Last week, when interest rates spiked, mortgage lenders withdrew offers to prospective housebuyers. People trying to buy houses suddenly found that property which had been affordable last week was no longer so. The economic climate shifted, ever so slightly in the grand scheme of things, and people who had previously considered themselves to be safe began to shake their fists at Kwasi Kwarteng.
But what if we consider that the chancellor’s actions are weather, not climate, and that the big problems we face are structural and systemic.
It’s now unequivocally accepted that humanity’s overuse of carbon-based fossil fuels is driving vast, civilisation-threatening levels of climate change, the impacts of which are being felt right now, and are only going to get worse.
It’s also accepted that, with so much capital and labour fundamentally intertwined with the fossil fuel industry, you can’t just turn off a coal plant and call it a day. What happens to the miners, the plant workers? What happens to the embedded capital in the coal and oil reserves when their value drops to zero, and the upstream effects of trillions of dollars of investment getting sucked out of the global economy?
As the International Trade Union Confederation has argued in its report, “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 should be a “just transition” – a movement to an environmentally sustainable economy that does not leave workers to rot in unemployment, carrying the costs while the bosses walk away with the spoils, but that sustains and protects people through the massive upheavals that are necessary.
Does the British economy need its own just transition, to wean us off our addiction to mortgage-backed growth just as we need to wean the energy economy off carbon? What would such a thing look like?
The problems are not 100 per cent comparable, but there are easy parallels to draw. House prices are the UK’s political third rail, like gas prices in the USA. Changes to affordability of mortgages or returns on property investments cause problems for the British middle class, who are much less easy to ignore than the underpaid and overworked precariat who have been expected to shoulder the burden of financial mismanagement over the last 10 years.
But at the same time, you can’t base the wealth of an economy on 10 per cent rises in house prices year on year and 1 per cent interest rates. That’s as unsustainable as basing it all on burning limited fuel stocks that also murder the biosphere.
Kwarteng’s extremely ill-advised mini-Budget was very well received amongst opaque think tanks like the Institute of Economic Affairs because to the minds of the Tufton Street Taliban – whose ideological commitment to their pet economic theory always outweighs any evidence – it was primed to “unchain” the moribund British economy and stimulate growth. The prescription was barking mad, of course, but the problem wasn’t incorrectly identified. The UK does have low growth and stagnant productivity, and that’s a massive weakness in the overall economy.
The Bank of England, on the other hand, has been deeply disturbed by rising inflation and the Bank’s economists have been not just predicting, but even welcoming the prospect of a recession because “the alternative [of high inflation] is even worse”. One former member of the Bank’s monetary policy committee has even claimed that “the central bank has no choice but to cause a recession”. Were it not for the weakness in the economy, interest rates would have gone up long ago. The trouble is that these low rates have pretty much been the only thing keeping the country out of recession for 10 years.
Kwarteng might have triggered the crisis in the mortgage market in a more chaotic and cack-handed manner than a more orderly and well-trailed raising of bank rates, but the effect – raising rates, reducing mortgage affordability, suppressing demand – is pretty much what the Bank has been trying to find a good moment to do for ages. This isn’t a good moment, not really, but the rise in a different kind of inflation has put it in a situation where it doesn’t see any other way forward than to try to, very carefully, slightly break the economy now so that it doesn’t break more later.
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 posing good solutions to these problems, which frankly they really aren’t, that’s a sign that things are getting really bad now. The economy is at the “floods and also fires” stage.
Perhaps the biggest parallel between the fossil fuel and financialised housing problems is that, by and large, the general population is politically in favour of these systems being maintained, even up to the point of disaster, not so much because most people feel any great benefit from them, but because abolishing them would cause great harm. The broader population has been conscripted as foot soldiers in an economic war where the risk of losing is far greater than any benefit we get from winning.
Just as a worker at a coal power plant might understand the damage of climate change but even more intimately understand the damage of losing their livelihoods, even people who can clearly see the problems of spiralling house prices can’t escape the hold they have over their own financial situation.
If you’re one of the people in the UK lucky enough to not be totally locked out of the housing market, your house tends to be – by necessity as much as choice – your savings and your pension. While the gains of inflation in the housing market are incredibly unevenly distributed across geography, age and class, such that only a small fraction of mortgage holders have benefited anything like the amount suggested by the headline inflation, it is such a large part of the economy that even a small correction could wipe billions of pounds of savings off households’ balance sheets, and leave many mortgage-holders in negative equity.
Over the last 30 years, above-inflation price rises have added £3 trillion in wealth for British homeowners. If all of that was simply “corrected” away, the results would be decidedly ugly.
So if we’re going to try to get off our addiction to funding the economy through inflation in the housing market, among other interventions, we will also have to commit to the full and proper rebuilding of the social safety net, in particular pensions and care of the elderly and infirm. As these have been dismantled in the UK, the middle class has been encouraged to insulate themselves by building up housing wealth.
This has created a chasm between those who can afford to sustain themselves in their dotage, and those who are cast into poverty once they can no longer work, as well as a growing group whose accumulated assets dissolve into nothing if they find themselves in need of care for dementia or other serious age-related infirmities.
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By putting pensions and social care onto a solid footing, ensuring that those from all walks of life will be able to live well in retirement and will be supported if they need care, much of the necessity of accumulating housing wealth – at least for the lower middle classes for whom it basically forms an alternative to the welfare state rather than a real store of useful wealth – can be mitigated.
No aristocrat willingly gives up his feudal army, of course. Just transition policies over fossil fuel dependency have often been woeful in practice because the CEOs of oil and gas companies benefit immensely by being able to mobilise an army of workers to their defence. Likewise, those who make money from property speculation are also politically insulated by people who, rightly, don’t want to see their retirement turn into collateral damage. Implementing policies designed to protect most people while turning off the firehose of free money for the super-rich is not going to find favour with the sorts of people who can get lunch with the chancellor.
But the system needs to be reformed before it collapses on top of us. And if it has to be reformed, it has to be done so in a way that doesn’t leave everyone else picking up the bill for the destruction that 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 leaves the rest of us, literally and financially, underwater.