Analysis by Keith Rankin.
This last week I watched Push: The Global Housing Crisis on Al Jazeera, featuring Leilani Farha, Canadian lawyer and former United Nations special rapporteur on adequate housing. She is now leader of The Shift (the global movement to secure the human right to housing).
The central takeaway from this ‘Witness’ documentary is that the housing crisis is a global financial crisis (as opposed to the Global Financial Crisis of 2008).
The problem is essentially the concept of housing (and the real estate that it sits on) as more a form of financial wealth (‘financial wealth’ is an oxymoron, by the way; it means ‘wealth comprised of claims on wealth’) than a human right; as such, whether housing is occupied or not – or whether it is occupied by sojourners rather than residents – is incidental. In this financial view, all that matters is the dollar value attributed to assets, and that wealth is somehow generated through a bidding process that raises that dollar values of financial assets.
Managed Funds, especially Government (or government-mandated) Pension Funds
While we may emphasise the self-perceived entitlement culture of individual speculators in financial assets, the point of emphasised by Leilani Farha was the role of managed funds, which means that – indirectly – many of us, with savings ‘invested’ in these funds, are financial speculators without thinking of ourselves as such.
A particularly important class of managed funds is government funds, including and especially government pension funds. The worst kind of these funds would be the kind such as the New Zealand Superannuation Fund created by Roger Douglas in 1974 and thankfully disestablished by Robert Muldoon in 1976. The Canadian government pension fund is notorious in this regard. And New Zealand does have a smaller-scale government fund of this sort; it came to be known after its establishment in the 2000s as the ‘Cullen Fund’.
We can generalise here, by thinking of Sovereign Wealth Funds, many of which are classed as ‘pension funds’; and we can think of private managed funds – the mainstay of the financial industry – many of which (like KiwiSaver) are government partnerships with that industry. Governments, around the world, have a deep stake in the financialisation of real estate assets; both as governments, and in the private capacity (as speculators) of finance industry and technocratic and bureaucratic and elected elites. In the formal sense, as citizen holders of public equity, we are all speculators when government-directed funds are deployed in the speculative financial marketplace.
Yes, including the homeless and the underhoused among us; the deprivileged among us can still feel good that our unrealisable public equity increases as our housing and other material rights deteriorate. We own notional shares in the lands we are evicted from.
The way around this financialisation approach to ‘wealth management’ is the ‘pay-as-you go’ approach, which was last championed – in New Zealand – by Sir Robert Muldoon. New Zealand Superannuation is still largely funded – as it must be – out of current economic product; and not through the sale of financial assets that we hope can be converted by retirees into goods and services of a certain value. Further, pay-as-you-go is the essence of the Basic Universal Income, an income distribution mechanism based on democratic accounting standards (ie based on basic human rights); a mechanism that can form the basis for the re-engagement of the rapidly marginalising populations of each country in the world.
(The scandal of Covid19 is how the entitled minority of the world’s population has spread this virus to the disentitled – including the disengaged poor – infecting them, and killing them in numbers on a World War scale.)
Other stories this week underscore the conjoint problems of financialisation, inequality, and impoverishment. One such story is the release of the Pandora Papers’ leak to global media organisations.
These papers reveal a comprehensive story, not of illegality, but of uber-elite entitlement; of legal theft.
Control of price-appreciating financial assets, as revealed by these papers, is more than ‘mere’ tax avoidance. It is theft in the fullest sense of the word, in that it is increasing the claims of the entitled on the world’s finite economic output, thereby diminishing the claims of the disentitled, and pushing them into unsustainable survival practices. Financialisation is an entitlement mechanism, and it applies to both the demanders and the suppliers of financial products.
Entitlement is not only a problem of the uber-elite. Indeed, through our KiwiSaver accounts and the like, we all come to align ourselves to some degree with the highly entitled. Further, the highly entitled go well beyond the ‘one-percenters’; rather the top nine percent (or even the top nineteen percent) of the ’99-percenters’ tend to have an entitlement mindset towards property values and interest rates, even while blaming the conspicuous ‘one-percent’ for the world’s woes.
