Where has the money gone?

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cc sometimes growing through aquisition is to remove one company from competition. It seems to happen with hi tech games companies for example.

One interesting side effect could be that institutions (typically those who run pension funds) will be getting a higher return on their investment in Gilts and fixed interest securites - which they need buy to provide income to pay pensions in the short term. This could pull their investments from equities, lowering stock market prices.

Dinahmo

cc

GrannyGravy13

Furlough wasn’t a cheap exercise neither was subsidising energy bills over the winter months.

Effectively the government had to borrow to fund these and other recent spending so some of the current spending is going on interest on this borrowing - they can't conjure money from nowhere so have to borrow.

The borrowing takes the for of bonds issued (gilts) which are taken up by pension funds but also ordinary people with savings who would like a reasonable rate of return. Could be a win win situation!

Indeed the bond market is doing well at the moment, but few ordinary investors have the expertise to know when to buy and when to sell, though the calculations are not that hard. But the more the government borrows the higher the interest rate rises (as there is only so much money available) and the more it costs them to service the next round of borrowing. Also the pound may weaken as governments overseas see what is happening.

Dinahmo

M0nica

Deregulation was the result of adherence to the prevailing economic theory about the ability of markets to self regulate.

When you go deeper into the build up to the GFC you wonder how 'the market' could have been so irresponsible as to encourage people to go deeper into debt and then to try to monetise that debt.

It had absolutely nothing to do with Labour expenditure in the preceding decade.

Maizie surely para 1 answers the question you pose in para 2. Markets self-regulate by swinging between boom and bust. They are amoral not immoral and have no interest in what effect their operations have on individuals.

There were warnings from the late 1990s that markets were overheating, particularly that the property market, especially that the domestic was being dangerously overlent, but while Labour expenditure contributed little to the 2008 collapse then government, and we could never have completely avoided the 2008 meltdown, but action by the (Labour) government under its 'prudent' chancellor could have done much to mitigate its effects.

The catalyst of the collapse in the UK was the collapse of Northern Rock, which had been offering mortgage loans of 125% and the reckless explosion in 'self-certified mortgages' beyond the narrow bounds of their previous limited use.

The government had the power to dampen down the property market and was, indeed urged to do so, but chose not to. The party cannot wriggle out of the accusation that it was instrumental in making the 2008 crisis far worse than it needed to be.

Because the bankers were greedy - as were some of the people who took out sub prime loans. They took loans in order to buy property to let. A similar thing is happening in the UK now. Many people who took out several buy to let mortgages are having to sell the properties because they can no longer afford the repayments.

Yes, greed from bankers, from buy to let landlords, from board members drawing huge salaries and benefiting from bonuses and equity schemes related to growth which was due to borrowing rather than sound business management.

As @Whitewavemark2 said
"The banks allowed the situation to develop though, and were far too highly leveraged. They knew the risks that they were taking, where the financial products they had developed were offered to lower-income people with little understanding of the risk."

Personally I am very risk-averse and though I am a buy-to let-landlord I did not do it through borrowing. I get a reasonable return and provide a good home for somebody.

So many of our problems have arisen through borrowing to fund greed, be it personal or in the misguided believe that growth is always best, ignoring the fact that a well-managed profitable company is a good thing, it doesn't need to be a multi-national or to double in size.
"Growth through acquisition" is another of my pet hates, companies swallowing other companies and destroying employment to gain a larger turnover. But is is a larger turnover? In many cases it is no more than the turnover of the two companies would have been and it is not sustainable.

cc

GrannyGravy13

Furlough wasn’t a cheap exercise neither was subsidising energy bills over the winter months.

Effectively the government had to borrow to fund these and other recent spending so some of the current spending is going on interest on this borrowing - they can't conjure money from nowhere so have to borrow.

The borrowing takes the for of bonds issued (gilts) which are taken up by pension funds but also ordinary people with savings who would like a reasonable rate of return. Could be a win win situation!

GrannyGravy13

Furlough wasn’t a cheap exercise neither was subsidising energy bills over the winter months.

Effectively the government had to borrow to fund these and other recent spending so some of the current spending is going on interest on this borrowing - they can't conjure money from nowhere so have to borrow.

Maizie My hat goes off to you.You have put so much effort and research into this topic and IMO you way ahead of everyone else.

MaizieD All the financial commentators could see it coming. It was written up and discussed on the financial pages of every newspaper.from the late 1990s onwards.

