Apocalypse now?

Bank rate down... No surprise there, given the evidence that market interest rates are higher than intended and a slowdown is gathering pace.

Is the world saved? Can we now all relax?

Bank of EnglandProbably not. The main challenges remain, and the risks are sufficiently worrying that even if one tries to disregard apocalyptic language about recession, this is a pretty good time to allow oneself a bit of scary hyperbole.

For the most cogent example of that, see Anatole Kaletsky in The Times today.

My own personal view is that things may well go quite well next year. However, there is a sufficient risk they will go badly or very badly.

At the outset, it should be said that whether things go well or not, the economy seems to have reached a turning point, with an end to an era of rising house prices, rising borrowing, strong consumer spending, a deteriorating trade deficit and relaxed bank attitudes to lending.

Those had to end at some point and they have probably now done so. No problem there.

However, there are two reasons to worry that the turning point we've arrived at may result in significant problems.

Interest rates graphFirst, there is a risk that a small degree of incipient inflation has been allowed to creep into the economy, which will make it hard to manage the changes occurring.

It's not obvious yet, but with inflation starting this difficult period just above target, and with energy and food prices rising fast, we can't dismiss it.

Indeed, if inflation is an issue, a mild repeat of the 1990s experience may be necessary to get rid of it.

But secondly, even if inflation is not a problem, we might be in for a difficult period. The Bank of England will have more room to cut interest rates, but lower interest rates are not a very powerful lever against certain forces. It can be hard for the Bank to engineer a controlled slowdown.

Once falling house prices take hold and consumers decide to save, there may be nothing monetary policy can do to get them spending again. In fact the best proof of that is that monetary policy has struggled to contain the boom in house prices enjoyed over the last few years. If households believe they need to save, to repair their personal balance sheets, there will be little point in trying to get consumers out into the shops again.

Now this raises the risk that even with more interest rate cuts, the economy can run out of steam, and then get itself into a downward spiral. A slowdown causes job losses, which causes more slowdown and more job losses.

On my recent trip to New York one economist, Jan Hatzius of Goldman Sachs, made the point that we should regard the words "vicious circle" as a pretty good definition of what a recession is. Once it takes hold it can be hard to stop, as the Japanese found out when their own share and property price bubble burst in the early 90s.

This is where the credit crunch and the difficulties of the banks come in. I suspect these are not causing the economic turn we are witnessing because the turn had to occur at some point anyway.

But credit problems may well end up being an accelerant, transforming the economic drama of an inevitable house price correction into a full-blown crisis. If the banks are unable to lend, the economy will probably slow more than it needs to for the various imbalances to correct.

If things do go into a tailspin we have no idea how deep or how long they could last. If confidence collapses, there is no good economic model to tell us when it will be restored. That's the apocalypse scenario we need to worry about.

Now for the good news.

Things might go actually quite well.

The economy has momentum, companies in general are profitable and so have a little cushion to fall back on, the labour market has not yet suffered (and even if it does, unemployment may not rise because there is a large supply of migrant workers who may choose to move to other more successful economies instead).

Inflation may not turn out to be a problem and interest rate cuts may put a floor under the housing market, the credit crunch and the slowdown.

And it might be that a gentle fall in the value of the pound allows the economy to steam ahead, built on exports rather than on domestic consumer spending.

It doesn't all have to go wrong.

Does that mean we should not allow ourselves to be apocalyptic? Well, I've tended to use the earthquake analogy. If you live on a fault line, you should be wary of the horror of an earthquake, even if there may not be one.

And in the economy right now, we can hope for the best but need to prepare for the worst.

Comments   Post your comment

  • 1.
  • At 01:03 PM on 06 Dec 2007,
  • Peter wrote:

Agree that Bank of England will be 'pushing on a string' if they try to manage property prices from now on.

  • 2.
  • At 01:04 PM on 06 Dec 2007,
  • damien de wrote:

hey evan how did you knock this up within 5 minutes of the bank of england press release?

  • 3.
  • At 01:08 PM on 06 Dec 2007,
  • Nick wrote:

Why oh why do we have to wait for crisis every time? The early signs of this slowdown were visible at least six months ago. Earlier for those handling imports of raw materials for manufacturing. This ship takes time to turn. Please can we have some helms-people who know how to steer it!

  • 4.
  • At 01:09 PM on 06 Dec 2007,
  • john thomas wrote:

Surely this rate cut is to benefit what banks do between themselves (libor) rather than what banks do for us (morgage/savings)? Just how much of this rate reduction can we expect or even hope to be passed on?

And if the concern yesterday between the banks was that even they did not know who was a good bet, hence libor at near record highs, what, since yesterday, has changed to alter that perception?

Is this rate cut a case of emporer's new clothes or have I missed something?

  • 5.
  • At 01:12 PM on 06 Dec 2007,
  • Scamp wrote:

I read that article in the Times and noted that most of the comments seemed to be against a rate cut because of the dangers of resparking the credit/mortgage/private equity boom.

I tend to agree. This rate cut is unwelcome. Inflationary pressures are still problematic. Cutting rates to please the City will not help this country rebalance its economy properly. I can now see the trade balance worsening, continuing low investment in new companies, increasing household debt and it's letting the utterly useless private equity companies off the hook.

This rate cut is relatively small but it sends entirely the wrong signals.

Bad move Mervyn!!

  • 6.
  • At 01:13 PM on 06 Dec 2007,
  • Iain wrote:

There may not be an economic model for confidence, but is there a model to determine what is an appropriate level for interest rates? It took just 19 minutes following the rate cut announcement for an email to arrive in my inbox stating that this is just the first in a "series of rate cuts" and that 75bps should be expected.

