Tuesday, December 18, 2018

Mark Blyth and Tami Oren - From Big Bang to Big Crash: The Early Origins of the UK’s Finance-led Growth Model and the Persistence of Bad Policy Ideas

It's very long and detailed, well, Mark Blyth is a university/ college professor and so there's a lot of research here. Now we know the type of work that gets done behind the scenes.

How the  Conservatives messed up our ecomony, and yet millions of people vote for them believing they know what's best for the country.

Using newly declassified documents from the British Public Records Office, we argue that the finance-dependent growth regime that typified the UK economy in the period up to the Great Crash of 2008 has much deeper roots than is commonly realised. We use these documents to demonstrate that the growth of finance was integral to the Thatcher revolution, tying together mortgage markets, household debt, and boom-bust cycles as early as the mid-1980s. We also show how policy-makers in this period were aware of all the weaknesses of this growth model, to the point that they effectively diagnosed what would happened in 2008, back in 1987. We argue that selecting for a finance-led growth model as the preferred growth model so early effectively rendered other possible growth models for the UK unattainable. The result was the shift from an economy characterised by ‘stop-go’ cycles in the post-war period to an economy characterised by recurrent ‘boom-slump-austerity-reset’ cycles in the Thatcher and post Thatcher periods. The 2008 crisis did not change this highly unstable mode of accumulation.

The Conservative Party has a lot to answer for - 

By 1983, the Right-to-Buy programme – the privatisation of the social housing stock – had already missed its targets. Sensing that the private sector was not being aggressive enough in supplying housing credit, increasing competition between banks and Building Societies (BSs) (UK savings and loans) became a central policy goal (Christopher Monkton (Policy Unit) T486/137, 20 January 1983). But up until 1985, banks were reluctant to enter the mortgage market (T486/137, January 1983; October 1985).1818 Their market share of less than 15% was much smaller than hoped (T486/137, January 1983; October 1985).View all notes Moreover, local authorities’ current deficit – mostly the result of financing the sale of Council Houses – became ‘the biggest’ drag on the government’s austerity ambitions (John MacGregor, Chief Secretary to the Treasury, PREM 19/1701, 1984). The government was ‘looking for a gradual replacement’ for this outstanding mortgage-debt – that reached £4.1bn in 1984Q2 – and expected the private sector to re-finance the sale of Council Houses off the states’ books, thus reducing the Public Sector Borrowing Requirement (T486/137, 31 October 1985).
Against this background, the government put a lot of pressure on BSs to take a ‘more active role in housing’ and develop new mortgage products such as 100% loan to value, ‘low start’, and index-linked mortgages to help ‘marginal house buyers’ enter the market (RB Saunders (Treasury) T 486/5, 17 November 1982). Meanwhile, from 1982 onwards, mortgage demand on the side of middle-income families kept on growing, stretching the BSs narrow funding base to its limits. The BSs, in turn, argued that they would be able to respond to the growing demand, but ‘would be left with little or no margins for innovative lending, such as re-financing local authority mortgages’ (BSs Association T486/137, 10 February 1983). In response, the Mortgage Finance Committee (MFC) of the Housing Department encouraged BSs to expand their activities into wholesale markets, even if they lacked both the experience and the expertise to do so. The Treasury actively supported the MFC is this regard (T486/137, 17 November 1982; 31 October 1985).1919 The Financial Bill 1983, for example, expanded BSs ability to use wholesale funding (Richardson BoE QB 1983, p. 217). Since ‘most mortgages deeds allow the BSs to assign the mortgage to anyone else’, there was no legal bar preventing them from raising funds from wholesale markets and expand their lending activity (T486/5, December 1982).View all notes
As a result of these joint efforts, between 1983 and 1986 mortgage securitisation, the demon of 2008, expended significantly. During 1984, a record year in mortgage lending, growing use of ‘non-traditional funding’ significantly expanded (T486/37, MFC, January 1985; HLG118/4346, 18 April 1986). Up to May 1985, as their deposit base shrank, BSs wholesale borrowing increased by a ‘staggering’ annual growth rate of 105% (Redwood to Thatcher 10 July 1985, ‘The State of the Economy’). Four off-balance-sheet vehicles dealing with Mortgage Backed Securities (MBSs) had been established, with institutional investors finding this market ‘particularly attractive’. And by 1986, local authorities started selling their loan book into new secondary mortgage markets (HLG 118/4346, MFC 18 April 1986).2020 In 1985, the National Home Loan Corporation was established with the specific objective of purchasing loans from insurance companies and local authorities (HLG 118/4346, 10 October 1985).View all notes These developments, as we would hear again in the late 2000s, were a useful way of ‘getting BSs’ assets off balance-sheet[s]’, and as a ‘natural development’, they would enhance flexibility and should be widely embraced (Hoston (BoE) HLG118/4346, 18 April 1986).
But this is not the end of the story. Thanks to the Big Bang reforms, the mortgage market was now a fully implicated part of the on-going ‘credit revolution’ generated by the elimination of banks’ reserve requirements in 1981. Together with credit cards, bank loans, and overdrafts, these developments led to a massive expansion of household debt in this period. As John Redwood (PREM 19/1461, 18 September 1985) put it ‘hous[ing] finance cannot be split off from the rest of … financial activity, especially now that mortgage money is effectively withdrawn from the housing market and recycled into consumer spending or other types of investment activities’.

New Political Economy

1 comment:

Ralph Musgrave said...

Sounds to me like a load of leftie whinging. It’s true that Thatcher relaxed restrictions on bank lending, but I see nothing necessarily wrong with letting free markets govern what banks do.

The main thing wrong with banks at the moment is precisely the fact that they are NOT free market entities: they get bailed out by taxpayers whenever they fail (at least large banks do). And that tendency to fail stems directly from the fact that they are allowed to create money, something that Andrew Anderson constantly objects to on MNE, and quite right.

Taking deposits off people, lending the money on while promising depositors their money is totally safe is basically a form of fraud. That’s the basis of commercial bank money creation. Mutual funds and other investment intermediaries are barred from indulging in that fraud. Why are banks allowed to get away with it?