Central banks' obsession with holding down wages has led to banks becoming 'collateral damage in a class war,' says GFC veteran economist

• British economist Ann Pettifor criticized central banks for choosing a 'class war over financial stability.'
• Central banks have been trying to tame inflation with higher interest rates.
• This is in turn targeted at tightening the job market and slowing wage growth to cool the economy.

A leading economist who correctly predicted the Global Financial Crisis back in 2006 has criticized central banks for waging a "class war" in their pursuit to crush inflation with higher interest rates — which has hit the banking sector.

In a Substack newsletter titled 'banks as collateral damage in a class war' published Sunday, British economist Ann Pettifor hit out at "the predicted and deplorable outcome of recent decisions by central bankers" who have been hiking interest rates aggressively in the past year.

"In other words, their effective preference is for class war over financial stability," she wrote.

Pettifor took a swing at central bankers for contributing to the current bank crisis, which makes the financial institutions collateral damage to their policy moves.

She's likely alluding to the Fed's aggressive rate hike cycle, which hit the value of Silicon Valley Bank's bond holdings — in turn, triggering a series of events that led to its closure by regulators on March 10.

"Through lack of analysis, regulation, oversight and foresight - central bankers have shown this last week they were prepared to use high rates to risk and even precipitate bank failures and global financial instability," she wrote.

This is even though economies have not fully recovered from the Global Financial Crisis and the pandemic, she added.

'Central banks seem willing to sacrifice private banks in their rush to raise rates'

She even said that civil servants that head up central banks seem willing to sacrifice private banks and global financial stability in their rush to raise rates, crush demand, discipline workers and shrink the nation's income.

Some, like Bank of England chief Andrew Bailey, even called on workers to hold off on asking for big pay raises because that will make inflation worse.

US Fed chair Jerome Powell said in November that a labor shortage and higher wages were the biggest hurdles to taming inflation.

Higher interest rates make borrowing for anything from mortgages to credit cards more expensive. And it encourages people to save rather than spend, which in theory, helps bring down prices. But it takes a while for the effects to be felt and the risk is that the central bank raises rates to the point where the economy slows down and even tilts into recession, as demand contracts. 

But Pettifor argues that inflation is caused by speculation in the commodity markets and not wages.

"If workers demand higher wages to deal with the inflationary impact of higher energy and other commodity prices — that is a consequence, not a cause of commodity price inflation — that regulators and central bankers refuse to manage or regulate," she wrote.

Markets are closely watching the Fed's two-day meeting that ends Wednesday for their interest rates decision. The US central bank already hiked interest rates eight times over the past year to its targeted levels of 4.5% to 4.75%.