I consider this response to be quite rational, but at the same time somewhat worrying. Like it or not, the BoE (like the Fed) is now responsible for setting expectations as well as rates. Is this the right message to be sending in the run-up to Christmas? We'll find out in January I suppose.

  • 7.
  • At 01:15 PM on 06 Dec 2007,
  • jay wrote:

Evan, you have not mentioned the inflation that has been caused by the Governments over zealous expenditure and the cost of council taxes rising significantly faster than Inflation.

Majority of the inflation that that we have has been caused by a rise in commodity prices around the World, but what you fail to mention is the taxes that have been rising under this government and burgeoning public sector.

The Bank of England can control Consumer Expenditure via Interest Rates, but what is there to control the Government Expenditure.

We now have a two tier system controlling growth working in free markets. The Bank of England should not have reduced interest rates and should instead have forced the government to rein in government expenditure.

  • 8.
  • At 01:16 PM on 06 Dec 2007,
  • vincent Wells wrote:

In your opinion, how does one prepare for the worst?

  • 9.
  • At 01:18 PM on 06 Dec 2007,
  • not telling wrote:

i'm interested in hearing your opinion on what the media's responsibility is in this situation? is it not possible that the "apocalyptic" language can in fact, make the slow down only worse by forcing the consumer confidence down with only the (well let's be frank) sensationalist comments of the press as the general public's real guide? is it not the responsibility of economic reporters to ensure that the facts are reported and that conjecture and forecasts kept as free from emotive statements as possible? we are now seeing more 'mom & pop' investors than ever before, making decisions based on the front pages of papers, starting profit-taking runs and all sorts of emotive and panic-based decisions. perhaps we should look at a balance of restraint and concise reporting to assist the future. (even shying away from such expressions as 'apocalypse now' might help when referring to the economy and someones job security)

  • 10.
  • At 01:19 PM on 06 Dec 2007,
  • Deborah wrote:

Why do all of our journalists in this Country talk us into a recession. Wouldn't it be better to put a positive spin on things to give people more confidence and avoid all the doom and gloom.

  • 11.
  • At 01:20 PM on 06 Dec 2007,
  • Mark wrote:

At least we now know that the MPC has no semblance of independence. A cut at this stage can only be political. Inflation in input prices, wages and energy all pointed to a rise. Supposedly that is the MPCs only remit, not asset prices, not confidence, not the high street. Hopefully Mr King voted against this cut as he did in Aug 05.

  • 12.
  • At 01:20 PM on 06 Dec 2007,
  • s wrote:

So a drop in demand has occured and the BOE reacted to it by dropping rates. No ,actually demand slowed and the BOE reacted to it.
This is very much the story of central banks. The bias is always upwards which is why our expectation for inflation should always be upwards over time.
That will not reverse until a level of inflation becomes transparently a greater problem the growth. That will as usual be a wonderful hindsight moment which implicitly will be too late for reducing price volatility.

  • 13.
  • At 01:21 PM on 06 Dec 2007,
  • greg pullen wrote:

But here's another possiblity from someone who worked through the last crash (I'm a chartered surveyor who's worked in the residential property biz for 28 years); after the October '87 stock market crash we saw Nigel Lawson drop interest rates and make sure the wider economy remained robust. It worked for about 9 months - confidence surged, as did borrowing and house prices (30% in 6 months!); by the time interest rates went back up the damage was done and we were left with 4 years of recession, negative equity and more. Even if next year is fine there's still 2009 to worry about. And 2010...

  • 14.
  • At 01:21 PM on 06 Dec 2007,
  • Deepak Chawla wrote:

Since when has the principal work of BOE become economy instead of inflation?
Inflation even after they do not include oil is around 2.1% CPI and 4.3% RPI. I can bet if any human being in UK says its that low.

Who are you trying to save with this rate decline.
1) Home owner who have paid excessive for for their houses.
2) People who think property is their saving rather actual physical savings
3) London city and private equity who have over paid. Making multi millionaires into billionaires.
4) If Libor rate is high because banks don't want to lend to each other irrespective of the BOE rate.
5) Greedy banks who lost money in US
6) Greedy banks who have now started to loose money in UK housing as well.

Who gets hurt with lower rates.
1) People who save and make sound investments
2) First time buyers.

Do you see the difference who are we trying to save absolutely the wrong people.

So often I have mentioned people forget the social consequences of young people not able to start their lives. Hence you have no or late marriages. No children. Who will take care of you in your old age.

I just can't begin to say that monetary policy in UK is for the rich and not the common man.

  • 15.
  • At 01:25 PM on 06 Dec 2007,
  • Iain wrote:

There may not be an economic model for confidence, but is there a model to determine what is an appropriate level for interest rates? It took just 19 minutes following the rate cut announcement for an email to arrive in my inbox stating that this is just the first in a "series of rate cuts" and that 75bps should be expected.

I consider this response to be quite rational, but at the same time somewhat worrying. Like it or not, the BoE (like the Fed) is now responsible for setting expectations as well as rates. Is this the right message to be sending in the run-up to Christmas? We'll find out in January I suppose.

  • 16.
  • At 01:27 PM on 06 Dec 2007,
  • Simon Stephenson wrote:

I'd suggest, Mr Davis, that for a professional economist you are being too non-committal in this column.

I know, because I'm in this position myself, that the world of the last 20 years has seen things happen that, to a classically trained economist, just shouldn't have happened. Logical, rational explanations have sometimes been hard to find, and I know that this makes it increasingly difficult for one to have the confidence to assert what is good and what is bad, what is right and what is wrong.

