Why have the government and the Bank of England failed us on inflation?

This week, the Bank of England took leave of its senses again. It generated blood-curdling headlines that the state of inflation and the economy was now such that interest rates could not be lowered again, this year or next. Newspapers wrote that we are to look forward to letters from the Governor to the Chancellor explaining why inflation is well over target. They even gave the press the opportunity to ramp the story up, by using colourful language, telling us the “Nice decade” was over, and inviting us to expect a nasty time ahead.

What do they think they are doing? No sensible analyst would dream of saying interest rates cannot fall for that length of time, given the slowdown and the uncertainties. Why on earth, when sentiment is collapsing, would the Bank wish to strengthen the forces of gloom and doom? Don’t they understand that we need to be fighting slowdown as well as dealing with the inherited inflation from the Bank’s excesses of previous years leaving interest rates too low and debt too high? Have they seen what the Fed is doing? Why do they take unacceptably high levels of government borrowing for granted and never speak out against them?

The truth is the Bank of England was badly broken by Gordon Brown’s attack on it in 1997-8, and it has not recovered. In the age of spin, it has gone along with the fatuous nonsense that it has a valued “independence”, when it has lost its power to regulate and understand the day-to-day activities of the many powerful commercial banks in London, and been stripped of its control of government debt issue by a power-hungry Treasury which nationalised it. In place of these crucial powers and duties in the Money markets, it was given a monthly academic tea party to set indicative interest rates, rates which the markets have scorned and ignored in the last few months of turbulence.

If the Bank had been an institution of substance it would have fought against the stripping of its powers in 1997-8. The Governor then should have resigned if he could not keep his Bank in good shape. Subsequent Governors should have made an issue of the Bank’s loss of influence and power in the money markets, and the Bank’s loss of understanding of the actions of the commercial banks in those markets, to wrestle back those necessary duties. The Bank should have fought for proper independence in the appointments to its Monetary Policy Committee. When I asked why some members were renewed and others were not, no good reason was given. When I asked what process of review and decision was in place to ensure that good and truly independent members were renewed, there was no proper reply to my question. The MPC became the Treasury’s plaything, appointing who it wished, when it wished, with no independent control on the appointments. The fact that some members were very good is no substitute for having a robust process to reassure us all. The whole system was deeply compromised by Gordon Brown’s decision to switch inflation target at a crucial time, diluting monetary discipline by opting for the soft target of the CPI instead of the RPI. There was no loud voice of complaint from the so-called independent Bank.

The change to the RPI helped undermine inflation control and public confidence in the system. No-one I know believes 3% is the current rate of inflation, yet this is what the CPI tells us. Even the RPI at 4.2% does not reflect the full pain of the very high increases in the prices of the basics we have to meet day by day, because of the weightings of cheaper and lower inflation goods in the RPI. When Gordon Brown switched targets he cut the target by just 0.5% to “allow” for the relative softness of the CPI. Today, the true differential with RPI is 140% more than 0.5% at 1.2%. Government further complicates it all with RPI-X as well as RPI. Fortunately for people with inflation links in their savings or their pay deal, they use the RPI and not the meaningless CPI. In that sense, this is an economy facing full RPI inflation, not CPI.

The Bank has to accept its junior role to the Chancellor’s in creating the current mess. It is now widely accepted that the UK is in the worst position of the major economies to tackle the Credit Crunch because, uniquely, it has spent and borrowed far too much in both the government and private sectors. It has compounded its fiscal laxity uniquely with the botched nationalisation of a leading mortgage bank at great cash cost and financial risk to taxpayers. Even Will Hutton now agrees that the government overdid the spending and the borrowing! He and I don’t often agree on these things. How did it get into such a state?

The main blame must rest with a government which has spent and wasted too much money, and now seems to think its capacity to borrow is unlimited. £2.7 billion to see it through a by-election to give people the promise of a tax cut? No problem. £13 billion a year for centralising computer schemes in the public sector, some of which won’t work as intended? Yes, let’s have them. Thousands more civil servants? Yes, let’s not leave the others lonely. £90 billion of swaps for commercial banks? Is that enough? £100 billion of new liabilities for the state by nationalising a bank? Bring it on. More spin doctors to explain how wonderful everything is? You can’t have enough of them these days.

But the Bank is not blameless. Here are the questions the Bank should at least be asking itself about how it all went so wrong:

1. Why did it not complain about the loss of powers and explain the need to keep them in the late 1990s?
2. Why did it not oppose the new target based on CPI when it was announced, or at least set out clearly why it was a weakening of discipline at a crucial time?
3. Why did it never warn of the inflationary dangers inherent in the huge build-up of public sector debt and spending during the upswing?
4. Why did it fail to supply sufficient liquidity to the money markets in August 2007, when it was obvious banks were starting to struggle?
5. Why did the Bank famously state there would be no banking bail-outs shortly before helping bail out Northern Rock?
6. Why did the Bank make available large funds this year, when it had said “No” to such measures for banks last summer?
7. Why did the Bank keep interest rates low in the run-up to the 2005 election, when there were inflationary signs?
8. Why is the Bank now keeping rates high, when credit is well and truly squeezed, and the inflationary burst we have to live through cannot be stopped by high interest rates today?
9. Why is it now saying interest rates cannot be cut for a long time in the future, narrowing its future room for manoeuvre or, in due course, forcing it into another U-turn?
10. Why is it still not telling the government it needs to cut its borrowings to get the UK economy into better shape?