My point is, MOnica, that the 'orthodox' economists didn't see it coming.

And, when it did happen they were taken completely by surprise. Like the Chair of the Federal Reserve...

As I said before. I'm not trying to make partisan points, I am trying to talk about economic theory and the possibility that alternative schools of economic thought from the one now dominant in the US and the UK may have a better grasp of how economies work.

Same all over the world,drives you crazy

MaizieD All the financial commentators could see it coming. It was written up and discussed on the financial pages of every newspaper.from the late 1990s onwards.

We may have had a non-economic PM but we also had a seemingly very astute and economically knowledgeable Chancellor (who became PM) and on such matters PMs generally listen and act on the advice of their chancellors.

The information was there - that the prophets of market economics were so convinced of their absolute command of economic wisdom that they chose to ignore them, is a separate issue. There are none so blind to the aapproaching train as those wedded to one simple solution to all our economic problems, whatever that solution may be. Words, MaizieD* that you too need to bear in ind.

It is the same as the way the Bank of England has acted over over interest rates rises in the immediate few years. Again the wider financial world was saying that interest rates needed to start rising the sooner the better and those with fixed period mortgages were encouraged to make the length of thei mortgage fix more important than the lowest interest rate.

When we took out a mortgage 2 years ago we sacrificed a few points of interest for a 5 year fix, as did our daughter not long before interest rates started to rise. Our mortgage rate will not move from its current low rate for another three years and we have plenty of time to prepare for a big hike in the interest rate when the 5 years expires.

I have no informed ideas on the subject, but could suggest some likely reasons for the increase of the national debt.

The amounts originally appropriated for certain improvements in any public department, whether these are borrowed or not, frequently turn out to be grossly under the total price of the improvements they were scheduled for, so the NHS or whoever are faced with a half-finished project that has gone over budget and have to borrow (more) money to complete it.

Administrators and COs have for years now had the right to be paid quite enormous sums in serverence pay or upon retirement, whether or not they have done their job well, badly or been convicted of some criminal proceeding. Not only are these payments written into their contracts, they are paid out irrespective of "austerity" rules or any other consideration.

Borrowed money is lent at a certain rate of simple and compound interest and these rates have risen since the original loans were taken out, as like as not.

Taking out a new loan when you already owe a lot of money ought to make any competent banker wary, whether you are a private individual or a state, so when the government, irrespective of which party is forming it, needs money, a sensible banker will ask him- or herself how high the risk of the borrower defaulting is, and adjust the interest demanded accordingly, or simply say no to the proposed transaction.

A country that already has a large debt is bad business, so securing new loans becomes harder and dearer, thus enlarging the vicious circle.

Whitewavemark2

The banks allowed the situation to develop though, and were far too highly leveraged. They knew the risks that they were taking, where the financial products they had developed were offered to lower-income people with little understanding of the risk.

The banks allowed the situation to develop but there were very few economists who signalled any warnings on the consequences. Those few who did were not 'mainstream', in that they didn't subscribe to the mainstream 'ruling theory' (i.e a theory which is dominant over other theories) of neo classical economics.

In fact, according to Steve Keen, a non mainstream economists, the Dutch economist Dirk Bezemer looked through economic literature to identify people who could legitimately claim to have predicted the GFC . He identified only 12 out of the thousands of economists who were happy with the developing situation. The 12 are listed on Keen's blog if anyone wants to check (you may have to register as a 'free' subscriber before you can read the blog)

profstevekeen.substack.com/p/my-blessed-and-cursed-life

A longer extract from a very long blog post about non 'orthodox economists and economic theory.

... "Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief,” testified Federal Reserve Chairman Alan Greenspan before Congress. “The whole intellectual edifice, however, collapsed in the summer of last year". What’s worse, this massive humiliation of the economic orthodoxy was attached at the hip to an equally massive victory for the economic heterodoxy. For it was precisely economists of the dissident schools—employing completely different models from those of the mainstream, rooted in different principles derived from the historic analysis of financial markets—who did successfully predict the crash. And not just in the manner of those dogmatic Marxists who, as the old joke goes, “predict” 12 of the past 2 crises of capitalism. Rather, using tools like stock-flow consistent models and Minskyan crisis theory,33 heterodox economists such as Wynne Godley and Michael Hudson not only proclaimed in print (far in advance) that a financial crisis would happen but also identified its specific origin and causes in the real estate market. Here was as neat a natural experiment as anyone could ask for, and the winner was clear to anybody with eyes to see.

strangematters.coop/frederic-s-lee-profile-part-one/

The Greenspan quote is found all over the place in economic literature. He was Chair of the US Federal Reserve. He was in a position to evaluate the actions the financial institutions and to do something about them if he felt that they were threatening the financial stability of those institutions. His belief, as an economist, in the neoclassical economic theories made him confident that the institutions were doing nothing untoward.