Many have retreated to, perhaps, the only safe-haven available - that what's happened and is happening is somehow pre-destined and should therefore be considered to be positive. That the collective intellect of political and economic leaders, and of the markets themselves, must be assumed to be leading us in the most appropriate direction. And that therefore individuals should accept this passive gradualism as unquestionably the right approach.

Mmmm. Dangerous, I feel. We've got the ability to construct, over time, precise structures, intellectually proven to be superior to what we have now. Why, instead, do we insist merely on chipping away at something known to be second-rate?

Isn't it arguable that World War I the avoidable result of this sort of thinking?

What I'd like to be able to read from you and from other professionals, is no so much a forecast of what's likely to happen, but an assessment of where we are now - how sustainable is the world economy based on current attitudes and beliefs. I know it's a to a large extent a matter of confidence, but what I'd like to hear is a proper no-holds-barred discussion about whether where we are, and what we are doing, is robust and sustainable enough for us to conclude that confidence is capable of being maintained. Or are there major structural faults that MUST be corrected before properly founded confidence is possible?

  • 17.
  • At 01:27 PM on 06 Dec 2007,
  • Andy Taylor wrote:

Perhaps you can explain how when house prices inflate rapidly, it is not within the BoE's remit to quell them by raising rates, yet the moment they fall by a measly 1%, rates are cut?

And what about oil prices? This cut will lead to falling £ vs $, and push up petrol prices in real terms, leading to inflation.

  • 18.
  • At 01:29 PM on 06 Dec 2007,
  • vincent Wells wrote:

In youropinion, how does one prepare for the worst?

  • 19.
  • At 01:32 PM on 06 Dec 2007,
  • Ray wrote:


Within 17 minutes of the BoE reducing interest rates by 0.25% Lloyds TSB e-mailed me the reduction in interest paid on the now closed Online Saver .. down from from 5.25%to 5.03% AER.

Surely the quickest notification to savers' ever.

I note that the banks are never as prompt to increase the rate paid to savers when rates rise!

  • 20.
  • At 01:33 PM on 06 Dec 2007,
  • George wrote:

Gordon Brown artificially created the upward spiral of growth by public funded job creation with wasted borrowed money, and now that the money has run out due to overtaxation of the tax revenue generating private sector, he and we will have to ride out the resulting downward spiral. This is a going to be a big recession (coupled with high inflation and growing goverment debt) of Labour's making.

  • 21.
  • At 01:37 PM on 06 Dec 2007,
  • Tim Probert wrote:

All a lot more balanced and sensible than Evan's piece on last night's Ten O'Clock News, which had more than a tinge of doom-mongering about it.

  • 22.
  • At 01:38 PM on 06 Dec 2007,
  • Tony Jackson wrote:

One thing that seems to be missing when people discuss the bank base rate is what I see as one the underlying problems.
It strikes me that we are in this situation, not just because of energy prices and US economy concerns, at this time because the housing industry, from lenders through to consumers, has been allowed to run out of control for years.
Lenders were clearly aware that their ever more elaborate offers of mortages and deals going beyond the norm (talk of 10 times consumers salaries etc) would sooner or later cause a problem. Evan talks about when "consumers decide to save". Consumers are easily led and tend to take what is put in front of them, or taken away. In recent years, fueled by Estate agents on one shoulder whispering sweet equity "quick profit" promises in one ear, whilst banks and building societies were offering insane mortgage packages in the other, it was clear that the industry was suffering from a greed culture. This was allowed to happen by the monetary committee and the Government through lack of industry controls. Although not the only reasons for the base rate where it is, I am convinced that the housing industry is guilty, as are us consumers, of fueling this whole situation and being the major cause. We should all be crawling away with our tails between our legs with the last remenants of the 'Ride of the Valkyries' echoing in our ears and chew on our huge mortgages and wonder if offsetting the purchase of the 4x4 against the equity was really worth it in the end.

  • 23.
  • At 01:39 PM on 06 Dec 2007,
  • Clare wrote:

If it all goes "rather well", perhaps you could explain what the financial prospects are of those who don't own housing, and pretty much anyone under the age of 30 who isn't an investment banker or doesn't have rich parents who are prepared to bung them the odd quarter of a million devalued pounds (the price of a modest two-bed flat or terrace in much of the SE).

  • 24.
  • At 01:41 PM on 06 Dec 2007,
  • Christian Evans wrote:

At a stroke the MPC throws away any reputation for financial prudence that it had gained under Gordon Brown and New labour. Now inflation matters not a jot. I will start my campaign for an inflation plus pay rise now.

  • 25.
  • At 01:44 PM on 06 Dec 2007,
  • Richard wrote:

Good analysis Evan although I feel less apocalyptic about a crash in house prices and look forward to it with much excitement. The prospect of myself and my future wife (getting married next year) being able to buy our own family home one day is now looking like it just might be possible again. As part of the priced out generation (I'm 31), we didn't really want to struggle to buy a 1-bed flat not suitable to bring a family up in so we haven't bought yet. Bring on the housing market crash and BoE interest rate cuts won't help avoid it now as the days of lenders prepared to throw insane sums of money at anyone are over.

  • 26.
  • At 01:45 PM on 06 Dec 2007,
  • Clare wrote:

If it all goes "rather well", perhaps you could explain what the financial prospects are of those who don't own housing, and pretty much anyone under the age of 30 who isn't an investment banker or doesn't have rich parents who are prepared to bung them the odd quarter of a million devalued pounds (the price of a modest two-bed flat or terrace in much of the SE).

