Home Economics An economist who correctly predicted the Great Financial Crisis says the world’s...

An economist who correctly predicted the Great Financial Crisis says the world’s central banks have opted for ‘class war over financial stability’

An economist who correctly predicted the Great Financial Crisis says the world's central banks have opted for 'class war over financial stability'

Backed by the U.S. Federal Reserve, central banks around the world have had a unifying philosophy over the past year: to cut inflation no matter the cost, even if it means hurting people and businesses. But that approach has been called into question more than ever this month in the wake of several high-profile bank collapses in the US and Europe. Now a British economist who predicted the 2008 global financial crash has escalated the issue by saying central banks prefer “class war over financial stability.”

The Fed and other central banks have highlighted tight labor markets and high wages as the main underlying drivers of inflation. But while the loosening of labor markets could help cool the economy, it also means layoffs, unemployment and a possible recession – an unacceptable and risky trade-off for some critics.

“[C]bad servants at the head of central banks seem willing to sacrifice private banks and global financial stability in their rush to raise rates, suppress demand, discipline workers and shrink the country’s income,” said Ann Pettifor, a British economist and frequent economic adviser who predicted the 2008. global financial crash with a 2006 prescient book on mounting global debt, wrote in its Substack newsletter on Sunday.

In other words, their actual preference is for class war over financial stability.

“Hard to face what central bankers are doing”

Silicon Valley Bank has received quite a bit of criticism for its collapse earlier this month, with much criticism directed at its management, but the Fed also played a role in its downfall.

The Fed has been accused of blocking any wording about regulatory blunders that may have led to the bank’s collapse when the government announced the rescue of SVB. SVB’s bankruptcy was also linked to the loss of asset value over the past year as the Fed abruptly moved away from a near-zero interest rate environment. That made SVB particularly vulnerable to a liquidity crisis and other banks are in a similar position.

Story continues

“The fact is, I found it hard to face what central bankers are doing, not just raising rates, suppressing demand and cutting wages,” Pettifor wrote. “Due to a lack of analysis, regulation, oversight and foresight, central bankers showed last week that they were willing to use high rates to risk and even accelerate bank failures and global financial instability.”

She also criticized the European Central Bank for sticking to big rate hikes last week despite the recent US bank collapses. Credit Suisse went bankrupt just days later and was bought by USB in an emergency deal brokered by regulators.

Pettifor further referred to an interview between former Treasury Secretary Larry Summers and comedian and political commentator Jon Stewart that aired last week. Summers insisted raising rates and tackling inflation at all costs was the right way forward, while Stewart challenged him about the outsized role corporate earnings have played in fueling inflation, which has received relatively little attention from the Fed.

Pain for workers and lower income groups has been portrayed by Fed Chairman Jerome Powell and other prominent economists, such as Summers, as a necessary evil in the fight to curb inflation. But the approach of reducing inflation by targeting the labor market has also been criticized around the world. Bank of England Governor Andrew Bailey was reprimanded last year for asking British companies to exercise “restraint” in negotiating wage increases. More recently, Powell’s method has been condemned in the US for causing financial instability with this month’s banking crisis and ultimately placing the burden of reducing inflation on the shoulders of workers.

Pettifor is not alone in criticizing central bank policies. Political figures in the US, mostly on the progressive left, including Senator Elizabeth Warren and Bernie Sanders, have also criticized Powell and the Fed for risking driving the economy into recession and putting millions out of work. Warren was at the forefront of the attacks, saying on Sunday that Powell had “failed” at his job and should no longer be chairman. She has long been critical of Powell for the risks high interest rates pose to the job market, warning earlier this month that the Fed could put as many as 2 million Americans out of work by the end of the current tightening cycle.

Increasing rate hikes and slowing the economy tend to hit workers hardest, especially low-wage workers, by causing layoffs and slowing wage growth. “Higher interest rates will hurt millions of workers who will be involuntarily drawn into the inflation struggle through job losses or long-overdue wage increases,” former US Secretary of Labor Robert Reich wrote in an op-ed for The Guardian shortly before last year. the Fed started its tightening cycle.

To be sure, inflation has been a major concern for Americans since last year, often more than any other issue. Last month, according to Gallup, 13% of Americans cited inflation as their top current concern, while only 1% cited wage issues.

Inflation has been a heavy burden for Americans of all income levels since prices started creeping up in 2021. It has been especially painful for low- and middle-income Americans, who have had to dive deep into their savings to cope with rising food, energy and home prices. Inflation has also been hard on high earners, as more than half of high-income Americans now live paycheck to paycheck.

But the Fed’s focus on inflation — and especially the tight labor market that Wharton professor Jeremy Siegel called “monomaniac” earlier this month — may be ignoring some key points behind rising prices. A 2022 study by the left-wing Economic Policy Institute found that more than half of price increases for goods and services could be attributed to increased corporate profit margins, while only 8% of inflation was related to higher labor costs.

Siegel told CNBC this month that since the start of the COVID-19 pandemic, worker wages have risen more slowly than inflation and that it was “difficult to argue” that labor costs were the main contributor to inflation.

As for the Fed’s bigger inflation view, some economists, including Mohamed El-Erian, have argued that the 2% target is outdated and that reaching it would lead to serious economic damage, while a “higher stable inflation rate” of around 3% to 4% might be more. appropriate.

It’s unclear whether the recent bank failures and pleas from the left have made Powell renege on his commitment to lowering inflation at all costs, though Fed officials will clarify their direction when they meet Wednesday to discuss the size of the next interest rate. discuss. walking tour.

This story was originally on Fortune.com

More from Fortune:

Previous articleHere’s How We Planned a Wedding for Under $10,000
Next articleAn economist who correctly predicted the Great Financial Crisis says the world’s central banks have opted for ‘class war over financial stability’