Published on Mar 24, 2013
Michael Hudson: Why do they call for governments to balance the budget by pushing the economy at large deeper into debt, while trying to save the banks from taking a loss?
Stacy Herbert spoke to Professor Steve Keen while he was in London. He officially declared George Osborne’s ‘Help to Buy’ scheme a PONZI, and one which should be more accurately named ‘Help to sell’!
Read more at http://www.maxkeiser.com/#2uVRUOUrrzeVurO2.99
Published on Jun 15, 2013
Definition of ‘Ponzi Scheme’
A fraudulent investing scam promising high rates of return with little risk to investors. The Ponzi scheme generates returns for older investors by acquiring new investors. This scam actually yields the promised returns to earlier investors, as long as there are more new investors. These schemes usually collapse on themselves when the new investments stop.
The Ponzi scam is named after Charles Ponzi, a clerk in Boston who first orchestrated such a scheme in 1919.
A Ponzi scheme is similar to a pyramid scheme in that both are based on using new investors’ funds to pay the earlier backers. One difference between the two schemes is that the Ponzi mastermind gathers all relevant funds from new investors and then distributes them. Pyramid schemes, on the other hand, allow each investor to directly benefit depending on how many new investors are recruited. In this case, the person on the top of the pyramid does not at any point have access to all the money in the system.
For both schemes, however, eventually there isn’t enough money to go around and the schemes unravel.
George Osborne’s Help to Buy scheme ‘a moronic policy’
George Osborne’s scheme to boost the housing market through state mortgage subsidies has been dubbed one of the “most stupid economic ideas” of the past 30 years by a leading City commentator.
Albert Edwards, who heads the global strategy team at Société Générale said the chancellor’s flagship Help to Buy programme was artificially inflating property prices and driving young people deeper into “indentured servitude”.
The chancellor said in the budget that the government would provide lenders with a guarantee of up to 20% of a mortgage in an attempt to provide potential buyers with a big enough deposit to purchase a home. If a borrower defaults on a loan, the taxpayer will be liable for a share of the losses.
Edwards – a high profile City strategist renowned as a market doomsayer – said the scheme was artificially propping up the market and preventing prices correcting to affordable levels. First-time buyers need cheaper homes, not greater availably of debt to inflate house prices even further, Edwards said. “This is madness.”
He added that house prices were still overvalued despite Britain being at the epicentre of the global credit crisis and remaining in the “icy grip of private sector deleveraging”. In other countries, such as the US, house prices were now cheap.
“Young people today haven’t got a chance of buying a house at a reasonable price, even with rock bottom interest rates. The Nationwide Building Society data shows that the average first-time buyer in London is paying over 50% of their take home pay in mortgage repayments – and that is when interest rates are close to zero.”
In a research note, Edwards said it made him “genuinely really angry” that burdening young people struggling to pay off student loans with more debt was seen as the solution to the problem of excessively expensive housing.
“Why are houses too expensive in the UK? Too much debt. So what is George Osborne’s solution for first-time buyers unable to afford housing? Why, arrange for a government-guaranteed scheme to burden our young people with even more debt! Why don’t we call this policy by the name it really is, namely the indentured servitude of our young people.
“I believe it truly is a moronic policy that stands head and shoulders above most of the stupid economic policies I have seen implemented during my 30 years in this business. It ranks above some of Alan Greenspan’s very worst blunders”….
The International Monetary Fund has also warned that the plan would fail to improve access to housing while the Treasury Select Committee and Office for Budget responsibility have warned it is likely to drive up house prices.
Larry Elliott
http://www.guardian.co.uk/business/2013/jun/04/george-osborne-help-to-buy-moronic
The stated aim of ‘Help to Buy’ is to assist first-time buyers but as Albert Edwards indicates, it has no such likely outcome. And anyway, ordinary commonsense would say that in a housing crisis, the solution is to build affordable homes… and to bring in rent controls.