  • 27.
  • At 01:50 PM on 06 Dec 2007,
  • Mark Henwood wrote:

I agree in general with your sentiment and I find your upbeat comments refreshing. However I think in all of this, one important factor is being forgotten:

It is widely acknowledged that the British public have, in the main, been max-ing their debts with easily obtained credit cards, remortgages etc. For example, I work with a lady who proudly (!) claims that she and her husband (in their late 40s) have never saved, they simply remortgage their flat when they need some more liquidity.

With lenders and credit providers about to get far more picky, it won't matter that rates are lower because fewer people will be granted new credit facilities.

A large proportion of Britain relies on debt to be able to spend. Personally I think we will see their spending power come crashing to a halt as the last card is filled up. And not wanting to be too doom-stricken, I reckon that not only will this bring the direct effect of an economic slowdown, it will probably have dire consequences on the social order in the UK as well.


  • 28.
  • At 01:55 PM on 06 Dec 2007,
  • bryan wrote:

The MPC is weak.

The role of the MPC is to control inflation not look after the housing market and the interests of shareholders in our leading banks.

  • 29.
  • At 02:01 PM on 06 Dec 2007,
  • harry escott wrote:

Quite a reasonable balanced view today but CONTRAST your report on 10.00 news last night which was ALL Doom and Global Gloom!
Where was the balance then?
Just giving the downside is in itself
unhelpful and crates a lack of confidence which contributes to the downward spiral effect!
Please try for more balance or we will end up talking ourselves into a recession when the economy is actually strong.

  • 30.
  • At 02:01 PM on 06 Dec 2007,
  • David wrote:

Inflation is all around us, despite whta our Govt tells us, and the Bank is cutting rates. Does this not put Sterling at risk of a plunge in value?

  • 31.
  • At 02:04 PM on 06 Dec 2007,
  • Paul wrote:

"In fact the best proof of that is that monetary policy has struggled to contain the boom in house prices enjoyed over the last few years"

Yes, but the MPC repeated ad-infinitum the mantra that their job was to target inflation not house prices, and so we had ridiculously cheap lending while house prices rocketed 15% a year.

And yet the very moment house prices begin to fall, just like 2 years ago, they cut interest rates even when inflation is on the way up and oil prices are nearing $100.

I think what credibility they have left disappeared today. It is quite obvious that their job might be to control inflation, but all they actually seem to care about is keeping house prices high, whatever the cost to the general economy.

  • 32.
  • At 02:04 PM on 06 Dec 2007,
  • Lee Saunders wrote:

"Indeed, if inflation is an issue, a mild repeat of the 1990's experience may be necessary to get rid of it."

what exactly was this? I'd love to know as I'm studying inflation for a report at University. Thanks!

Great article though, and I agree with the earthquake reference at the end, it'll be interesting to see what happens in the next 12 months!

  • 33.
  • At 02:06 PM on 06 Dec 2007,
  • Carl wrote:

Following the economics report on the News at 10 last night I am surprised that this post contains any positives.

Its good to see that Evan has got some perspective and moved away from brash comparisons of the economy in 2008 with the Great Depression.

Its also nice that credible sources such as Goldman have been used in this analysis rather than, a web site that might just have a slight agenda.

  • 34.
  • At 02:11 PM on 06 Dec 2007,
  • Robert Macnab wrote:

Hi Evan,
Recollecting the last recession of 1989-91 and even the one bfore that of 1979-81, as far as when recovery might occur if the economy does go into a tailspin, I think economists have to look at the long term trend in house prices and interest rates. At some point house prices must (or should) correct back to the long term trend relative to interest rates. If they don't actually fall significantly over the next year or two as they did between 1990-93, then consumers will batten down the hatches until incomes catch up. The threat to the economy given the last few years unprecedented growth in house prices is that it could take years for nominal incomes to catch up.

  • 35.
  • At 02:15 PM on 06 Dec 2007,
  • Dave, lancashire wrote:

I think the biggest threat has to be housing prices and the knock-on effects on the wider economy of any major fall. Credit availability, savings ratios, consumer spending and business investment all, to a greater or lesser extent,follow a fairly logical pattern, but house prices are subject to the decisions of millions of ordinary people who sometime have a tendency to stampede and behave far more pessimistically than the market conditions suggest. I used to live in Hong Kong where property prices reached crazy levels up to early 1998 - at the time all the usual arguments were trotted out to explain why such levels were sustainable (increasing population, reduction in average household size, increasing divorce rates etc etc)but they didn't persuade people not to panic when the time came and prices for mass-market properties fell by up to 70%. Prices ended up well below what economic fundamentals suggested they should be, and the danger is that a similar negative sentiment could take root here and bring the whole house of cards down with it. The B of E's decision to lower interest rates was the right one.

  • 36.
  • At 02:19 PM on 06 Dec 2007,
  • Michael wrote:

AS you allude to, there are examples of economies coming off a bubble and suffering a decade long hang over - Japan and Germany post unification - I would have thought all the lessons re the ineffectiveness of monetary AND fiscal policy will apply if there is a deflationary or even stagflationary cycle.

The UK does have more room to manouevre as we are not emebers of the EUR zone.

I am concerned that the concentration on the fundementals (underlying economy, employment) is underplaying the expectations impact that could easily unexpectedly result in the housing correction being much swifter than anticipated and this contaiging into the real econmy via consumer retrenchment, accelerated by a negative multiplier from tighened lending conditions.

  • 37.
  • At 02:21 PM on 06 Dec 2007,
  • Ian Ryder wrote:

I think you're missing the point Evan.

It's falling house prices that has kicked off the credit crunch. The fall was originally caused by complete over-supply in the US and now here.