The danger for us is that the Bank is trying now to follow a tight policy, at a time when the government is still borrowing as if there were no tomorrow, as it adds huge banking and money-market liabilities to its creaking balance sheet. The Bank and the Treasury need to sit down together and settle their differences. We need a proper plan for getting out slowdown, which needs a government plan to cut its borrowing sensibly, and the Bank to show greater flexibility and understanding of the needs of the money market. This government could easily cut borrowing and spending without touching schools, hospitals, police and other core services.

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38 Comments

  1. Tony Makara
    Posted May 17, 2008 at 10:39 am | Permalink

    The MPCs dread fear of cutting rates is all down to the fact that Sterling is due a significant correction after being kept artifically overvalued for so long, this combined with Britain's dependency on imports, particularly EU foodstuffs, means the MPC is afraid that an ongoing process of cuts will send Sterling falling at too fast a rate leading to severe levels of high-street inflation. I agree that we need to cut rates to stimulate the economy and to bring relief to home-owners, but I also agree with Mervyn King that we can't cut rates, not without pulling inflation into our country on the back of imports. This is classic stagflation, all because Sterling has been kept overvalued to support easy-credit going on imported goods. People fail to understand that cheap imports are paid for with higher interest-rates to keep Sterling overvalued.

  2. Cliff
    Posted May 17, 2008 at 12:10 pm | Permalink

    It does seem that we are determined to talk ourselves into a deep recession.

    One thing that really confuses me, a mere ordinary person, is this; If I decided to go to my bank to borrow vast sums and then donate those sums to charity, people would rightly feel I had lost my sanity. Why is it that a PM will borrow vast sums that he neither has nor can afford, just to give away to other countries. Is it more about boosting egos rather than sound financial policy on financial matters.
    I see another Twelve Million Pounds give away was announced yesterday. Whilst it may be a worthy cause, it seems crazy to ordinary people like me to have to borrow money just to give that money away.
    Borrowed money always has to be paid back.
    It seems the real economic cycle in this country is as follows; Labour get into power, they overspend and run out of money, we get back into power and spend much of the time putting right the financial mess caused by the Labour government. Putting right the mess always hurts and thus, our party gets a reputation. We then hand over the economy to another Labour government in great shape, just for the cycle to start again. Or am I missing something?

  3. Peter Baker
    Posted May 17, 2008 at 3:54 pm | Permalink

    I am particularly interested in the BoE decision during 2003 to reduce interest rates to 3.50% which was far too low. (Simultaneously Greenspan did the same in the US with an absurdly low level of 1%). Predictably there followed a massive credit expansion. Inducing masses of consumers to take out short-term low cost mega-mortgages only to be followed at some later point by a turning of the interest rates screw is a classic money-lender's ploy. To that extent I feel that the relationship between the BoE and the banks it "supervises" is akin to that between Fagin and his team of Artful Dodgers as characterised in Dickens' Oliver Twist. So be they bankers or politicians they are never averse to "picking a pocket or two".

  4. Chris
    Posted May 17, 2008 at 3:56 pm | Permalink

    I agree with you, John, that the government deserve most blame for this mess, particularly Gordon Brown for deliberately excluding mortgage costs from inflation measurements. He promised the country he would not let house prices get out of control, but then acted to stoke a massive house price boom and borrowing binge.

    I disagree that such an amount of blame can be placed on the Bank of England. They are public servants. They would be expected to argue vociferously in private with politicians about such things and I'm sure many a heated discussion went on, but I don't see that it is feasible to expect a BoE governor to publicly challenge the prime minister on big political issues such as targets for inflation and the regulatory system. These are big political issues, and to be blunt, it was part of your job as an opposition politician to publicly challenge Gordon Brown's folly at the time, not Mervyn King's. Perhaps you did at the time, I don't know. If you did then I'm sorry you didn't succeed, because the country as a whole will suffer because of bad decisions made in the past.

    Reply: yes I did challenge all these mistakes at the time. If the Bank is to be truly independent it has to challenge these errors.

  5. David Page
    Posted May 17, 2008 at 4:27 pm | Permalink

    Interesting John; there is much to agree with here. However, let's not lose sight of the main issue — one that you don't even try to address — the real measure of inflation. Forget CPI and RPI(X) and the 1-2 % difference that exists between these; house prices aren't included in our inflation measures by the current Government or yours, and they should be. What matter the cost of a loaf of bread / pint of milk / gallon of petrol when the price of a roof over your head (that doesn't belong to someone else) is allowed to inflate by 300% in a decade? Shelter is every bit the basic requirement as food and warmth and it is little short of a disgrace that it is ignored in these discussions.

    I don't see your party doing anything about that, and your clarion call to let the BOE sink rates again will only produce more of the same. I can't afford my own home in my own country, and you, Brown and King are all equally to blame.

    Davd Page

    Reply: There is no danger of house prices going up any time soon. Nor have I said lower rates today, but it is unrealistic to say they should not go down for 2 years, when the main problem we now face is slow down and price falls.

  6. Robert
    Posted May 17, 2008 at 4:36 pm | Permalink

    No, you are right, this country only comes to its senses when we are in the d'oggy doo' and then goes all 'sentimental and silly' when things are in good shape!

