The Treasury and the Bank lurch from policies which promote boom, to bust, and from boom to bust again. In the period 2001-6 they followed a low interest rate strategy, supplemented by a regulatory approach which encouraged the most extraordinary boom in off balance sheet financings and a credit bubble. The government was especially keen on this, ballooning its own true balance sheet with PFI and PPP packages which it did not include in its stated borrowing figures.
In the summer of 2007 the Chancellor and the Governor concerted their rhetoric to blame the banks for this inflationary bubble, telling them that there would be no bail outs and they would have to correct it on their own. Readers of this site will remember I urged them (as others did from the banking sector itself) to make the markets more liquid in August and early September to avoid a banking crunch. The pleas fell on deaf ears, so we witnessed the run on Northern Rock. If the authorities had made less than Â£50 billion available in September to the markets the Rock crisis could have been avoided.
Once the Rock run began, many of us urged a quick deal to buttress the bankâ€™s mortgage book. Instead, the Bank claimed it could not do this owing to EU rules â€“ although on the continent under the same rules banks were rescued quickly. We had to watch the agony of the Rock leading to the eventual nationalisation of the bank.
I argued strongly against nationalisation. The government, the BBC and others allowed Vince Cable to front the ridiculous case for nationalisation and give it plenty of airtime so it would go through without it being an Old Labour idea. The Lib Dems showed themselves to be old time spend and tax socialists wanting to stick anything really expensive onto the taxpayers account: now the taxpayer has to pay the losses as the business is run down. As a result Northern Rock has effectively withdrawn from the mortgage market (for good competition reasons as a nationalised and subsidised bank) making the housing market worse. It will have to sack more than half its staff as it retrenches and fights to pay back the huge sums of money taxpayers were forced into lending it. The collapse of Northern Rock is a huge hammer blow to the housing market in the UK, as it was a large participant who can no longer play any serious part and is effectively in run off.
After the Rock had been nationalised at huge cost to taxpayers â€“ with a maximum potential liability of over Â£100 billion â€“ the Bank then made available up to a Â£100 billion to ease credit shortages in the markets! Why on earth didnâ€™t they do that before the run on the Rock? Then they would have saved themselves the large sums they spent on the Rock as well. At last it seemed the authorities understood that they had to be in the downturn fighting business, and had to ease the credit squeeze.
More recently, following further increases in international oil and food prices, the Bank has decided its policy is too loose, and has warned that it might have to put interest rates up again! It effectively declared war on the property sector, and helped trigger large share price falls in the shares of the housebuilders. It threatened higher rates at a time when banks were seeking to recapitalise themselves by asking shareholders for more funds, helping to drive their share prices lower and jeopardise those fund raising activities.
The idiotic inconsistency of the authorities has reached new heights. The early 2000s saw low rates and boom boom. 2007 brought higher rates and bust. Early 2008 saw edging to lower rates and more liquidity. Middle 2008 has delivered the threat of higher rates and bust. This is made worse by their gross insensitivity to markets struggling to recapitalise the banks, and to the financial plight of the housebuilders, retailers and others. They should want a better equity market to raise the large sums of new capital it will take, following the wealth destruction brought about by their lurch from credit boom to credit bust.
It seems clear that we no longer have an â€œindependentâ€ Bank of England, if we ever did. The Chancellor and the Governor concerted their tough talk and their decision to say â€œNoâ€ to more liquidity in the crucial summer months of last year. They concerted their bungled response to the run on the Rock, and agreed the eventual nationalisation. They clearly agreed the extra liquidity earlier this year, and are now both trying to talk price increases down. I just donâ€™t think the international oil and food markets are listening, and it makes the Governor and the Chancellor both look silly.
As a result the governmentâ€™s housebuilding strategy is in tatters. When the government published its work telling us the problem in the UK was one of a shortage of new homes being built, I pointed out that you need to understand the impact of mortgage finance on the market. Take the excess credit creation away, as they have now done, and you have no shortage of homes for sale, as you cut off the possible buyers. The government went out with a demand that the UK industry move towards building 300,000 homes a year at the very top of the cycle when ti was obvious there would be a sharp fall, not an increase. How stupid can you get? They should revise their position, for this year will see a big downturn in the numbers of new houses being built.
The government should recognise there is a credit crunch, for after all they created it. In a credit crunch businesses canâ€™t afford to build new homes, and people canâ€™t afford to buy them. The government needs to be in downturn fighting mode.
I know my critics think I am too careless about the inflationary threat. I tell them that was something to worry about a couple of years ago when the authorities were encouraging a bubble with too much credit. You cannot stop global demand for oil and the action of global oil speculators by hiking UK interest rates. Tightening money here is not going to stop Chinese and Indian housewives buying more meat and grain. The UK economy is no longer inflationary. Each time oil and food prices go up we do not demand more wages â€“ we take a further cut in our real pay, and rein back on other items in our budgets. Thatâ€™s not evidence of an inflationary problem. Itâ€™s evidence that the government has declared war on individuals and families, and is going to make them pay for its economic mistakes by a very nasty squeeze on the living standards of us all.