Why rate cuts stir so little interest

The news headlines last week acclaimed the Bank of England’s ‘historic’ decision to cut UK interest rates a further half-percentage point to 1.5 per cent, the lowest-ever level in the Bank’s 315-year history. Yet like the other cuts that have brought the Bank’s base rate plummeting downwards from five per cent since October, this one excited little wider interest.

The New Labour government, the Bank of England and the financial authorities have invested a huge amount of effort to inject more ‘liquidity’ – money for spending and investment – into the moribund British economy. They have slashed central interest rates. They have pumped billions into the banking system and put increasing pressure on the banks to lend more, including plans for a government-backed mortgage guarantee scheme. Now there is even talk of the Bank resorting to its last desperate measure of simply printing more money – or as it is called in these more sophisticated times, ‘quantitative easing’.

Yet despite all that effort, and prime minister Gordon Brown’s claim to be leading/saving the world out of the crisis, there is no sign of any upturn in lending, investing or spending. Those endlessly banging on about the need to extend more cheap money and end the credit crunch are surely missing at least half the point. Everybody needs more money today. The bigger question remains, however, what would you do with it? The central issue is not just a shortage of cash or credit. It is the shortage of productive and profitable sectors of the economy to put it into – the absence of something worth investing in for the future of society.

Take the ‘soft’ option of extending more consumer and mortgage credit. That might get some punters to spend a bit more in the sales. But as a strategy for reviving the UK economy, it is bargain basement to say the least. It amounts to little more than trying to retain some air in the deflating bubble of the retail and property markets that has masqueraded as a boom economy for the past decade. The ‘strategic’ plan behind it seems to amount to artificially keeping a few more shops out of receivership for a while, and trying to slow the slide in house prices.

However, contrary to the prejudices of many in high places today, the buying public are not stupid. People might snap up an obvious bargain, but nobody is going to sacrifice what remains of their credit rating to boost the official retail figures – that is why, from Woolworth’s to Marks and Sparks, big retailers are in trouble. And even if mortgages become slightly more available and come with government guarantees, who is going to dive back into the property market when they don’t know where the bottom might be, far less when we might reach it? Recent figures reveal that householders have been using the recent interest rate cuts to reduce their mortgages rather than take on extra borrowings.

The more important issue is the availability of credit to business. This is what the government, the Bank and business organisations keep highlighting as the key to recovery. In fact the Libor rate – the interest rate at which banks lend money to one another and hence pump liquidity into the economy, often cited as more important to capitalists than the base rate – has also been falling lately, reaching its lowest level since 2004. Yet that has not stopped the rise of closures and redundancies or the collapse of borrowing and investment.

This points to the bigger problem facing British capitalism today. It is not only a lack of credit. Crucially, it is a shortage of profit to be had by borrowing capital to invest.

When economists talk about ‘real’ interest rates rather than headline ones, they normally mean in relation to inflation. By that measure, since the Bank’s base rate is now below the official inflation rate, real interest rates are actually negative today – a sure sign of how desperate the financial crisis has become.

But for capitalists there is another relative measure of what interest rates ‘really’ mean in practice: that is, the current rate of interest compared to the prevailing rate of profit. If profit rates are sufficiently high, then they can borrow even at inflated bank rates and still have a decent margin. That is what UK sectors such as property and financial services and retail have managed in recent years. However, if profit rates are very low or non-existent, as they appear to be for many UK businesses now, it does not matter how cheap credit becomes, if they cannot make enough money to make borrowing worthwhile. That is why all the emphasis on lowering interest rates and getting more money into the economy is having a very limited effect. This crisis of capitalism may be different to those that have gone before, yet it remains at root a crisis of profitability.

What the UK economy needs is not just credit but something worthwhile to invest in. That almost certainly means searching out new economic sectors that will be more productive and substantial than the credit-sustained ‘thin air’ economy of recent decades, so dependent on inflated values of paper assets such as share and property prices. That is where the energy and attention should surely now be focused, with debate concentrated on more fundamental questions about how to restructure the economy and how we want our society to produce, distribute and use its future wealth. In the absence of any alternative to capitalism today, we could at least test how to push the market economy closer to its capacity.

But such fundamental questions about reorganising our economic life are not even being asked. Instead we have Gordon Brown’s ongoing I-saved-the-world act – for all his self-professed seriousness, it is more a political performance than a proper attempt to address the future. Brown is merely flying around the stage on wires, acting the superhero. His constant mantra is that the government is taking action, doing things, launching initiatives, while the Tories are supposedly doing nothing.

But what is Brown really doing, and what difference is it making? Pumping billions into the banks has had little effect. Wasting billions on a 2.5 per cent reduction in VAT, at a time when retailers are slashing 50 per cent and upwards off prices, has proved an invisible tax cut. Beyond that it is all promises of more apprentices (many of which turned out to be at McDonald’s), fiddling around at the edges with more welfare measures, or shipping the Cabinet off to Liverpool or Birmingham in an awkward effort to feel people’s pain. This frenetic exercise is largely action for action’s sake.

For all the rumours of a return to traditional Labour with large-scale state intervention in the economy, this looks more like classic New Labour: a restless state launching endless high-profile initiatives that mean little beyond the next headline. This was bad enough in the ‘booming’ Blair years, but it is far worse in the context of a full-blown crisis. It appears to have dawned on more than a few people that the more New Labour has done, the worse things have seemed to get. Only the lack of serious alternatives and opposition allows Brown to get away with his action man act. Yet even at the peak of the mini-boom in good publicity Brown has enjoyed, he is still trailing the clueless Conservatives in the polls.

Never mind arguing about how to kickstart the housing market or bank lending as an end in itself. How about kickstarting a more difficult debate about building a new economy and giving us something to invest in for the future? That might just stir some interest.

Mick Hume is spiked’s editor-at-large.

The Crisis With No Name, by Frank Furedi

The ‘credit crunch’ and the SAD economy, by Phil Mullan

The state won’t be the saviour of the economy, by Frank Furedi

I don’t predict a riot, by Mick Hume

This Marxist isn’t laughing, by Brendan O’Neill

Against austerity, by Brendan O’Neill

There Is (still) No Alternative, by Mick Hume

Congress bales out, by Brendan O’Neill

Scapegoating the spivs, by Tim Black

It’s the politics, stupid, by Phil Mullan

Lehman Brothers: when confidence runs out, by Rob Lyons

Five myths about the Wall Street crisis, by Daniel Ben-Ami

Read more at spiked issue: Financial Crisis.