  7. george
    Posted May 17, 2008 at 6:23 pm | Permalink

    I don't think people are generally feeling pain. Restaurants and cinemas are full, as is Wembley today and Manchester the other night. People just don't want any pain whatsoverer but we must endure some pain to get things back on track. The excesses of the 'nice decade' have to be paid for. My money's on Mervyn.

  8. Bruce Mcaaw
    Posted May 17, 2008 at 7:39 pm | Permalink

    The Bank of England is no more independent now than it was 10 years ago, every knows, despite the political spin that it is Gordon Brown's poodle stuffed with his cold cronies. Its also an utter disgrace while the Government is lecturing us on CO2 and saving energy that Mr Blanchflower files into the UK at our expense for a meeting once a month. The Bank of England's target was always too narrow and it was Gordon Browns economic illiteracy which lead him to the fundamental mistake of targeting CPI and ignoring housing costs . Money Supply has been rising too quickly for far too long and the Bank should have tackled this seven years ago and stepped in to prevent the over heating of the housing market when prices were rising at double digit percentages in around 2003. The real sadness is I fear many people will now suffer sever hardship for merely believing too much in the line Gordon Brown has spun them for far too long. Hopefully he will pay the price at the next election.

  9. Rob H
    Posted May 17, 2008 at 7:57 pm | Permalink

    Why have the Tories failed to be an effective opposition for the last 10 years. You seem to have all the questions now, but what about while the miraculous Brown was doing his worst work? The only politician who saw this coming was Vince Cable. Correct me if I'm wrong.

    Reply: I have asked these questions repeatedly over the years, and stated the case against Brown's bodged reforms of the Bank again in the Economic Policy Review before disaster struck Threadneedle Street last autumn.

  10. C.L.Wightman
    Posted May 17, 2008 at 8:39 pm | Permalink

    What a joke! In your reply to David Page you say the main problem we face is slow down and price falls. Price falls are a problem? A PROBLEM???? A half wit knows that it is price rises which are a problem. No wonder we are in a financial mess in this country.

    Reply: I think house price falls are a problem if they are too far and too fast.

  11. mikestallard
    Posted May 17, 2008 at 8:41 pm | Permalink

    John, your blog was excellent asking the most awkward questions of the Governor of the Bank of England. He appears to have sat back and let Gordon Brown lose out to the Treasury and FSA, and then to watch them get on with fiddling the CPI, getting us into serious debt, wasting a lot of public money, doing his job over Northern Rock and entering a world downturn broke.
    Now let me ask you an awkward question: How much of this was the EU?
    Your own EU credentials are impeccable. Do you know?

    Reply: Some of it is influenced by the EU – Gordon would no doubt claim in defence he was merely harmonising the inflation rate with EU figures, and the Bank's arhcitecture is based on EU experience.

  12. Jon Cooper
    Posted May 17, 2008 at 9:17 pm | Permalink

    Interesting thoughts on the BoE. But could you explain why house price falls are a problem? For most people they would be welcome, although things have got so out of kilter that we risk major 'real economy' side effects from seemingly inevitable large house price falls.

    Even more welcome therefore would have been an inflation measurement regime which forced a brake on this enormous bubble about 5 years ago. I see history repeating itself in years to come under your party's stewardship sadly despite what you say. Shadow Housing Minister Grant Shapps and his vested interest Estate agent/Property industry paymasters do not inspire confidence. Your call for rate cuts in the face of significant inflation seem to suggest you want to try anything to keep house prices rising. I must agree with David Page's comment above here.

    I find it ironic that you seem to have forgotten who said "you cannot buck the market". When that market is a HOUSING market, both Labour and the tories seem to be willing to give it a go at (almost literally) all costs. I am disappointed, as I was hoping to be able to vote for you lot.

    Reply: I have not called for an interest rate cut in the last couple of months. Rapid house price deflation is worrying, because it will lead to other contractionary forces in the economy which hti jobs and livelihoods.

  13. DBC Reed
    Posted May 17, 2008 at 9:19 pm | Permalink

    David Page is right: who's arguing over a few percent on tea and bread when houses inflate by much greater percentages and much greater capital values?The Conservative Party has boxed itself in by ceaselessly insinuating "House price inflation good: wage inflation bad."
    There's already a majority of the population ,according to a recent survey, which thinks rising house prices are no benefit .Brown has begun to suffer from a backlash already now that House Price Inflation has stalled but the Conservative Party's whole raison d'etre ,since Macmillan, has been bound up in providing unearned capital gains in housing.When these evaporate ( thanks to the banks not Brown) , the Conservatives will have nowhere to go.
    The property-owning democracy project is now something that the banks can no longer afford to endorse.

    Reply: On the contrary, a property owning democracy is what most of us want. I have spoken out against measures that served to raise house price inflation in the past -e.g. the fiddled inflation target and very low interest rates. Now I am speaking out against measures which could trigger too fast a house price fall. We need more stability.

  14. Al Nightingale
    Posted May 17, 2008 at 9:46 pm | Permalink

    What DO you say? Nothing that I can see. What DID you say? Little at the time that I read. Broadly reasonable comments, about 10 years too late. This kind of retrospective sniping is exactly why people have given up with politicians. No here-and-now radical direction just (justifiable, late) criticism. The country is in trouble, the tories can win the next election honestly saying that things will have to get a lot worse (whoever's in charge) before they get better. But there's no honesty. The tories still want to stoke the housing market as an “economic idea.' They're just as bereft as Gordo.