With falling house prices came negative equity and the end of re-financing / flipping out. Then came defaults followed by collapses in the value of packaged debts.

If house prices were still inflating there would be no credit crunch.

You are correct I suspect when you talk about the vicious circle...stricter lending will lead to further falls which will lead to even stricter lending etc etc. We are going Japanese and there's nothing much the BoE can do to stop it now the process is in train.

We will be back to 3 x salary mortgages (for the lucky few able to get them) some time soon which in my mind equals 50% falls in value back to 2000/2001 prices. It's not going to be pretty.

  • 38.
  • At 02:21 PM on 06 Dec 2007,
  • Tony Goodson wrote:

A decision made under pressure from No 10,designed to protect Brown's reputation for as long as possible in that he made a "pigs ear" of the job whilst he was chancellor, it won't work the wheels are nearly off

Thankfully, the Bank of England is at liberty to adjust interest rates as inflationary pressures allow - unlike the early 90s when interest rates were being used to defend an overvalued currency.

  • 40.
  • At 02:37 PM on 06 Dec 2007,
  • fergus31 wrote:

Now don't get me wrong, I'm no expert, but I though that back in 1997 when independance was granted to the BOE in relation to interest rates, that the MPC had a clear brief to use their new found independence to set interest rates in order to manage inflation, in the considered knowledge that stable and 'on target' inflation is central to long term economic prosperity.

How, or why, has that responsibility (seemingly) been subsumed by the desire/need to bail out irresponsible lenders and borrowers who have created a lunatic housing bubble?

Surely you can't be a 'little bit pregnant', and consistency of application to the task is the key to long the term credibility of the goverment that ushered in the change?

  • 41.
  • At 02:42 PM on 06 Dec 2007,
  • Joe wrote:

Evan, do you think that the overnment has become too reliant (and perhaps complacent) on interest rate management to control demand? Do you think that house-price inflation of the last decade will encourage Government to make use of fiscal policy in the near future. Perhaps we'd have been better served with a penny or two on income tax in recent years to curb demand.

  • 42.
  • At 02:43 PM on 06 Dec 2007,
  • Simon wrote:

Anatole article is really quite nonsensical, but the readers comments are worth a look. Interesting the FTSE was up nearly 100 on the suspicion (and confirmation) of a rate cut. Now down 40, as the realisation of future growth sets in. Cut or no cut, we are facing a pretty bad couple of years, and tinkering with the interest rate won't suddenly wipe out the consequences of a debt fuelled economy.

  • 43.
  • At 02:47 PM on 06 Dec 2007,
  • Ian in London wrote:

Hi Evan,

To be honest I am very annoyed. The Bank has showed itself to be a spinless, gutless wonder in the face of big business in completing this amazing about-face.

The sole role of the bank is to make sure that inflation is kept under control. (Their remit does not include worrying about economic growth.)

By prostrating themselves to the will of big business they have proved themselves to be as independent as the board appointed by Dick Grasso to oversee his pay package.

Who in their right mind can dare to say inflation is under control when food prices are spiralling out of control, oil is at 90 bucks a barrel and gold is at or near it's all time high.

By providing no moral guidance and caving in like they have, the market will now expect them to provide a 'put' on reckless behaviour, and aggrivate the coming the recession. (It is coming, and will only get worse the longer we try to stave it off.)

Mervyn Kind and his bunch of toadies get a very big thumbs down from this observer.

  • 44.
  • At 02:48 PM on 06 Dec 2007,
  • roger owen wrote:

Thanks for your view however I have felt for a long time that all sence of balance has gone from the British economy. In a few generations we have gone from being the workshop of the world to the spendthrifts of the world.Our balance of trade figures run at a continued deficit and control of important British companies pass abroad eg British Steel and ICI this year alone.We can not be always hope we can live entirely on our wits since the Northern Rock debacle shows that even in the field of banking the problem of excessive lending to a narrow range of borrowers soon causes trouble

  • 45.
  • At 02:48 PM on 06 Dec 2007,
  • Anne McCrossan wrote:

Hi Evan,
The capitalist system depends on an infinite amount of consumer wants and needs that generate year on year increases in commercial return. Personally I can't help thinking that the pain of the sub-prime kick-back has come from the increasingly desperate sourcing for this return that is akin to trying to wring as much value as possible out of a drying cloth. The difficult question then that not many seemed focused on is whether the capitalist system is running out of steam? What is the new, sustainable, economic model for the future? Interest rate drops may alleviate the problem but without an answer to this question, at least for those of us in the West, your apocalyptic note sounds true to me.

  • 46.
  • At 02:50 PM on 06 Dec 2007,
  • philip mccall wrote:

i am a firm believer that any economy can manage inflation at a higher rate that the 2% target safely

  • 47.
  • At 02:51 PM on 06 Dec 2007,
  • roger owen wrote:

Thanks for your view however I have felt for a long time that all sence of balance has gone from the British economy. In a few generations we have gone from being the workshop of the world to the spendthrifts of the world.Our balance of trade figures run at a continued deficit and control of important British companies pass abroad eg British Steel and ICI this year alone.We can not be always hope we can live entirely on our wits since the Northern Rock debacle shows that even in the field of banking the problem of excessive lending to a narrow range of borrowers soon causes trouble

  • 48.
  • At 02:52 PM on 06 Dec 2007,
  • F.Lee wrote:

Now let me see if I have got this right. The present crisis has been due to easy credit and excess liquidity being injected into the economy. This policy was Greenspan's gift to the world but the unintended effect has been asset-price inflation (notably in the property market) and irresponsible lending by banks (not just Northern Rock but big players like Merrill Lynch, Citibank, UBS and Morgan Stanley) So cutting interest rates is a 'solution'!? It sounds more like a repeat of the problem to me. Simply prolonging the agony I would have thought. But in the epoch of a 'one golf-club' economic policy it is apparently all that central banks can offer. The cure for a debt fuelled crisis is apparently more debt!

