I blame Gordon Brown

Kinda-ish. Him making the Bank of England independent in 1997 is normally viewed as having been an unquestionably good thing. You could argue, well I’m going to anyway, that it actually made a notable, if indirect contribution to the credit crunch in Britain. Here’s why.

Banks regularly run stress tests. These set out stressful scenarios wherein property prices fall, inflation rises, the economy goes into recession and so on, the point being to develop a sense of what all of these things would do to a bank’s profitability, capital and liquidity. This in turn should inform how much capital a bank needs to hold just in case.

The most demanding stress test used to be the 1 in 20, which looked back over the previous 20 years (or what was regarded as being 3 to 4 business cycles), then used the experience of the worst ever period during that time to set the test parameters.

Before 2007 this meant 1987 to 93 when Canary Wharf first boomed/bust and Britain had its Black Wednesday. The primary cause of this feck up was the exchange rate mechanism experiment when the Tories used what eventually became crucifyingly high interest rates to hold the pound at an artificially high level. Then George Soros bet against the pound and won.

Given this experience, the subsequent decision to make the Bank of England independent and take the politics out of monetary policy made and makes perfect sense. Except, doing so fed directly into the NICE (Non-Inflationary Constant Expansion) decade that followed or what retrospectively looks more, in economic policy terms, like the “Great Complacency” as when schumcks started claiming to have conquered boom and bust.

Going back to the stress tests i.e. what bankers used/use to identify the risks that should be keeping them up at night, the biggest stresses they used to be institutionally aware of – destructively high interest rates and an over-valued pound - were both politically determined and as such  no longer options, the Bank of England was independent and increasingly transparent after all i.e. finance could be confident politicians were no longer in a position to do anything daft. However, this change also meant it simply wasn’t clear what the actual risks or triggers were or could be. In this environment confidence became hubris, which in turn begat a bubble that became a crash (to be fair historically low interest rates helped here as did the FSA, which was utterly rank rotten incompetent shite too).

I reckon we’re still suffering from a broader, complacency hangover due to the Bank of England’s independence when it comes to the broad understanding of economic policy. The interest taken in Mark Carney’s appointment, his supposed superstar status and notions of him being here to save the British economy distract from how (a) the Bank of England has already done pretty much all it can and then some, (b) economic policy is about monetary policy AND fiscal policy and (c) by focusing on a pretty technocrat, we ignore the reality, which is political dogma is alive and well and actively – via fiscal austerity – influencing economic policy in ways that are actively undermining Britain’s short, medium and long-term economic prospects.

The question isn’t can Mark Carney save the British economy, his primary purpose after all is nothing more than to keep consumer price inflation as close to 2% p.a. as possible, rather its why are George Osborne and the ConDems doing so much to undermine it?

No seriously, the help to buy scheme really is mental

First off lets be clear, the various government Help to Buy schemes are and will make a lot of people a lot of money. House builders obviously, but you too could cash in if you:

1)      Borrow as much as you can to buy a house in London and the S.E. of England within the next 18 months.

2)      Live in it for 24-30 months

3)      Sell it and buy somewhere cheaper outside London and the S.E. of England

4)      Use the profits to travel the world for a year or two

5)      That’s it.

Now bearing in mind the scheme hasn’t fully kicked in yet i.e. its not boosting house prices as much as it's about to, lets do some sums. If you bought (and remember the more you can borrow i.e. the bigger your income cos this is about helping the already well off, the more you’ll make) a £300,000 house, all you’d need is a £15,000 deposit. If the current rate of house price growth was maintained, after 30 months you’d be something like £54,000 up on paper. Nice. And I guess making the housing market more accessible does generate the broader economic benefit of freeing up the labour market/making labour more mobile. Despite that though the schemes are still feckin’ mental and profoundly unfair.

Lets bring some additional reality into play now. Most people get a 2 year fixed price mortgage (really, right now you should try and get a 5 year fixed – please don’t consider that professional advice BTW). Except, depending on who you talk to interest rates are now expected to start rising from late 2014 onwards and even more likely to start doing so from 2015/16. Then you look at the details of the government schemes and see that after 5 years of being a freebie they start charging 1.75% in year six and then retail price inflation plus 1% thereafter.