    Reply: I spoke out against the economic mistakes as they occurred, and am merely updating and repeating the charges here. I am not advocating measures to stoke up house prices, but measures to avoid recession and house price crash. Many of the measures I started advocating last summer have now in part been adopted by the administration (cuts in interest rates, more liquidity into banking system etc)

  15. David Page
    Posted May 17, 2008 at 10:32 pm | Permalink

    "There is no danger of house prices going up any time soon". Cold comfort after they have already quadrupled in price. Disappointing that the issue hasn't been addressed: the constant carping about the details of CPI when the most expensive purchase any of us ever makes is permitted to inflate out of all recognition.

    Why is inflation good when it is house prices but bad when it is food or petrol? Interest rates must remain low to deflate the housing bubble that is ruining Britain. Perhaps you can say what your party would do about the MIRAS tax break that exists for Buy to Let. This more than anything has inflated our housing market while robbing the exchequer. In addition to having renter's pay off all of the capital of their mortgage loans, BTL investors get all their mortgage interest paid by the taxpayer (because it's a 'business' expense), unlike the poor fools who (are able to) buy their homes to live in. Why should the average person be priced-out of a home because of the preferential tax treatment our government gives to property speculators?

    The UK government is acting in concert with the finance industry and the private investor to maintain stratospheric house prices; to insulate them (with taxpayer's money) against every falling to normalcy. An entire generation of people are being permanently priced out of home ownership — kept paying the mortgages of others in privately-rented accommodation — a new breed of have's and have not's. That this collosal inequity was ever allowed to happen is a disgrace; that it still persists is an outrage, and down to Gordon Brown alone. Remove the tax breaks for the BTL leech feeding off the body of the British housing supply: a painless (politically, as well as morally) way to restore some balance to the UK housing market.

    Cool off the housing bubble and all else — building, spending, investment, saving etc. will correct themselves. Continue to make party political capital out of the errors of the current government, but offer no solution, and nothing will change. Which is why few have any faith in politicians anymore…

    D Page

  16. Steve
    Posted May 18, 2008 at 12:23 am | Permalink

    If the Tory policy is to cut interest rates I would have to ask – why? Why is it necessary for people to take on ever increasing debt to maintain economic growth? This is the economics of the madhouse. We've had it for 11 years now, I was hoping that if we get a conservative government next time, the lunacy might stop.

    As long as we have restrictive planning policies for housing, the only thing low interest rates achieve is a house price bubble. We now have a generation priced out of home ownership. What is the answer to this? The lunatics in charge now think it is shared ownership. To anyone with an IQ above 100 this is patent nonsense. In a world of zero house price inflation, unless the buyer of a shared equity has a large salary increase, or interest rates fall substantially from whatever they were when the buyer bought, it is impossible for that buyer to move up the housing ladder. Are our young people to be condemned to only ever owning 40% of a 1 bed shoebox?

    If you throw some house price inflation into the mix, the problem is exacerbated as the rungs on the housing ladder move further apart.

    It's time to stop thinking that low interest rates are a good thing. They aren't. The British can't handle them. All they do is build a mountain of debt – like now.

    Reqply: Official Tory policy is to support the Bank of England and its judgements on interest rates. I myself have not called for a cut in rates recently. The ideal is house price growth in line with wages. Houses do need to become more affordable – that is best achieved by a period of no house price growth so wages can catch up. A sharp fall in house prices has knock on effects to other activity, and will slash housebuilding rates, which does not help people find new homes.

  17. anthony scholefield
    Posted May 18, 2008 at 12:49 am | Permalink

    It is also worth looking at the GDP deflator rate. This is too low which means reported GDP increases are too high

  18. Matthew
    Posted May 18, 2008 at 11:01 am | Permalink

    I don't understand this comment:

    "No one I know believes 3% is the current rate of inflation, yet that is what the CPI tells us. Even the RPI at 4.2% does not reflect the full pain of the very high increases in the prices of the basics that we have to meet day by day, owing to the weightings of cheaper and lower inflation goods in the RPI."

    Are you proposing a reform of the index so it only include goods that are going up in price?

    Reply: No, but I am querying the weights in the CPI basket

  19. DBC Reed
    Posted May 18, 2008 at 11:04 am | Permalink

    I can remember a (Waterfront?) conference at, of all places ,Centrepoint (which only Dave Wetzel of the Labour Land Campaign mentioned was symbolic of an age-old problem of property being built for passive investment and not for active use) when a left-wing trouble-maker asked the platform ensemble whether they agreed that house prices were inflating at an entirely different rate to the rest of the economy and ,if so , what they would do about it .While most of the other party representatives agreed and spoke of Land Value Tax (Dave Wetzel's big idea), John Redwood said that he did n't think house prices were too high to start with so would n't look to do anything about them ( Otherwise imagine the headlines in Wokingham:" Local house prices too high" says Redwood.)
    The fact is that it appears that wheels are coming loose on the property-owning democracy bandwagon which is only "what most of us want"(see reply above) because in the early Sixties the Tories got rid of the tax (schedule A ) which took money out of owner-occupiers' income in proportion to the rental value of the house.
    .Before that people were fairly happy renting (and no bad thing since Prof Andrew Oswald demonstrates a clear correlation between high rates of owner-occupation and unemployment).The industrial prosperity of this country was built on renting as people could move to where there was work. Now they can't: in London high house prices work better than the old South African pass laws in keeping out the working-poor from prosperous areas.
    Think of the mobility of labour which would have been possible had the country continued with its public-provision of housing and this had been allowed to continue into the age of the Net.
    Property owning democracy has brought immobilism. The Conservative offer remains: You may not get decent wages out of us but your house will make more in a year than you do.
    Meanwhile Dave Wetzel has lost his job on the board of TFL for political reasons. With scant sympathy from John Redwood .

