FACED with loud and strident demands to slash its lending rate, to try and avoid a housing crash and a depression by crashing the pound sterling and letting inflation rip instead, the Bank of England Monetary Policy Committee chose to respond by trimming its rate by 0.25 per cent, to 5.5 per cent, from 5.75 per cent.
Some of the bourgeois economists who were making the most fervent demands, spelt out, that if the Monetary Policy Committee failed ‘to do its duty’ and cut rates, they would be responsible for the major share crash that would surely follow, and then for the emergence of a depression of the type that has not been seen since the events of 1929-31.
Faced with such a barrage, the Monetary Policy Committee was overwhelmed, and had to ignore the previous warnings of Governor Mervyn King that ‘the signs’ were that the world was treading along an inflationary path of the type that ran amok in the period after August 1971.
This was when the gold backing of the dollar at $35 an ounce was ended by President Nixon, and the world’s currencies were ‘floated’. This was followed by the Yom Kippur war in the Middle East when Israel was driven out of the Sinai peninsula by Egypt, after which oil prices were trebled, and Britain was put on a three day week by the Heath Tory government.
In fact yesterday the stockmarket was unimpressed with the 0.25 cut and an hour after the announcement the FTSE 100 index was 41 points down, while the pound continued with its record breaking decline against the US dollar.
This is proving to be just as spectacular as were its record gains against the US currency in the wake of the Iraq war and US Federal Reserve rate cuts.
Meanwhile, just as the bankers have hiked up the libor rate (London inter bank offered rate), well above the Bank of England rate to protect their interests, and halted by that act much of the inter-bank lending, many mortgage lenders are expected not to pass the rate cut onto their borrowers, such is the current crisis-ridden situation.
Indeed, the chief economist at Lloyds TSB Corporate Markets, Trevor Williams, has emphasised why such acute pressure had to be piled onto the Bank of England to achieve a rate trim when he said that the decision to cut rates had been an ‘incredibly tough one’.
He said that worries about inflation, with rapidly rising food and oil prices, ‘could easily have swayed the Bank to hold rates’. In fact the rate cut will lead to a further fall in the pound sterling and further increases in food and oil prices.
Meanwhile, the housing market is expected to fall by 10 per cent in the next year.
The crunch will come when, in the New Year up to 1.5 million people have to remortgage when fixed rate mortgages end, but will not be able to find a mortgage deal that they can afford.
The reality is that the bosses and the bankers are caught like rats in a trap, they have banks but no cash, only useless promises to pay of one kind or another – but it is the working class that will pay the price!
The next upsurge in the world crisis will be reflected explosively in Britain, which is the debt capital of the world with over £1.3 trillion of domestic debt. When the US sub prime mortgage crisis erupted, the queues to get deposits returned formed outside a British bank, the Northern Rock.
So far the Brown government has spent over £30 billion trying to defend that bank from total collapse.
Yesterday morning the Royal Bank of Scotland revealed that it has just written off £1.25 billion because of the sub prime mortgage crisis.
The next deepening of the world crisis will see speculators testing out the British pound and the British banks with a major run, creating a crisis that no government will be able to bail out.
This is the nightmare of the British capitalists that is about to be realised.
Their only solution will be to dump the whole cost of this crisis onto the working class through massive cuts in wages, benefits and jobs.
The only way to resolve this threatening catastrophe in the interests of the working class is through the trade unions taking action to bring down the Brown government to go forward to a workers government that will nationalise the banks and the major industries and bring in a planned socialist economy.