TBH, if Greenspan couldn't see it coming and neither could any of the similarly influenced economists depended on by the UK government I don't see how we can blame the non economist PM of the time for going along with them.

To say the 'banks self regulate through boom and bust' is just repeating a neoclassical economic theory which has been proved to be untrue. It's based on a supposition that they are rational actors, and the neoclassical idea that markets shouldn't be interfered with in any way because they are self regulating. Calling for more regulation seems to me to be contradictory if one believes that the neoclassical theory is correct.

The banks allowed the situation to develop though, and were far too highly leveraged. They knew the risks that they were taking, where the financial products they had developed were offered to lower-income people with little understanding of the risk.

Markets self regulate between boom and bust unless there are safeguards to prevent massive swings. Any responsible government controls the interest rate and quantity of money available, before the crash there were no effective safeguards, if any existed at all. Moreover Retail and high risk Wholesale banking was not separated, which has now been done.

RBS in particular invested heavily in commercial property, when that crashed it would have affected thousands of personal and mortgage customers, which is why they had to be rescued.

When you owe £1000 you have a problem
When you owe £1m the bank has a problem
When the bank owes £100billion the Government has a problem

M0nica

^Deregulation was the result of adherence to the prevailing economic theory about the ability of markets to self regulate.^

When you go deeper into the build up to the GFC you wonder how 'the market' could have been so irresponsible as to encourage people to go deeper into debt and then to try to monetise that debt.

It had absolutely nothing to do with Labour expenditure in the preceding decade.

Maizie surely para 1 answers the question you pose in para 2. Markets self-regulate by swinging between boom and bust. They are amoral not immoral and have no interest in what effect their operations have on individuals.

There were warnings from the late 1990s that markets were overheating, particularly that the property market, especially that the domestic was being dangerously overlent, but while Labour expenditure contributed little to the 2008 collapse then government, and we could never have completely avoided the 2008 meltdown, but action by the (Labour) government under its 'prudent' chancellor could have done much to mitigate its effects.

The catalyst of the collapse in the UK was the collapse of Northern Rock, which had been offering mortgage loans of 125% and the reckless explosion in 'self-certified mortgages' beyond the narrow bounds of their previous limited use.

The government had the power to dampen down the property market and was, indeed urged to do so, but chose not to. The party cannot wriggle out of the accusation that it was instrumental in making the 2008 crisis far worse than it needed to be.

Because the bankers were greedy - as were some of the people who took out sub prime loans. They took loans in order to buy property to let. A similar thing is happening in the UK now. Many people who took out several buy to let mortgages are having to sell the properties because they can no longer afford the repayments.

Un-inhibited growth

monica I agree that Brown should have foreseen the danger relating to the overheating of the housing market, however, no government did, and in particular the US sub-prime market was the biggest factor in the eventual collapse, largely because of illegal banking activities relating to debt and housing.

All governments ignored economists warning, as they are want to do if it doesn’t suit them politically, and as a result of a period of inhibited growth it is easy to see why governments were too optimistic about future prospects.

Never-the-less Browns quick action in saving Northern Rock and other banks undoubtedly proved invaluable and was copied by other governments throughout the world , including USA.

Interesting conversation - of course the economic theories of the founding fathers are continually developing and changing, if they hadn’t done so, we wouldn’t have had Keynesian or Marxist economics - and off-shoots.
MMT is a theory being promulgated by initially economists in the USA and finding acceptance amongst some economists in Europe. I have been reading the theory with interest, but have yet to be absolutely convinced as to its credentials, particularly relating to the capitalist market economy.

The government had the power to dampen down the property market and was, indeed urged to do so, but chose not to. The party cannot wriggle out of the accusation that it was instrumental in making the 2008 crisis far worse than it needed to be.

I don't know why you are insisting on reading what I am posting as though I am trying to make partisan points. I am alive to the differences in policy making that different economic 'schools' could enable but the 'theories' they promulgate are available to any party to use. I'm just describing what their theoretical base is and trying to point out that there is no one school of economic thought that is 'correct' while all the others are wrong.