    Reply: That was a Conference before the latest sharp rise in house prices and I stand by what I said then. I also made clear my opposition to the CPI switch and the lower interest rates that led to.

  20. Mike Christiansen
    Posted May 18, 2008 at 11:49 am | Permalink

    Looking at all the comments and replies, it seems to me that you are suggesting that it would be a good thing if house prices simply stopped growing, and wages caught up. I see a few problems:

    1) with the huge increase in prices since 2000, I'll have retired and passed on long before my wages catch up with house prices.

    2) given the stagnation in non-home equity gains-based income for normal people over the last 5 years or so, how do you propose to keep the economy going, and therefore grow wages, without house prices rising? Sounds to me like you want your cake to have and eat.

    3) Every article I read says that wage inflation is the worst possible kind. With every banker, politician, and CEO doing everything they can to keep wage increases at a minimum, how do you propose to discover this 'wage growth' that we'll need to catch up to house prices?

    Regarding interest rates, keeping rates high tries to avoid the toothpaste effect, and I think Mervyn's got it right. We had a bubble in house prices, and nobody can deny that. We're going to have to feel the pain – the question is how much pain do the banks share?

    Reply: I welcome wage growth, which should be similar to productivity growth in the economy – it used to be around 2.5% real per annum, and may now only be around 1.5%. The Economic Policy Review looked at how we could lift the real growth rate, which would also lift real wages. I want people to earn more, not less, in a low inflaitonary environment so they can buy something with the extra wages.

  21. James Caffery
    Posted May 18, 2008 at 12:16 pm | Permalink

    David Page is absolutely right. It is madness to encourage BTL in a country whose housing supply is so restricted. A friend of mine is a BTL landlord who has been able to acquire 60 properties over the last ten years. He literally laughs at how easy the government has made it for him to get "money for nothing". It is perfectly sensible to want a country that is a "property owning democracy", but it is insane to make it easy for those who already own property to expand their share of the finite supply. If you have millions of would-be first time buyers locked out of the market, you have a generation who feels alienated, stakeless and betrayed, while the greedy prosper at their expense. It is no wonder so many young Britons are emigrating. (I left the country several years ago and have no intention of returning while the UK remains a place where speculators prosper while those doing real wealth-generating work are financial suckers.)

    Reply: Like you I prefer owning to renting, so I would myself give any incentives to owner occupiers rather than to landlords.

  22. David Belchamber
    Posted May 18, 2008 at 12:25 pm | Permalink

    There is a huge amount to agree with in your article and one minor correction, I think. The para beginning "The change to the RPI…", should read (I believe) "The change from the RPI…"

    I agree with others here that the conservatives must accept some criticism over the years for letting Brown get away with so much, especially with constantly trumpeting his "fake facts" about inflation, interest rates and the level of unemployment, so that many people believe him to have been a superb chancellor.

    I would also have liked us to have been stronger on regulating irresponsible lenders over the years. I know we believe in letting the markets dictate but lenders should not have been allowed to lend to people way beyond their ability to repay.

    Properties are now seen to be much more of an investment than a roof over our heads.

  23. John Moss
    Posted May 18, 2008 at 1:29 pm | Permalink

    Rob is wrong to suggest the Conservatives were not pointing these things out, we just didn't get a hearing because the media was star-struck by New Labour.

    We did point out that the "independence" of the Bank and creation of the FSA and the split of responsibilities was potentially dangerous. We did highlight the shift to 2% CPI from 2.5% RPIx was actually a loosening of the inflation regime. We have highlighted every year since 2001 the fact that Brown and now Darling, have missed their budget targets and had to borrow more and more and more.

    Vince Cable may have got some prominence for a good joke over Northern Rock, but I don't recall him making much impact when Kennedy was in charge of the LDs? Right up to 2005 all they could do then was bleat about Iraq!

    In truth, the economy is like a ball in the middle of a big ring, attached to it by three big pieces of elastic: interest rates, exchange rates and Government spending and borrowing. If the Government is profligate and over-spends and over-borrows, the exchange rate and interest rates will take the strain. That is clearly happening now and the root cause of the problem is excessive growth in Government spending.

    I recently listened to a radio programme, I think about 1968, and the Civil Service going on strike because they had not had a pay rise for 2 years. Imagine what would happen if we tried that now? The sad truth is, we need a cash freeze, ie a real terms cut, in Government spending, to force efficiencies into the big spending departments. Boris Johnson has shown the way with his slashing of the PR budget to pay for uniformed officers.

  24. Matthew
    Posted May 18, 2008 at 6:26 pm | Permalink

    As Anthony says the GDP deflator has tracked the CPI/RPI quite closely, so if inflation has been overstated by (say) 1-2% every year then basically we've had zero growth for years now, and are GDP is overstated by tens of percent.

