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ABSTRACT
Austerity in the twenty-first century is different, compared both with the past, and across locations. This analysis explores the different role played by households in policies designed to maintain financial market liquidity in the context of aspirations of state deficit reduction. While in Europe there is austerity as popularly depicted, in the United States, where mortgage-backed securities have become central to monetary policy, the agenda is to keep households meeting their debt obligations. These differences are explained in terms of different conceptions of monetary policy and evolving conceptions of money itself. The evidence portends a changing role for households and their financial payments in anchoring the money system.
Disclosure statement
No potential conflict of interest was reported by the authors.
Notes on contributors
Michael Rafferty is Associate Professor of International Business at RMIT University in Melbourne, Australia.
Dick Bryan is Emeritus Professor of Political Economy at the University of Sydney.
Notes
1. The United States will be the focus of the analysis of securitization. In the US issuance of mortgage-related securities peaked in 2006 at $2600 billion. Between 2009 and 2015 annual issuance has averaged over $2000 billion. For asset-backed securities (ABS), issuance recovered from a post- global financial crisis (GFC) slump in 2010 to average around $200 billion per year from 2012 to 2015. That is down from the peak of $280 billion in 2007, but the trend is decidedly upwards. In 2015, almost three quarters of ABS are backed by auto loans. See SIFMA (Citation2016b, 8–9).
2. For some evaluations from different political positions see Conover (Citation2012) and Krugman (Citation2013).
3. The proposition that austerity can be expansionary was made by Harvard economist Alberto Alesina in Alesina and Ardagna (Citation2009). This is an empirical survey of instances of fiscal austerity wherein the author argued the 26% of adjustments were associated with increase in gross domestic product (GDP). See Chowdhury (Citation2012) for a summary of the work of Alesina and his influence on the austerity debate in Europe. Guajardo, Leigh, and Pescatori (Citation2011) at the IMF have provided a disproof arguing that a review of the evidence indicates that the scope for and empirical evidence of instances of expansionary austerity are overstated.
4. The catalyst for the most recent version of austerity has been (nominally) purely evidential: Harvard economists Reinhart and Rogoff (Citation2010) produced a model to identify a critical tipping point for government indebtedness. They estimated that when government debt exceeds 90% of GDP, economic growth declines sharply. In the current period of mounting debt, this became a theoretical rationale for austerity programmes as the key to future economic growth and well-being. Although their model has now been shot down on technical grounds (Herndon, Ash, and Pollin Citation2013; see also Krugman Citation2013), we might perhaps identify their analysis as a hook on which a ‘science’ was being attached to certain ideological state policy agendas.
5. Of course their combined effect is a concerted one: to shift spending from the state to private sources, and hence reflect more directly the different class and individual capacities to spend.
6. Estrella (Citation2002) of the New York Federal Reserve contends that even by 2000, 46% of all home mortgages in the US were being securitized, but significant amounts securitization was also occurring of student loans, credit card debt and auto loans.
7. We contend that those who judge financial products such as MBS, CDS and CDOs as merely ‘speculative’ are in danger of using that judgement to neglect analysis of their real and on-going role in financial markets.
8. Adrian and Shin (Citation2009) suggest that monetary policy needs to use measures of collateralized/securitized borrowing and measures of asset market liquidity (via the repo market) as targets of monetary policy.
9. See note 1.
10. For example, for Thompson (Citation1963, 63), 18th century bread or food rioting ‘was legitimised by the assumptions of an older moral economy, which taught the immorality of any unfair method of forcing up the price of provisions by profiteering upon the necessities of the people.’
11. Clarke and Newman (Citation2012) apply the concept of moral economy to the current period.
12. See www.merriam-webster.com/info/woy_archive.htm. Appropriately the 2010 word of the year ‘austerity’ sits between ‘admonish’ (2009) and ‘pragmatic’ (2011).
13. In this second definition the Oxford dictionary then adds the illustration of ‘the austerities of post-war London.’ This is a problem of lexicographers with limited economic history. In the UK, public spending as a percentage of GDP rose from an average of 25% in the decade before World War II to 35% immediately after the war and it then continued to grow during the 1950s. Spending on health, education and social welfare grew particularly rapidly. Taxation rates also increased, perhaps giving a sense of ‘private’ austerity, but post-war London was not an illustration of austerity in the sense of reduced public expenditure. See Clark and Dilnot (Citation2002). There was a paying down of national debt from 1945, but this was consistent with increasing public expenditure.
14. Bramall (Citation2013) develops a parallel distinction in addressing contemporary austerity. As a work in memory studies, Bramall’s work focuses on how nostalgia for the war and immediate post-war period serve to secure compliance (‘keep calm and carry on’) with fiscal austerity. The political/economic issues are not the objective of this valuable work.
15. Lanchester (Citation2013) makes a useful distinction between budget cuts and austerity. The former target specific expenditures and are implemented. The latter is not implemented, for government expenditure grows in aggregate, but is invoked as a piece of persuasion.
16. The New York Times in 2015 ran a three-part series of articles about how compulsory arbitration is increasingly being written into debt (and employment) contracts to limit the capacities of debtors to use the courts individually and via class action to challenge the actions of debt collectors (and employers). See Silver-Greenberg and Gebeloff (Citation2015) for the first part, with links to subsequent parts.
