9th October, 2008.

Central banks’ obsession with inflation is stopping them from tackling a far more pressing threat.

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Both the British Chancellor, Alastair Darling and the shadow Chancellor, George Osborne, have been on the radio this morning, resisting the idea that interest rates are political. Instead they have argued, vehemently, that the Bank of England is independent, and that the Bank must decide whether or not to lower interest rates.

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The Prime Minister, Gordon Brown, speaking on Radio 4’s flagship current affairs programme this morning, repeated something he says regularly: that ‘interest rates are low’ and that his government, through the Bank of England, kept them low. The question the BBC should have asked is this: if interest rates are low, and have been so, why on earth are people/companies/banks having such a hard time paying debts? Surely the Credit Crunch crunched, because debts - of banks in particular - became both too large, too expensive, and unpayable? Do small businessmen/women pay low rates on  investments? Mortgages? Credit Cards? Car loans? Does the PM live/work on another planet?

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You have to admire the spin.  The US Treasury Secretary, Comrade Hank Paulson, pictured here, announced  today, Sunday 7th September, 2008  that the US government is natonalising two huge US banks, Fannie Mae and Freddie Mac.  Which means in effect that Comrade Paulson is  socialising the losses of the shareholders and investors in these banks -  $5.4 trillion of guaranteed mortgage-backed securities (MBS) (mortgage backed securities) and debt outstanding. These liabilities are equal to all the publicly held debt of the United States. This in the words of Prof. Roubini is ’socialism for the rich, the well connected and Wall St.” (see below).

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In this big bad world of the Credit Crunch, powerful central bankers - civil servants all - have bent over backwards to help powerful and rich private bankers.

On one day, ‘debtonation day’, central bankers in Europe and the US pumped an eye-watering $150 billion into the financial system, to keep big banks afloat. According to Bloomberg, the US’s Federal reserve has ‘cycled $2.58 trillion through U.S. money markets since December’. (Bloomberg 8th August, 2008).

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Have been listening to debates about the conflict in Georgia over the week-end. There has been much wailing and gnashing of teeth about Putin’s disregard for democracy. In a similar vein, western commentary about President Hu Jintao’s Olympic Games is never complete without some tut-tutting about democracy and human rights in China.

Yet these leaders have in reality much in common with Alan Greenspan, former chairman of t he US Federal Reserve, who is held in the greatest esteem by western commentators. He came to London recently to promote his book, and I attended one of his sessions at Chatham House. The deference from the British political and media establishment was nauseating. The Prime Minister had already honoured him with a knighthood, so deferential is he. Yet this is Greenspan on democracy, as expounded in the columns of the Financial Times last week:

“It has become hard for democratic societies accustomed to prosperity to see it as anything other than the result of their deft political management. In reality, the past decade has seen mounting global forces (the international version of Adam Smith’s invisible hand) quietly displacing government control of economic affairs. Since early this decade, central banks have had to cede control of long-term interest rates to global market forces”

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The precedent of the United States’s great depression and Japan’s post-bubble collapse should haunt today’s G8 summiteers, writes Ann Pettifor in Open Democracy.

Japan hosts the G8 summit in the northern island of Hokkaido on 7-9 July 2008 at a time when its prolonged period of deflation and economic failure have rendered its politicians impotent. Philip Stephens notes that - despite Japan’s still considerable role in the global economy - the country’s politicians are the weaklings of global geopolitics. “Where is Japan?”, he asks. “The question is one of psychology rather than geography. Japan is still the world’s second most powerful economy. Politically, it is all but invisible” (see “Japan goes missing: invisible host at the summit“, Financial Times, 4 July 2008).

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The FT reports today on a debate economists are having with the Bank of England (BoE). To summarise: the Bank of England does not seem bothered by falling house prices; economists are.

This is a very important debate for all those that have debts - because while house prices are falling, the debts on those houses loom larger for owners. According to the Office for National Statistics in May, unemployment is rising, and unemployment makes it hard, if not impossible, to pay off any kind of mortgage. This is the context in which the BoE is preparing to raise interest rates above the current 5% and appearing relaxed about falling house prices.
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