This scheme is another one of George Osborne’s ‘brilliant’ re-election ploys .. the purpose of which is to persuade UK property owners.. in readiness for the GE 2015… that the economy is ‘healing’ because house prices are going up (until that is, the bubble bursts). As a corollary, the banks will profit nicely.. all the new mortgage debt will boost speculation in the financial markets and any ‘losses’ from mortgage defaults will be picked up by the tax-payer not the banks.. Wealth will yet again be redistributed upward … from the poorest home buyer to the richest; from the young to the old; from the ordinary tax-payer to ‘bail-out’ the banks’ losses.
There really seem to be no bounds to the contempt with which this government holds the electorate … as Think Left described in George Osborne, leader of the Wrecking Crew mk2
As Professor Bill Mitchell writes:
It is clear to me that the British government and the US governments (and many state governments in the US) are no longer serving public interest. They are punishing innocent and disadvantaged citizens to satisfy the ideological (religious) beliefs of a monied elite.
I think we should be explicit… George Osborne is using neoclassical economic theory as a ‘blind’, in order to push through an ideological agenda. It has nothing to do with creating an economic recovery. Osborne wants to lock-in irreversible changes to the social and employment fabric of the UK. He and his ilk, are not Conservatives in the classic sense of desiring to preserve the connections between the past and the present. They are deliberately wrecking the UK economy (any new government will be faced with a shortfall in output of approximately 20% of GDP or £250+bn) but of course, any crisis is a money-making opportunity for the financial speculators, the corporations and the super-rich 0.003%.
If you want to know where, and what model, Osborne, Letwin, Maude et al are following.. look across the Atlantic at the US. Osborne is known to be obsessed with American politics. The Independent’s Steve Richards agrees that Osborne’s ‘philosophical’ position is to the right of the Republicans.
‘The Wrecking Crew’ is the description Thomas Frank gives to the economic/political strategy of the Republicans (in his 2008 book) but the same features have become all too familiar in the UK:
“Fantastic misgovernment of the kind we have seen is not an accident, nor is it the work of a few bad individuals. It is the consequence of triumph by a particular philosophy of government, by a movement that understands the liberal state as a perversion and considers the market the ideal nexus of human society. This movement is friendly to industry not just by force of campaign contributions but by conviction.”
The goal of the Republicans (Osborne et al) was/is to actually erase liberalism (social democracy, democratic socialism, the left)… an ‘end of history’ in which taxes and onerous regulation will never again be allowed to threaten the fortunes that private individuals make for themselves. This is what Karl Rove meant by creating a ‘permanent majority’, and by Margaret Thatcher who said “Economics are the method, the object is to change the soul’.
‘Casting back to the early days of the conservative revolution, Frank describes the rise of a ruling coalition dedicated to dismantling government. But rather than cutting down the big government they claim to hate, conservatives have simply sold it off, turning public policy into a private sector bidding war …
It is no coincidence.. that the same politicians who guffaw at the idea of effective government have installed a regime in which incompetence is the rule. Nor will the country easily shake off the consequences of deliberate misgovernment through the usual democratic remedies. Obsessed with achieving a lasting victory, conservatives have taken pains to enshrine the free market as the permanent creed of state.’
This ‘economic’ strategy is described in more detail by Thom Hartmann. Essentially, the Republicans deliberately aim to run up huge deficits by cutting taxes for the rich (whilst keeping on spending).. a deficit which is then inherited by the Democrats. As Frank explains.. ‘the main reason conservative administrations run up as large a deficit as possible – is that deficits defund the left’ and prevent them from implementing their social programmes when they return to government.
Robert Reich, former labor secretary to Clinton, commented on the Republican approach:
‘If the public thinks government is wasteful [useless], that’s fine. That reduces public faith in government, which is precisely what the Republicans [Osborne] want.’
A major factor in the success of this strategy is that the right can play dirty (very dirty) but intrinsically, the left cannot. Furthermore, the mainstream political commentators constantly give the right’s lies and spurious rationales an undeserved credence, often in the name of impartiality. The narrative… regardless of the facts… is all.
So what is to be done?
The current Labour leadership seems to be falling into the trap of accepting the ‘lack of funding’ caused by Osborne’s mismanagement of the economy. Crazily, Ed Balls has even suggested adopting Osborne’s spending limits for the first year if they form the government in 2015. However, his economic approach, Neo-Keynesianism, is a horrible, contradictory synthesis of Keynesianism and Neoclassical economics, which makes no sense to the post-keynesians (Modern Monetary Theorists) and Steve Keen.