When oh when are we going to take the bull by the horns - like Paul Volcker did in the 80s - and drain the system of debt and excess liquidity. Nothing short of this is going to work in the long run and I am sure that Davis knows this. However, in the present political climate only short term considerations matter. Long term it is somebody elses problem, so lets not worry.

  • 49.
  • At 02:58 PM on 06 Dec 2007,
  • John Doe wrote:

So, Evan, things may go badly, very badly, or they may go well.

Goodness me, how do you come up with such profound insights.

Very good as usual Evan, however I would like to point out that the net strength of household balance sheets (ie: after all borrowing) has never been higher.

Very roughly; personal debt is outweighted by various assets 3 to 1. (source: HBOS 2007)

We do live in interesting times I agree, but there are fundementals underpinning the UK, these will all have to erode simuntaneuosly and completely before we go into a tail spin (doubtless there will be plenty of doom and gloom merchants soon on here.)

The BoE finally got their act together today; February will, probably be the next one - with a pause.

Inflation? Well who says it has to be 2%? Australia has a 3% target and manages its economy extremely well.

Other economies we are in awe of at the moment have inflation targets of twice that! - I would suggest we just revise the target to 2.25% or even 2.5% and stop strangling the baby unnecessarily!

I rather get the feeling I am about to get 'flamed' from all sites - but I do like a bit of banter.

  • 51.
  • At 02:59 PM on 06 Dec 2007,
  • Darren Sawyer wrote:

The BoE doesn't try and control housing booms becuase it's mandate is controlling inflation. The CPI measure used does not including mortgage costs.

Only when house prices fall does the BoE step in with a cut for the simple reason that housing market busts take the economy down with them.

All those cheap goods from China and cheap services from India should have seen the CPI falling, instead we get super low interest rates and a huge asset bubble in housing.

The credit bubble we are in is larger than the one that triggered the Great Depression... merry xmas all.

  • 52.
  • At 03:06 PM on 06 Dec 2007,
  • Richard Sanders wrote:

Interest Rates down 0.25% - well there is a surprise following the recent ground swell of public opinion, I thought the Bank of England was independent!
Unfortunately, the younger generation think that interest rates over the past 10 years are normal and the country can continue on this "buy now, pay later" ticket that has to come to an end. Property values are over inflated, growth has been to rapid and inflation is set to rise.
Incidentally, many people do not know what the word "Recession" means and for the avoidance of doubt, let me remind you of the one in 1979: -
1. High Interest Rates
2. High Inflation
3. A Labour Government past it's sell by date.
The only part missing at the moment is unemployment, which I believe is only just round the corner. The moral of this tale is that a correction is required in the financial world for the benefit of us all which the current rates seem to be having an effect, but we are now moving back to where we came from.

  • 53.
  • At 03:07 PM on 06 Dec 2007,
  • mark wrote:

Rates should be going up not coming down..

Our business is not suffering due to lack of sales far from it, we are booming in that dept..

It is inflation that is killing us..

Real inflation we have calculated is around 9%

What the BOE rely on is doctored figures with barely anything in them.. So how can they rely on bum figures?? What they do is drop rates...fools

  • 54.
  • At 03:17 PM on 06 Dec 2007,
  • GM wrote:

Inflation is rising. And interest rates are dropping. Beggars belief. I'm just glad I moved my deposit to euros at the beginning of the year. Looks like inflation for the UK.

  • 55.
  • At 03:19 PM on 06 Dec 2007,
  • Stephen Wyman wrote:

The OECD stated today that Europe has decoupled itself from the United States.

I personally believe that the UK decoupled itself from the United States and coupled itself with Europe a decade ago.

So it is whether you think the UK is still Coupled with the United States, that you should set your Scenario Targets.

It is a matter of whether you are innovative enough to sell the goods that the world wants and is prepared to pay the price for or whether you want to be competetive enough to sell to the world anything you want on price.

I believe that our economy is currently based on the firsr scenario and America's economy is becoming based on the second.

Also through the National Lottery and European drip feeding of development grants our national Infrastructure is slowly but surely improving and becoming world class.

Americas National Infrastructure however is about twenty years behind us. America now needs to speed up its infrastructure development, ween itself off oil as far as possible, embrace the Green Technologies and substantially increase its electricity generating capacity.

If it does this then it can capitalise on its current devalutation and bring its trade deficit into balance. It it does not do this, then it will continue to be caught in this current downward spiral. As it will not hav enough capacity untilisation to fully take advantage of the current situation.

As far as the United Kingdom is concerned, those who have taken full advantage of their equity will no longer be able to borrow any more on a secured basis.

However providing their income is still rsing they will be able to use their credit cards managably.

Also those who do not own a house but have secure and rising incomes, will still be able borrow on an unsecured basis (but of course at slightly higher interst rates).

Also they are also likely to be the most Credit Worthy people over the next five years. For if they can afford their rtents without difficulty and their rents equal the repayment levels required for a mortgage. Then they will be able to own their own house.

So house prices will fall and rents will rise to a level where those renting accomodation will equal the cost of buying accommodation and that gap is closer than people think.

So people who have not joined in the equity boom and people who have been hesitant borrowers will take our economy forward.