  25. David Page
    Posted May 18, 2008 at 7:20 pm | Permalink

    Well Mr Redwood, I am truly disappointed with your responses to the issues I and others have raised on this page about inflation. In all honesty, I wonder why you maintain a blog — or indeed that you have any influence in affairs of government with simplistic answers such as these:

    Quote: "Houses do need to become more affordable – that is best achieved by a period of no house price growth so wages can catch up".

    Indeed? So you are content to wait a century for that to happen, house prices having risen 300% in the last decade while wages have only risen ~ 30% in the same period?

    Responses such as this confirm what I have only dared to suspect previously — that people like me could probably govern better than people like you. The quack and the charletan are alive and well in the world of politics. No wonder people don't vote any more.

    Reply: It is unrealistic to suppose real house prices are going to fall as much as you want, without huge damage to the economy. You are the unrealistic one. I care about people, and their mortgages and commitments. Clearly you do not.

  26. David Page
    Posted May 18, 2008 at 8:01 pm | Permalink

    Quote: “It is unrealistic to suppose real house prices are going to fall as much as you want, without huge damage to the economy. You are the unrealistic one. I care about people, and their mortgages and commitments. Clearly you do not”.

    On the contrary John; I care considerably about my home and its people. I am simply incensed at the blithe responses of those empowered to govern. These are substantive issues: let’s have a substantive response from you on them.

    You assert that falling house prices will result in “…huge damage to the economy”, yet this is baseless. If you bought a house to live in, it’s current value is irrelevant and there is no reason to move when that value drops. What if you owe more on the mortgage than the house is worth (the dreaded negative equity)? The same can be said of all purchases (ask anyone who owns a car). It is a mistake to mould financial policy to bail out those who bought houses for other reasons — a disgraceful state of affairs from the US that, like all things, is now being mimicked in the UK. Keeping interest rates low to sustain house prices puts the cost (or burden) of individual home ownership on the public purse. We heard no noise from these people when prices were going up and profits into pockets and remortgages, yet now the music is stopping it seems everyone else has to cover their mistakes — the privatisation of profit and the socialisation of loss. If I were one of those who has made a bad financial call (it does not matter if I was badly advised — I was the one who ultimately made the decision), it seems I can cry foul and put the burden onto someone else — i.e., the lender (with a knock-on effect for everyone else the lender deals with, and the economy generally). Astonishingly, it is only because enough people bought homes they couldn’t afford with money they didn’t have that the taxpayer is expected to respond. In the context of free hand outs, we never hear about the renter who can’t afford to get on the housing ladder, for whom falling house prices down to a reasonable multiple of income are a good thing. Where are the billions for them? Cash and tax gifts to bring these people up to the affordability level would soon cause the pips to squeak. One hundred billion pounds of ‘liquidity’ to ease jitters in the financial world? How about the same sum spent on reinstating the housing stock that your party scattered to the market winds?

    Think about things this way: how would it be if I had a preferential arrangement with the exchequer to buy up all the bread or milk and then sell it back to you at my price? Would you regard that as a morally acceptable situation for a government to put its people in? This is what throwing tax dodges and money at the private BTL investor (and the banks) has done.

    Your thesis is flawed John. Britain does not grind to a halt when house prices are low, anymore than any of us are truly prosperous when they are high: making fixed rate mortgages the norm would consign boom and bust housing cycles to history. Re-read James Caffery’s comment above about the BTL investor laughing in the face of government and the public to see the true losers in this.

    Yours is the politics of self-interest and discursive sops to those who vote you in and pay your wages. You don’t engage; you just evade. A genuinely sorry state of affairs.

    Reply: I do not evade. I give clear answers, some of which you disagree with. If we have a sharp fall in house prices there will be bankruptcies in the housebuilding and related industries and services, job losses, reduction in the number of new homes etc. I am surprised you want that.

  27. mikestallard
    Posted May 18, 2008 at 9:08 pm | Permalink

    Before it gets nasty…..
    I am living off the money which my in laws saved for us by investing all they had in their house. I think, looking round, that a lot of people have their capital tied up in houses. So they don't want a fall in the price of houses.
    Other people want to get onto the housing ladder. The lad next door has a steady girl friend and would like to go and live with her and start a family. But no, he has to stay at home with Mum and Dad breathing down his neck. He wants a fall in house prices.
    Another friend wants to move to another house. She doesn't much care what the prices are because she sells up her old house and buys a new one with the cash (except, of course, she cannot get a mortgage at the moment.)
    So, isn't this a case of swings and roundabouts?
    Renting? Fantastic. I did it for a long time. We were evicted three times in all. Twice when I changed jobs (house came with the job) and once because my landlord wanted to sell the house. When it works, of course, it is lovely. But you aren't your own master.
    And as for the Labour swindle of Council housing – I hate that. It makes citizens into patients/clients/suspects/losers.
    So, what's the answer?

  28. DBC Reed
    Posted May 19, 2008 at 12:46 pm | Permalink

    Mike Stallard is in error if he thinks he is living off the capital his in-laws invested in their house .
    Most of the increased capital value of the house is the result of public/ private action improving the area and inflation from the Gov's efforts to stimulate the economy being diverted into the property market where it puts up the price of land.
    Until the community reclaims the land values which they, not the owner-occupiers ,have created, house prices will continue to go up and down like boats in a harbour being lifted by underlying forces beyond their control.
    John Redwood calls for stability in the housing market but this is not possible when houses sit on land which goes up in value more quickly than the national rate of inflation which is produced by variations in the ratio of prices and incomes and measured by the customary indices.
    If John Redwood really seeks house price stability he needs to strip the land value off the price of the house by a Land Value Tax to stop houses teetering on an economic inflatable.
    As this would be risky for the Conservatives on their own, they need to join in All-Party action in the Commons (as for instance Dave Wetzel's APPG on LVT) and rid the country of the scourge of house price inflation.

