Last week, when interest rates soared, mortgage lenders withdrew offers to potential home buyers. People trying to buy homes suddenly found that property that had been affordable last week was no longer affordable. The economic climate changed, ever so slightly in the grand scheme of things, and people previously considered safe began shaking their fists at Kwasi Kwarteng.
But what if we consider that the chancellor’s actions are time, not climate, and that the big problems we face are structural and systemic.
It is now unequivocally accepted that humanity’s excessive use of carbon-based fossil fuels is driving civilization-threatening levels of climate change, the impacts of which are being felt right now and will only get worse.
It is also accepted that, with so much capital and labor fundamentally intertwined with the fossil fuel industry, you can’t just shut down a coal plant and call it a day. What about the miners, the plant workers? What happens to the capital embedded in coal and oil reserves when their value falls to zero and the knock-on effects of trillions of dollars of investment are absorbed by the global economy?
As the The International Trade Union Confederation has argued in its report“There are no jobs on a dead planet”, the scale of the problem does not mean that action should be delayed or cancelled, but rather that there must be a “just transition”, a movement towards an environmentally sustainable economy that does not leave workers to rot in unemployment, bearing the costs while the bosses walk away with the loot, but sustaining and protecting people through the massive upheavals that are necessary.
Does the British economy need its own just transition, to free us from our addiction to mortgage-backed growth just as we need to free the energy economy from carbon? How would such a thing be?
The problems are not 100 percent comparable, but there are easy parallels to draw. House prices are the political third rail in the UK, as are petrol prices in the US. Changes in the affordability of mortgages or property investment returns cause trouble for the British middle class, which is much less easy to ignore than the underpaid and overworked precariat expected to bear the brunt of poor housing. financial management in the last 10 years.
But at the same time, you can’t base an economy’s wealth on 10 percent year-over-year increases in house prices and 1 percent interest rates. That is just as unsustainable as basing everything on burning limited fuel supplies that also kill the biosphere.
Kwarteng’s extremely ill-advised mini-budget was very well received among the opaque think tanks such as the Institute of Economic Affairs because in the minds of the Tufton Street Taliban, whose ideological commitment to their pet economic theory always outweighs any evidence, it was poised to “unleash” Britain’s moribund economy and stimulate growth. Of course the recipe was crazy, but the problem was not misidentified. The UK has low growth and stagnant productivity, and that’s a huge weakness in the economy overall.
The Bank of England, on the other hand, has been deeply disturbed by rising inflation and Bank economists have not only been predicting, but even cozy the prospect of a recession because “the alternative [of high inflation] it’s even worse.” A former member of the Bank’s monetary policy committee has even claimed that “the central bank has no choice but to provoke a recession”. If it weren’t for the weak economy, interest rates would have gone up a long time ago. The problem is that these low rates have been about the only thing keeping the country out of recession for 10 years.
Kwarteng could have triggered the crisis in the mortgage market in a more chaotic and clumsy way than a more orderly and controlled increase in bank rates, but the effect (increasing rates, reducing mortgage affordability, suppressing demand) is more or less what the Bank has been trying to find a good time. do for centuries. This is not a good time, not really, but the rise of another type of inflation has put him in a situation where he sees no other way out than to try, very carefully, to slightly break the economy now so that it doesn’t break any more. after.
The Treasury and the Bank, fiscal and monetary policy, are now pulling in opposite directions to try to solve different problems. Even if they were coming up with good solutions to these problems, which frankly they aren’t, that’s a sign things are getting really bad right now. The economy is in the stage of “floods and also fires”.
Perhaps the biggest parallel between the problems of fossil fuels and financialized housing is that, in general, the general population is politically in favor of keeping these systems, even to the point of disaster, not so much because the majority of the people feel great benefit. of them, but because abolishing them would cause great harm. The general population has been recruited as foot soldiers in an economic war in which the risk of losing far outweighs any benefit of winning.
Just as a worker at a coal-fired power plant can understand the harm of climate change, but even more intimately understand the harm of losing their livelihoods, even people who can clearly see the problems of spiraling house prices don’t they can escape the control they have over their own financial situation.
If you are one of the people in the UK lucky enough not to be totally excluded from the housing market, your house is usually, both by necessity and by choice, your savings and your pension. While the gains from inflation in the housing market are incredibly unevenly distributed across geography, age and class, so that only a small fraction of mortgage holders have benefited from anything similar At the amount suggested by general inflation, it is such a large part of the economy that even a small correction could wipe billions of pounds of savings from household balance sheets and leave many mortgage holders in negative equity.
In the last 30 years, Price increases above inflation have added £3 trillion in wealth for British owners. If all of that were simply “corrected”, the results would be decidedly unpleasant.
So if we are going to try to get out of our addiction to financing the economy through inflation in the housing market, among other interventions, we will also have to commit to fully and properly rebuilding the social safety net, in particular pensions and care for the elderly and sick. As they were dismantled in the UK, the middle class was encouraged to insulate itself by creating property wealth.
This has created a chasm between those who can afford to support themselves in their old age and those who are thrown into poverty once they can no longer work, as well as a growing group whose accumulated assets dissolve into nothing if they are in need of care for dementia or other serious age-related illnesses.
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By putting pensions and social care on a solid footing, ensuring that people from all walks of life can live well in retirement and are supported if they need care, much of the need to accumulate wealth in homes, while least for the lower middle classes for whom it is basically an alternative to the welfare state rather than a real store of useful wealth – it can be mitigated.
No aristocrat voluntarily gives up his feudal army, of course. Just transition policies on fossil fuel dependency have often been unfortunate in practice because CEOs of oil and gas companies benefit greatly from being able to mobilize an army of workers to their defense. Likewise, those who make money from real estate speculation are also politically isolated by people who rightly don’t want their retirement to become collateral damage. Implementing policies designed to protect the majority of people while shutting down the fire hose on free money for the super-rich is not going to find favor with the kind of people who can have lunch with the chancellor.
But the system needs to be reformed before it collapses on us. And if it is to be reformed, it has to be done in a way that doesn’t let everyone else foot the bill for the destruction the upper classes have wrought on our economy. We have to refuse to be human shields for a system that creates massive wealth for a tiny fraction of the population, before it literally and financially leaves the rest of us underwater.