Also the UK's average population is getting older and that means people will inherit more and those inheritances will boost peoples pensions as well as reduce their debts as we go forward.

So, in conclusion, there are still enough areas of wealth in our economy to prevent it going the same way as the US economy.

Mainly because our economy is no longer linked to it because our overall infrastructure - physically, monetarily and economically is much better than theirs.

Therefore we should not prepare for the worst because the overall state of the UK economy is, I believe,is not as black as you are painting.

  • 56.
  • At 03:20 PM on 06 Dec 2007,
  • The Plinth wrote:

Spot On Even.

As an old stockbroker once told me "The markets can move in one of two directions at any time, so follow your instinct and then bet against it."

My city indicator of boom times - the queue of people outside Paul, the upmarket French bakers on Fleet Street outside Goldman Sachs - was down today to a couple of lost tourists.

I think Merv has delivered us a festive swevre from a Christmas Eve we may have all wanted to forget.

Eat Drink and be merry this Christmas...a long cold winter awaits.

Anyone want to buy my classic mercedes and grand piano? I thought not!

  • 57.
  • At 03:22 PM on 06 Dec 2007,
  • Bebedi wrote:

Spot on Evan, however I still feel the Bank has reacted to the noise from the the press and bankers. Personally I thought they would leave it on hold. But they couldn't win today , they were damned if they did or didn't. The reality is, it is still a token gesture and probably somewhere around March next year they'll have to look at the inflation figure and at that meeting the real picture should emerge. The worse case scenario is if inflation (RPI) continues to rise this cut will fuel the pay rise demands and they might have to reverse this cut.

  • 58.
  • At 03:23 PM on 06 Dec 2007,
  • Mary wrote:

The real pity is that housing was deliberately excluded from the inflation index which the Bank was supposed to manage. Brown's vast expansion of the public sector and increase in its salaries had only one place to go under New Labour - classic demand-pull inflation of house prices. Rates should have been cut a year ago; I've been trying to sell a (jolly nice) flat since September 2006 and despite several very deep cuts totalling 40% of the original agent-advised price over the period it still hasn't gone. I don't want to be a landlord but it looks like I've no other option...

  • 59.
  • At 03:32 PM on 06 Dec 2007,
  • Ian wrote:

The interest rate cut is a bit disappointing but in view of the general consensus of opinion I think the B of E had little option but to do something and soon.

This won't turn round confidence and the economy as many people are either locked into long term fixed rate deals on their mortgages or have annual reviews. All this will mean to me is that I will effectively be overpaying my mortgage by about £7 a month up until next September.

The real concern is inflation and particularly in areas people cannot avoid.

My train season ticket is going up 5.2% from next month. The price I pay for a pint of milk at Tescos has gone up 21% (from 33p to 40p); a small loaf of bread has gone up 15% (from 52p to 60p) and the diesel I put in my car by 16% all in the last six months.

This is going to push up inflation and increase the tension for increased pay rises next spring and summer.

Are the council tax rises coming out to day or later this week? I can't see those being below 2% can anyone else?

  • 60.
  • At 03:33 PM on 06 Dec 2007,
  • GM wrote:

Inflation is rising. And interest rates are dropping. Beggars belief. I'm just glad I moved my deposit to euros at the beginning of the year. Looks like inflation for the UK.

  • 61.
  • At 03:34 PM on 06 Dec 2007,
  • Anna wrote:

I would just like to add that the drop in interest helps my partner and i who are on small wages and have only just bought our little house, after both starting out in flats you wouldnt let your dog stay in. 95% of our wages go on bills and i am looking for a second job just to cope.

I just want to say to the people who are looking forward to the drop in house prices that they may be in for a shock as if the prices do drop many people wont be able to afford to move so you first time buyers out there will be able to get your foot on the ladder but will probably have no where to move to....

  • 62.
  • At 03:34 PM on 06 Dec 2007,
  • David wrote:

Evan's bad case scenario reads much more plausibly than the good. Even to the detail of stating that ... things may go quite well next year... rather than will, or should.

Remaining with the earthquake metaphor it is no use being 'wary' of the horrors, one must be prepared for the horrors. Presumably this means having accommodation available elsewhere. This is anagous to having savings; and there's the rub. It's starting to build the alternative accommodation at this late stage that means one is away from the site. Hardly being wary in the short term.

  • 63.
  • At 03:41 PM on 06 Dec 2007,
  • john thomas wrote:

#54 You are wrong regarding rents. I work in a property management office in Ipswich. Here atleast monthly rents are currently half the equivilent monthly morgage cost for the same property.

I'm an estate agent and I rent.

  • 64.
  • At 03:51 PM on 06 Dec 2007,
  • Colin Paton wrote:

I don't know what article 'Scamp' (01:12) read, but it wasn't the one i read by A. Kaletsky (!) Dear me...

I agree with everything Kaletsky says, though, as Evan points out, there are a number of economic factors that give encouragement, such as healthy corporate profits and low unemployment. I fear, however, that as the consequences of inappropriate financial market activity, particularly relating to credit markets, become fully apparent in the months/years ahead this will indeed catalyse any economic slowdown - you could say we have had a few warning tremors, one minor earthquake (Northern Rock), but not yet a big one/s.

  • 65.
  • At 03:53 PM on 06 Dec 2007,
  • John Braddock wrote:

I am not an economist but it seems to me that if you are trying to control a large and complicated economy with only one option ( interest rates ) then you are not in control of anything.