    Reply: This old scheme (originaloly proposed by henry George) would create economic chaos. the whole banking system is based on land and property values and people have paid good money to buy them.

  29. David Page
    Posted May 19, 2008 at 4:25 pm | Permalink

    It just doesn't makes sense, does it John? You and your political colleagues (of whatever hue) effectively regard the housing market as the business that is too big to be allowed to fall, so you make policy on the fly to cosset it.

    i.e., "…bankruptcies in the housebuilding and related industries and services, job losses, reduction in the number of new homes…"

    However, your new-found concern (never evident when you were in power) fools no-one, and look at the consequences: savers lose out (indeed, saving is dicouraged while debt is encouraged), first-time buyers are squeezed out of home ownership in favour of BTL investors, low interest rates cause the economy to inflate in every other area, and for what? So that political parties and financial institutions can coast along on a feel-good factor largely predicated on debt and the illusion of prosperity. At least the ECB is keeping its powder dry.

    Watch the economy fly when a house can be bought for £50,000 again — you will never see so much spending (of real money). Get interest rates up and people will only borrow what they can afford; thankfully, it looks like the banks will force this issue through self-interest, by only lending to secure borrowers / those with deposits.

    I don't think we can expect a reasoned response from the politician here but it is encouraging to see so much common sense from individual people. If only economic policy had the same, we might see our individual and societal propensity for greed also reigned in.

    However, I think we all remember what the Conservatives said of society in their last term in office.

    I wonder if Vince Cable has a blog?

  30. mikestallard
    Posted May 19, 2008 at 6:01 pm | Permalink

    I have thoroughly enjoyed reading about the strangely bearded Henry George, the Physiocrats, and the Liberals. Every State in the US, apparently, uses the land tax which is, so they say, better than our council tax (which taxes the improvements people make on their property so that they are discouraged from improving their properties!) My problem with it is this: does an acre – sorry hectaire – of fine Scottish heather equal a hectaire of London concrete?
    My father in law worked all his life as a teacher in the state system except for the Second World War when he was in Bomber Command. As the Reply said, he invested his money in property. He spent his salary on that. Money, after all, reflects value. I am sorry, but I cannot myself see why this is either wrong morally or wrong mathematically. You see, like the £20 note, I believe in Adam Smith and the invisible hand.
    I am also sure that a land tax would be seen, at least by the present government, as an additional rather than as a stand alone form of taxation…

  31. DBC Reed
    Posted May 19, 2008 at 11:45 pm | Permalink

    I would n't want to impugn the motives of Mike Stallard's father in law (or Mr Stallard himself) but the money that he put it to his house was very much less than what it is now worth.The difference is accounted for by the inflation in the land value , the bricks and mortar having been subject to depreciation ( A rough guide to what the building is worth can be gauged by looking up the ABI [ Association of British Insurers]Insurance re-build calculator which is on the Net. Subtracting this re-build value from the current market value gives you the land value)
    Of course up until 1963 Mr Stallard's father in law would have paid schedule A on the house i.e. a form of Income Tax proportionate to the rental value of the property.John Redwood analysis of a tax like this is that it would serve to ruin the financial system In fact, it tended to temper the effect of MIRAS which was still in operation (and still is in the US ) but shortly afterwards the Tory Mods had a giveaway budget which in the absence of Schedule A and credit controls led house prices to go up 70% in two years, a secondary banking crisis then had to be quietly taken care of , followed by union trouble then ,worst of all, Thatcher.
    A local tax (or rate as they still call it) very similar to Schedule A is valued on the capital value of houses in Northern Ireland and a very effective form of LVT is levied in Harrisburg Pa. which has gone from second most poverty stricken city in the USA to one of the most prosperous. Doubtless Boris Johnson will view this successful raising of revenue and stimulus to business in the USA with the same horror at genuine not socialist radicalism that grips Mr Redwood.

    Reply: I want to live in a country where people are better off and can afford their own homes. That requires lower and fewer taxes, not higher and more taxes.

  32. mikestallard
    Posted May 20, 2008 at 5:48 pm | Permalink

    I want to duck out now – but allow me to say that, I hope, we are all in favour of MUCH lower taxes!

  33. Acorn
    Posted May 22, 2008 at 8:26 am | Permalink

    I may be the epilogue for this thread – notice that house and petrol prices still bring in the longest threads!

    Land Value Tax – which will start out as a property value tax; if we adopt it – is for me the answer. It could replace Council tax and inheritance tax, even Business Rates.

    The concept of sitting on a plot of land, that was bought for peanuts; watching its value go up because of private and public investment all around it; at no cost to the owner, is unfair to all taxpayers and local council finances.

    LVT would put an annual cost on holding this land out of the economy. As said above, it is relatively easy to get back to the land value – not the development "residual" land value – from the property value.

