London, Wednesday: passers-by at the Bank of England building.Image AP

    The panic reaction followed the news that pension funds are in danger of getting into trouble. There is also nervousness in the housing market. Because the British government took no action, the Bank of England decided to intervene by buying government bonds in order to stop the interest rate rise. The Bank’s emergency intervention on Wednesday led to a slight drop in interest rates on British government bonds again.

    This situation is unique by British standards. The chaos is the result of the intention of Finance Minister Kwasi Kwarteng to borrow 50 billion euros in order to finance tax cuts. Since this gamble by the Conservative government, the British economy has been in dire straits. The pound is falling, government debt is rising and interest rates are rising.

    On Tuesday evening, the International Monetary Fund (IMF) announced its concerns about the financial course of the British government. US President Joe Biden and credit rating agency Moody’s have also questioned Britain’s share price for the past 24 hours. What the government in London is doing goes against all existing macroeconomic laws.

    Britain’s public finances have long been in a precarious state due to the war in Ukraine and the printing of hundreds of billions of pounds during the corona lockdowns. The decision to also spend many billions on tax benefits that mainly benefit the rich, seems to have been the straw that breaks the camel’s back.

    Prime Minister Liz Truss and Minister Kwarteng are under increasing pressure to withdraw their tax plans. If they do, it would be a huge disgrace to the newly appointed government. The tax cuts are at the heart of government policy.

    emergency meetings

    There are now fears that the British government has lost control of the economy. Truss, described by former government adviser Dominic Cummings as “a human hand grenade,” remains silent. Kwarteng has meanwhile held emergency meetings with British and American bankers.

    The bankers are demanding the Chancellor of the Exchequer to present an economic growth plan for the British economy soon and not in November as he plans. There is a chance that Kwarteng will come up with major austerity measures, with the excuse that the financial markets are forcing him to do so.

    Opposition leader Keir Starmer believes that the British Parliament should meet in an emergency session. Because of the party congresses, there is now a three-week parliamentary recess. Things are messed up in the Conservative Party. Several party members have already lost confidence in Truss – Boris Johnson’s successor has not been staying at 10 Downing Street for a month.

    Former finance minister Rishi Sunak, who has warned about this financial chaos, says he will avoid the upcoming congress of his Conservative party. Other Conservative leaders also avoid the party congress like the plague.

    Housing market

    From America, Larry Summers, former Treasury Secretary, stated that Britain will be remembered as the country that has had the worst macroeconomic policies in a long time. The financial plans are already having an effect on the housing market. Earlier this week, British banks rushed nearly thousands of different mortgage products off the market. Homeowners and flexible mortgages are in serious trouble if the Bank of England, as forecast, raises interest rates further in the coming weeks.

    On Wednesday, conservatives lashed out at the IMF. “The IMF has consistently advocated conventional economic policies over the years,” claimed former Brexit negotiator and Truss supporter Lord Frost. “This approach has led to years of slow growth and weak labor productivity.” Conservative commentator Iain Martin wondered why the IMF said nothing when the money press was running at full blast during the pandemic.