.

This is partly the orthodoxy in neoclassical economics – if there is inflation you need to bring it down, specifically by creating more unemployment and by making people poorer so they don’t spend. I know it sounds like that seems unlikely, but that is the economic theory and that is what the Bank is doing – raising interest rates to reduce the money in your pocket, knowing the result will be increased unemployment.

And since both these things (reduced spending power and unemployment) are deflationary, they are the ‘tough medicine’ that has to be swallowed.

Except you will notice a clear trend here. Higher interest rates make those with money richer and those without money (i.e. in some kind of debt like having a mortgage) poorer. This is – wait for it – a major transfer of wealth from the poor to the rich.

It is some ideology this; when the rich fail money must be taken from ordinary people to bail them out, when they make out big on the basis of this bailout they are not to pay any price and when a price has to be paid it is not by them but by the population as a whole.

And when the economy fails in no small part because of the actions of the rich and powerful who are absorbing about 60 per cent of the cost of inflation into their own profits then they must be bailed out by taking money from the population as a whole. Yet again.

So tell me this; is there any circumstance at all to which the response of the Bank of England isn’t to take money from ordinary people and then transfer it in enormous volumes to the rich? And is there any behaviour that the rich can engage in which will not get them rewarded with more and more money from those least able to afford it?

If we really existed in a democracy then the Bank of England (and the whole cartel of other agencies and bodies that make up the regulation of the economy) would be voted out of power tomorrow. But it isn’t, and so its behaviour never improves.

Don’t let anyone tell you that the poor Bank has no choices; it could have given bailout money to banks on condition, required it to be repaid and demanded major reform, it could have targeted the Covid bailouts to prevent it being used for stock buy-back, it could currently be demanding sharp increases in corporation tax and imposing price controls on the economy. Those are legitimate alternative courses of action.

So if people can’t yet see that the frankly corrupt infrastructure of Britain’s economy (though let’s not kid on that the US Fed or the European Central Bank are any different) is a plague on us all then it is hard to know what will make people wake up to this.

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