These heterodox economists are the natural inheritors of Minsky and Kalecki’s work which pinpoints the significance of private debt levels, and the need for full employment. Professor Bill Mitchell writes of Osborne’s economic deception in the UK:
None of this austerity is remotely justifiable. The state budgets collapsed largely because of the automatic stabilisers which are like canaries in the mind – they tell you that the real economy is in trouble. The fiscal aggregates (budget deficit etc) are just like thermometers – they send signals about how the economy is going.
You do not cure a failing real economy by cutting spending. That is like curing a cut leg with amputation and then leaving the wound open. It is madness.
There are workers ready and willing to work. People are pessimistic. They need to feel secure and confident. Keynes knew that well. You don’t give people hope by worsening their circumstances. Desperation does not lead to positive responses.
The people are rebelling in the Middle East as an expression of their recognition that their governments have failed to represent their best interests.
It is clear to me that the British government and the US governments (and many state governments in the US) are no longer serving public interest. They are punishing innocent and disadvantaged citizens to satisfy the ideological (religious) beliefs of a monied elite.
I think people don’t tolerate that forever.
Ed Balls should step out of the Tory trap and align the Labour Party with a commitment to full employment, a job’s guarantee for all who want, and are able to work. By offering the alternative of a job or benefits, a Labour government could raise the wages of the private sector worker because employers would have to at least match the ‘government’ jobs in order to get staff.
Increased employment and increasing wages and benefits, would automatically create the demand… the lack of which is the real problem beseting the UK economy.
What sort of government jobs?
Quite apart from replacing those removed by this government from nursing, the police and social care etc, we need a mass building programme of new affordable ‘council’ (democratically-owned) housing, and retrofitting of the existing housing stock with insulation and energy-conservation measures. The UK has an abundance of renewable energy opportunities and could be a net exporter of energy. Developing those resources could create the new manufacturing and apprenticeships in the non-South-East UK. Scotland is leading the way but is still suffering from a lack of political will from Westminster. Under this government, ‘Green’ capitalism has been shown comprehensively to have failed.
We need a New Green Deal. If government can create £350bn of Quantitative Easing for the banks, they could easily do the same for the real economy and real people. But do not expect to get such a solution from Osborne and the Tory/LD coalition.
This is described as a ‘hedgehog’ chart because of the various lines indicating the changes to the Bank forecasts over time. Chris Giles highlights the fact that this is the first time since 2007 that the Bank has produced an improved forecast, which raises projected GDP growth from 0.9% to 1.2% in 2013. This is shown on the chart as the difference between the orange and green spikes on the chart.
In reality, the Bank’s forecasting record is an extremely poor one. The November 2007 forecast (the purple line in the chart) was made just a few months before recession began in the 2nd quarter of 2008. This was the deepest recession since the 1930s. Yet the Bank was not forecasting any contraction in output at all. The various ‘hedgehog’ spikes arise because it has continually forecast a rapid return to growth that did not materialise.
The upward revision to the forecast this year is minimal, comprising just 0.3% of GDP. For many people, and not just supporters of austerity like Chris Giles, there is a hope that this upward revision to forecasts is the beginning of a trend and that there will be a continuous upward revision of forecasts as the outlook improves.
Yet the focus on such a slight revision to the growth outlook seems misplaced, and not just because it could be altered in either direction. Even before the slump the British economy was not growing at a fast pace by international standards. A return to prosperity would imply a rejection of permanently lower growth and a return to the previous trend. Instead the Bank’s forecasts imply a further widening of the gap between the future growth of the economy and its pre-recession trend.
This is the real scale of the economic crisis and the issue which is of primary importance. Currently the gap between the level of output and the economy’s former trend is approximately 16% of GDP.
This gap will continue to widen so that any new government will be faced with a shortfall in output of approximately 20% of GDP. In current prices, these are in the region of £250bn to £300bn.
This is a measure of the effects of both recession and austerity. Therefore it is also a measure of the scale of the task facing any new government that wants to end them.