17. There is in this context a proposition that households are being drawn into borrowing to fund current consumption, and in the process wages are being converted into returns to capital (see Lapavitsas Citation2013). That is a separate (and contestable) issue from the one addressed here.
18. For example a $100 bond may have a yield of 10%, but if the price of the bond goes above $100, the yield drops below 10%.
19. The theory developed in the 1960s associated with Tobin, Modigliani and others. See Bernanke (Citation2010, Citation2012) for an explanation of the theory in relation to Federal Reserve asset purchases. For estimations of the portfolio balance effect in relation to quantitative easing programmes, see Gagnon et al. (Citation2011) and Hancock and Passmore (Citation2012), although the effectiveness of the theory is also disputed. See, for example, Thornton (Citation2012).
20. At the Federal Reserve’s Jackson Hole meeting in 2013, Krishnamurthy and Vissing-Jorgensen (Citation2013) challenged the portfolio balance channel, arguing that long-term Treasuries have limited effect on long-term interest rates: the channels are narrow. But the purchase of MBS, they argued, supports new mortgage lending with positive economic effects (Harding Citation2013).
21. The description that follows draws significantly on Fawley and Neely (Citation2013).
22. These bonds are covered in the sense that where there is a default, the bond holder has recourse to the issuer of the bond. The critical attribute of covered bonds is that banks must hold the underlying collateral on their balance sheets. Hence the purchase of covered bonds by the central bank immediately releases private bank funds for lending. This was, in effect, a direct reflation of the banking sector.
23. The net effect of the BE’s QE programme was that the UK money base increased almost fourfold in just a few months during mid-2009. The BE subsequently added private assets (commercial paper and corporate bonds) to its purchases, but these never made up more than about 20% of BE assets.
24. The Fed also undertook some sterilized interventions. In 2011 the Fed sold short-term assets and offset the sale by the purchase of long-term assets, hoping to reduce long-term interest rates relative to short-term ones. It was called ‘operation twist,’ for it sought to twist the yield curve.
25. For example, the July 2014 Federal Open Market Committee (FOMC) statement said:
At each of its meetings so far this year, the FOMC reiterated that it would closely monitor incoming information on economic and financial developments, and that it would continue asset purchases and employ its other policy tools as appropriate until the outlook for the labor market had improved substantially in a context of price stability.
26. In June 2013 Bernanke announced an intention to taper the purchase programme. When the stock market fell more than 4%, the proposals for tapering were retracted (Federal Reserve press release, 18 September 2013). Tapering itself is not the critical turning point, for the market impact comes via the stock of securities, not the flow (the pace of new purchases) (Bernanke Citation2010). But the retraction of a taper, and the commitment to sustain purchases of MBS is a telling signal to the markets.
27. Bailouts, such as have occurred, were undertaken through mounting fiscal deficits, in breach of EU rules. The EU Stability and Growth Pact sets limits on national government deficit and debt levels. All members of the EU are signatories to the Pact (see http://ec.europa.eu/economy_finance/economic_governance/sgp/index_en.htm. For an evaluation from the perspective of austerity, see Laski and Podkaminer Citation2012).
28. Calls for ECB-backed bonds issued to fund debtor states have been advocated, but the proposal is not embraced in the ECB (see Varoufakis, Holland, and Galbraith Citation2013).
29. European issuance of securities, both MBS and ABS, has been declining steadily since its peak in 2008 (SIFMA Citation2016a).
30. The programme was initially to run for 18 months, but half way through, the period was extended, indicating that quantitative easing was not achieving its desired impact (see Draghi Citation2015b).
31. According to Marsh (Citation2015), describing the period November 2014 to September 2015:
The ECB has purchased 11.5 billion euros of asset-backed debt since November, about 10 percent of the amount of covered bonds bought under a separate program. Investors initially estimated the ECB would acquire 50 billion euros a year of ABS, according to Wildhaber, who manages the Julius Baer fund.
ECB Governing Council member Ewald Nowotny said on Friday its asset-backed securities purchase program ‘hasn’t been as successful as we’d hoped.’ He said insufficient supply of assets was to blame.
32. Krugman (Citation2012) has described the fiscal cliff as an ‘austerity bomb.’
33. The Federal Reserve's net acquisitions of securities are financed by the creation of commercial bank reserves, which are themselves held in accounts at the Federal Reserve.
34. Despite continuing assurances since 2010 that the Fed’s holding of MBS would soon be run down (e.g. Bernanke Citation2010), QE3 saw holdings continue to grow, and in 2011 any plans to sell MBS became specified as contingent upon a rise in the federal funds rate (FOMC minutes 21–22 June 2011). Yellen (Citation2011), now Chairman of the Federal Reserve, is of a similar mind.
35. For example, in summarizing the outcome of the June 2013 FOMC meeting, Chairman Bernanke (Citation2013, 2) announced:
While participants [in the FOMC meeting] continue to think that, in the long run, the Federal Reserve’s portfolio should consist predominantly of Treasury securities, a strong majority now expects that the Committee will not sell any agency mortgage-backed securities during the process of normalizing monetary policy.
36. Bramall (Citation2013) describes the gendered dimensions of this culture of austerity.
37. This framing helps explain why Keynes was relevant to the earlier period, focussed on industrial production, investment and aggregate demand, but the agenda is now one of finance, with adjustments in those Keynesian categories reduced to mere residuals of financial agendas.