One test of entitlement culture is a person’s attitude to interest payments. People who believe that they are entitled to an interest ‘return’ on saved income over and above the inflation rate are people who believe that they are entitled, as a form of self-congratulation, to an increased share of the world’s goods and services. It was in medieval times clearly (and correctly) understood that it was sinful to ‘make money from money’. This is distinct from making a profit from investments, such as planting a crop, irrigating a field, retaining livestock for breeding, or learning a trade.
In reality, the ‘real rate of interest’ is sometimes positive; that’s when lenders (ie savers) are scarce and borrowers (including investors and willing governments) are abundant. Under those conditions – rare in the lifetimes of people alive today – a legitimate premium is payable to people holding rather than spending money. The reverse conditions are much more familiar – an abundance of unspent money, and an aversion to deficit financing – in which, naturally, the real rate of interest should be negative.
Indeed, it was the negative real rates of interest during the global Great Inflation of the 1970s and early 1980s, that rumbled the uber-entitled, and led to the global financialisation coup of the late 1970s and (in New Zealand) the 1980s; the world event that is commonly called the neoliberal revolution. Theft through financial chicanery has prospered ever since.
New Zealand’s Official Cash Rate (OCR)
The first raising of the OCR in New Zealand for several years is indicative of this entitled view that real interest rates (as an indicator of real financial returns) should always be above zero. As such, the management of interest rates is the illiberal intervention in the marketplace that is most used to support economic liberalism.
By and large, the New Zealand public falls for the argument that higher interest rates are needed to slow down the rate of increase of financial asset prices (eg of house prices). There is little evidence for this, and indeed the 2004-08 house price inflation was in large part a result of rising interest rates.
The problem is that genuine economic borrowers are discouraged by high or rising interest rates, and that rising interest rates make very little difference to speculative borrowers. Thus, when interest rates increase, increasing proportions of all borrowed funds are lent to acquire financial assets with a view to making returns through capital gain. (Capital gains’ taxes are rarely sufficient to offset this reality; the main driving force pushing money into speculation is reduced lending to the real economy.) This truth is clearly evident by a cursory inquiry into the behaviour of house prices during periods of rising real interest rates.
In addition to rising interest rates ‘inadvertently’ stimulating financialised markets, the countries which intervene to raise their interest rates the most find that their exchange rates increase, as foreign money increasingly treats domestic money as a speculative asset. While this currency appreciation may dampen inflation in these countries – while exacerbating inflation pressures in the countries with falling exchange rates – it also does much harm to the export industries of these countries. Export industries suffer the double whammy of higher borrowing costs and an appreciating exchange rate. Indeed, the aggressive raising of interest rates to engineer an appreciating exchange rate has all the entitlement hallmarks of a Ponzi scheme. (Just look at New Zealand in years such as 1987, 1995-97, and 2004-08. If you don’t believe me, look at Iceland in the years before 2008.)
We should note that if rising interest rates make any difference at all to the global rate of inflation, they indeed exacerbate rather than diminish inflation. The only proviso to this is that rising global interest rates also create global economic crises, such as 1929-31, 1979-82, 1989-93, 2000-01, 2005-08, and 2010-12. While rising global interest rates are inflationary – they raise business costs, including higher required rates of profit – global recessions are clearly deflationary. Higher interest rates only reduce inflation by creating recessions, an even worse problem.
Consumption entitlements should be distributed as human rights, and not as greed premiums. They should be paid as we go, and not divvied out from greed funds. As it is, most entitlements are of the greedy, by the greedy, for the greedy. Inasmuch as we are incentivised to contribute to government-sponsored greed funds, most of us are a little bit greedy. We live in a greedocracy, not an economic democracy. A true democracy distributes public equity dividends – as the economy goes – as a human right.
Keith Rankin (keith at rankin dot nz), trained as an economic historian, is a retired lecturer in Economics and Statistics. He lives in Auckland, New Zealand.