This means:

1)      Government policy is to help people who can’t afford a mortgage get a mortgage

2)      The cost of these mortgage will start rising from 2014/15 onwards

3)      It’ll really start rising when the charges kick in

4)      Pay rises are pants and lag house prices. A lot.

Now I guess one way of dealing with the government charges is to remortgage i.e. borrow more and use that to repay the government, except that’s to assume asset prices only ever go in one direction (see here for a list of companies that made this same assumption). Alternatively, you're taking a punt that banks will be more willing than they are now to do higher LTV mortgages.

Really, what we appear to be contending with is a government whose policy is to increase risk/enable people to go bust from 2018 onwards i.e. they are planting a cheeky wee economic time bomb at the same time as boosting already questionable house prices by helping voters borrow to buy something they can't afford. This will also direct money towards unproductive assets i.e. houses rather than say new factory equipment.

It is truly mental.


P.S. A thing that's always struck me about the left is they're very good at critique, but pants at proposing an alternative. Here's one. Instead of giving free guarantees to the middle classes worth tens of thousands of pounds, give them to housing associations instead or establish a big pot of debt for them so they can build tens of thousands of new social housing. This would push down on rental costs, create state assets and give more people decent homes. The current proposals do none of these things.

I blame Adam Smith

Really, its all Adam Smith’s fault. After all, the founder of modern economics was a Professor of Moral Philosophy and its similarly impossible to understand the dominant attitudes towards the current crisis other than in moral terms. Here’s some examples:

• The tosh about skivers vs strivers and associated notions of fairness? That’s a (supposedly) moral argument that is.

• The troika, well the German for the most part, approach to Greece? Is a moral stance; they made this mess with their spending and tax dodging, so now they have to pay the price for any aid they get so they do.

• No additional public spending today because it would be at the expense of tomorrow’s youth? Yup, that’s a largely moral stance that is.

• More generally, what I’ve personally encountered is the sense that because we had a credit fulled boom we deserve the current bust, because that’s only fair, isn’t it? Like we deserve it, really. And anyway, we need to repay the debt because you can’t go on borrowing forever.......

A big problem with such notions of morality is they’re so utterly half-arsed i.e. not thought thru. Rather, they typically operate as instincts or what adherents, if challenged, dress up as “common-sense”. Except, they’re not, they're more simply statements of ignorant prejudice.

Take skivers vs strivers; researchers have actively gone out hunting and failed to find almost any of the multi-generational unemployed households that get the Daily Mail so excited. In the meantime, the benefit cuts are clattering the incomes of the disabled and the working poor as well as the unemployed who are almost all actively seeking work.

Greece? Well, I don’t think destroying an economy via the terms attached to French and German funded bailouts that helped the French and German banks that had lent to Greece in the first place is teaching Greek people the lesson France and Germany thinks it is.

Spending more today would hurt the youth of tomorrow? If proponents of this argument were actually bothered about the youth or even the "yout" they should perhaps reflect upon the massive rise in long-term youth unemployment seen across Western Europe and the associated permanent damage this is doing to future, productive capacity (and individual lives).

As for us all somehow deserving the bust, well current UK monetary policy is geared to protecting the heavily indebted via super low interest rates whilst using quantitative easing to boost asset values. Guess what caused the credit crunch here  – no it wasn’t casino banking, it was the bursting of various cheap credit fuelled asset bubbles, which here primarily meant commercial property and company values, things yer average punter had absolutely nothing to do with.

Credit did serve a useful political purpose though in that it papered over the stagnation in average real wages seen in the run up to 2007 and the associated rise in economic inequality. I’m not sure why that’s something most people should feel especially guilty about though. Oh and the notion that a country can’t borrow forever or at least for a very long time is simply dumb.

The problem with morality is that its a big dogmatic-y i.e. engrained and purely reflexive in a lets not let dull stuff like facts get in the way. And its creating big problems. What are nasty prejudices masquerading as common-sense appear so deeply engrained, widespread and popular are having a huge influence on government policy. Right now, we really are shooting ourselves in both feet whilst blaming someone else - the disabled and the poor for the most part - for the pain.