I do find it difficult, though, to look at the effects on the UK of last 40+ years of following the dogma of the neo classical 'free market, small state' school of economics and to find that no-one is intellectually interested in looking at alternatives.

For example, the belief in market 'self regulation' is a neo classical theory. It's not even borne out by empirical evidence. Do we have to live by the operation of fossilised, unevidenced, theories when there may be better evidenced understandings of how economies work available?

Deregulation was the result of adherence to the prevailing economic theory about the ability of markets to self regulate.

When you go deeper into the build up to the GFC you wonder how 'the market' could have been so irresponsible as to encourage people to go deeper into debt and then to try to monetise that debt.

It had absolutely nothing to do with Labour expenditure in the preceding decade.

Maizie surely para 1 answers the question you pose in para 2. Markets self-regulate by swinging between boom and bust. They are amoral not immoral and have no interest in what effect their operations have on individuals.

There were warnings from the late 1990s that markets were overheating, particularly that the property market, especially that the domestic was being dangerously overlent, but while Labour expenditure contributed little to the 2008 collapse then government, and we could never have completely avoided the 2008 meltdown, but action by the (Labour) government under its 'prudent' chancellor could have done much to mitigate its effects.

The catalyst of the collapse in the UK was the collapse of Northern Rock, which had been offering mortgage loans of 125% and the reckless explosion in 'self-certified mortgages' beyond the narrow bounds of their previous limited use.

The government had the power to dampen down the property market and was, indeed urged to do so, but chose not to. The party cannot wriggle out of the accusation that it was instrumental in making the 2008 crisis far worse than it needed to be.

Interesting blog from Prof. Simon Wren Lewis discussing neoliberalism (which is the economic system under which we have been living ever since the late 1970s and which DAR and MOnica think shouldn't be challenged.

I never made any such claim. Wishful thinking Maizie

Formatting fail. All the extracts are from the blog, not my words.

Interesting blog from Prof. Simon Wren Lewis discussing neoliberalism (which is the economic system under which we have been living ever since the late 1970s and which DAR and MOnica think shouldn't be challenged.

...If you look at current academic economics, Friedman largely failed in his attempt to discredit Keynesian macroeconomic policy (see below). [2]. While public choice theory has been very successful in taking economic methods into political science, it has not stopped economists talking a great deal about market failure and how the state can intervene in the market to deal with that failure.

As a result, academic economics is very different from the economics neoliberal proponents like to talk about. I have sometimes joked that neoliberal interpretations of economics are what you might get from attending a first year course on economics and missing half the lectures. Yet because economic ideas are very powerful, a selective use of that theory can be pretty persuasive, and the individuals like Hayek or Friedman were very good at doing just that. But because they were selective in order to persuade, their ideas become very vulnerable to a more general use of economic theory and evidence.

Discussions of neoliberalism as an ideology or set of political ideas generally focus on the primacy of markets as a central idea. But it may be a mistake to take what neoliberals say about markets as true of actual markets. One of the most egregious examples of this is justifying CEO pay as being ‘determined by the market’, when in reality CEO pay is generally fixed by a committee of board members and external CEOs. What is the difference between this and having wages fixed by a commission set up by government? Yet few would describe public sector wages set by public sector review bodies as determined by the market.

I have argued that a better way to describe neoliberalism in practice (policies pursued in the US and UK by Reagan and Thatcher and subsequent governments) is that neoliberalism uses concepts from economics to promote the interests of capital (corporations and companies).^

As I have already mentioned, Friedman’s arguments against Keynesian fine tuning never had widespread academic support, and have very little now. Across the globe central banks move interest rates month by month in an attempt to regulate the business cycle. [6] As I have also noted, many academics study market failure. Another example was austerity, which was opposed by the majority of academics, a majority that came close to a consensus as the evidence came in. On the left, many economists in the 60s and 70s argued maintaining very low unemployment was essential, and prices and incomes policies should be used to contain inflation. Once again, evidence was not on their side, and that approach lost favour among economists.^

A response I often get when I make these arguments is why do we hear so much from economists that support right wing policies. The answer to that is straightforward: just look at who controls the means of information. Few people would argue that medicine was ideologically biased because we heard so many medics in the media arguing against lockdowns. Equally the media chooses among academic economists based on the ideas they want to see promoted, and not on whether they represent the academic consensus, as Brexit clearly showed.

mainlymacro.blogspot.com/

Wren Lewis is a Keynesian. He does not support MMT.