    Apart from increasing the supply of land into the market, it will reduce its price. And, it may even cross the mind of the local planning committee that the more land they zone for development, the richer their council becomes.

    Reply: Why does nationalising land increase its supply – everything else nationalised reduces supply and raises price.

  34. DBC Reed
    Posted May 23, 2008 at 8:46 am | Permalink

    My misgivings over replying to "a reply" are overcome by the fairly
    serious misunderstandings that have arisen.
    Nobody is talking about nationalising land. Where has this notion come from? Land tax no more nationalises land than corporation tax nationalises business.
    Reframed in the terms that were being discussed: the question beomes how does LVT increase the supply of land for development?
    The answer would appear to be pretty obvious: people banking land would either have to bring it into use or pay a carry cost for keeping it out of use.
    The Royal Town Planning Institute published figures showing that there is enough land locked up in developers' land banks to meet supply targets for new housing in London for six years.They went on to accuse the developers of deliberately restricting supply to keep up prices.
    There are hundreds of thousands of empty homes according to the Empty Homes Agency .(There should be an empty land agency).
    On a local level , most people know valuable sites which can be collaterlised as loans, that have stood empty for years (or a generation in my town).
    And then there is asset stripping by which largish local firms employing hundreds of people with a large turn-over but low profit margin get bought out by private equity operators who first off sell the factories for conversion into luxury ( i.e.very small) apartments.
    The whole post-war asset -stripping farrago derives from the fact that inflated land values are an easier way of making money than providing goods and services.
    LVT provides a means of creating a high wage/ low accommodation cost economy.When the euphoria of Crewe is over, Conservatives must needs think about their current offer to the public: we can't get you good wages but we can make sure your house goes up in value. It looks like the banks have called time on that one.

    reply: Land Value taxes amount to nationalising land, as the government decides on how the land should be used and prices its accordingly. The owner no longer takes the lead in determining how to use it. Govwernment can then take people (and businesses) out of house and home.

  35. Acorn
    Posted May 23, 2008 at 11:36 am | Permalink

    John
    Sorry but I am not getting your argument about nationalising land. DBC put it better than I (above) and I would add that land planning is THE major issue for any government to sort out.

    Land planning law is a mess. As a ex local councillor, I have seen the results at many Planning and Development committee meetings. Numerous conflicts between national planning "guidance" diktats and local citizens desires, expressed through their Councillors. The requirement for PPS 12 Local Development Frameworks, just added insult to injury.

    Land owners / Developers all know that making a local planning application is just the stage before you go to appeal to some Inspector in Bristol who will decide the application according to Whitehall rules! As he does with LDF submissions, his (Whitehall's) word is final. We already have "nationalised land".

    LVT will not change this on its own; but, it will force owners to think about holding land out of the economy for decades. It will force planning authorities to think about the land value impact of their decisions and how local tax payers can get a share of it – they are not allowed to at present – the ballot box will tell them if they are getting it wrong.

  36. Tenuc
    Posted June 6, 2008 at 9:08 am | Permalink

    The economic mess we and the rest of the West are in needs to be sorted once and for all. Slight tweaks to the interest rate in either direction will not solve the fundamental underlying problems.

    The first step should be to for us to draw up a UK national emergency plan to deal with the following issues:-

    Regain control of the money supply from the global merchant bankers.

    Start the long and difficult task of returning our currency to the gold standard.

    Disentangle the UK from the UN, NATO and the EEC, as these bodies prevent us managing our own country and impinge our civil freedoms.

    Stop wasting money on our useless nuclear deterrent, and invest the money saved in building a strong, well equipped 'home defense' army and police force capable of upholding our laws.

    Pull our troops out of Iran and Afghanistan and stop interfering in the politics of other countries, we do not have any right try to impose our brand of ‘shamocracy’ on all the countries of the world.

    Stop the phony 'War on Terror' – anyone stirring up an hornets nest deserves to be stung. As we know from our experiences in Northern Ireland, these matters are only resolved by negotiation, not guns.

    Invest significant resource in the quick development of nuclear fusion reactors to meet our long-term need for cheap, clean power.

    Stop the high levels of immigration and only invite people who can contribute their skills or wealth to our country to work here.

    Bring honesty and integrity back to UK politics and stop the media cartels manipulating the UK public so that they, along with the bankers, become the real arbiters of how our country is run.

    Stop treating the UK public like children, who's every need must be met by all invasive government. Most of us are quite capable of looking after ourselves. Think context, not content when dealing with UK issues.

  37. Nick
    Posted January 11, 2009 at 9:27 pm | Permalink

    "Reply:…………If we have a sharp fall in house prices there will be bankruptcies in the housebuilding and related industries and services, job losses, reduction in the number of new homes etc. I am surprised you want that."
    I want house prices to fall to represent building costs and provide affordability. Any one at work should be allowed to afford some form of shelter.
    If the falls mean that certain factions suffer, then so be it. Myself, and many others, being unable to pay these hyper inflated prices is due to the gross mismanagement for the years the bubble was allowed to inflate. We the people were not protected.
    I look forward to a total collapse in house prices. It will serve us right and may we learn the lesson. albeit the hardway.
    Using bricks and mortar as an investment is wrong, and we need to take this on board and make it part of our culture for the good of all.

  38. Carsen
    Posted October 7, 2009 at 2:42 am | Permalink

    Thanks u for the post , i like it , is very very very great 🙂 http://nipastudio.com/

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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