  • 66.
  • At 03:57 PM on 06 Dec 2007,
  • Paul wrote:

Good article but I was amused / interested to read: "...a slowdown is gathering pace" in your opening paragraph. Does that mean things are getting slower or faster? ;-)

  • 67.
  • At 04:07 PM on 06 Dec 2007,
  • vsn wrote:

While rising house prices make people feel rich, they only really benefit those who downsize, i.e. people close to retirement, whose children have perhaps left home and who don't need the space anymore.

On the other hand, it's misery for people like me who have recently started a family and need a bigger house with an extra room or two. The prices have risen so much that we cannot afford it and end up paying rent to a buy-to-let leecher.

It's also misery for the first-time buyer.

In the end, it's a transfer of wealth from the first time buyer, who needs it most, to the people downsizing, who don't.

All this has been fuelled by a culture of ever-increasing borrowing. An economy built on debt. And Gordon Brown is to blame for this.

So bring on the house price crash! Raise interest rates to 10%! Abolish tax reliefs on mortgage payments and maintenance for buy-to-letters! See if I care.

I wish for a general election...

  • 68.
  • At 04:12 PM on 06 Dec 2007,
  • chris wrote:

It is a bit of a gloomy analysis, especially since banks do have some additional flexibility in who they lend to. The media do indeed have a responsibility to cool temperaments rather than hyping us into a downward spiral.

  • 69.
  • At 04:13 PM on 06 Dec 2007,
  • Andrew Dundas wrote:

It'll be US inter-bank lending in January that'll indicate whether this crisis is passing, or not. If the Fed's release of extra funds doesn't calm things for US banks' year-end accounts, their crisis will be our credit squeeze too.

Fortunately, the UK has much lower national debts than in the past and compared with other countries. That means we've scope for a fiscal stimulous in the March Budget, if it's needed. Thank Goodness!

Perhaps George Bush's legacy to the world will now add recession to Iraq, growing terrorism and mutual antagonisms? Quite an achievement really!

  • 70.
  • At 04:19 PM on 06 Dec 2007,
  • Andy wrote:

So the BOE reduces rates to "save" the people who didn't manage their finances adequately and whose case has been taken up by tabloids ? Perhaps focussing on their prime target of inflation would have actually lead to a different conclusion, but then Merv can always go back grovelling to No10 early in 2008 when his target inflation rate is missed by 1%

  • 71.
  • At 04:35 PM on 06 Dec 2007,
  • Tony wrote:

Call me a spoilsport but in terms of actually affecting the economy I thought that interest rate changes took about 18 months to affect the real economy so this feels like Keynesian economics is that when liquidity is tight the rates are loosened to ensure money moves around the economy. But we have inflationary pressure at the moment so boosting the supply of money might further reinforce that so I think you're spot on - this is too close to call - it might work , but then again it might not. Unless of course the intent is a 'signal' to the market required by the politicians ..?

  • 72.
  • At 04:48 PM on 06 Dec 2007,
  • Ian wrote:

Charles Dickens(via Mr.Micawber) had personal economics sussed ie.speding more than your income can only result in trouble. If the same applies to macroeconomics then a lot of Britns will experience a lot of misery soon and for the foreseeable future.

  • 73.
  • At 04:49 PM on 06 Dec 2007,
  • Simon Stephenson wrote:

Comment 37 : Ian Ryder : 2.21PM

Thsi is exactly what I'd like Evan Davis to address. We are in a position where average house prices are 8 to 9 times average income, having never in history been higher than 5 times. Even Ian Ryder's scenarion of a 50% drop will only bring average prices back to the top end of the historic range of multiples of income.

I appreciate that one must also take into account the level of interest rates in assessing the sustainability of a situation, and that if interest rates remain very low into the forseeable future, it's quite possible that high house price/income multiples could continue to prevail. But is it possible to say that low interest rates will, actually, be able to continue into the forseeable future?

The other thing about house prices in the UK is that it is very much a false market, obfuscated (perhaps deliberately) by the planning laws, whereby a piece of land can increase in "value" 150-fold overnight as the result of the decision of a committee. On top of this, the quoted price of a new house bears no relation to the cost of it's construction. Where we are now is that house prices are arguably 3 or 4 times as high as their real economic value. And there are huge obstacles in place to prevent market competition from bringing this ratio back into balance. This situation has been going on for so long that we appear now to have so many vested interests in its continuation for it ever to be allowed to correct itself.

What a complete nonsense!

  • 74.
  • At 04:54 PM on 06 Dec 2007,
  • Ian wrote:

Charles Dickens(via Mr.Micawber) had personal economics sussed ie.spending more than your income can only result in trouble. If the same applies to macroeconomics then a lot of Britons will experience a lot of misery soon and for the foreseeable future.

I totally agree with the conclusion. We should be aware of the potential dangers but should not get ourselves into a panic mode. I think that is the real cause of the economic downturn.

  • 76.
  • At 04:55 PM on 06 Dec 2007,
  • harry e wrote:

With inflationary pressures as high as they are, the rate reduction says to me the mpc is firstly very worried about the banking crisis and the fact it could get worse...and therefore we should be worried too.

Secondly, that the banking crisis is itself doing the job of the mpc by raising rates by over 1% above LIBOR and therefore Mervyn and the bank staffers could vote with the rest of the mpc to cut rates by .25%...leaving effective interest rates still far higher than where they were before the liquidity crisis.

Look for more reductions in the months ahead. But look also to a continuing slowdown.

  • 77.
  • At 05:00 PM on 06 Dec 2007,
  • will wrote:

A while ago I posted a comment to the effect "we'll all pay for this" when the Fed cut rates in the USA. It's the same here. It would be hard to prove that the bank yeilded to pressure - media, business, et alia -but remember how we got into this mess. The aggresive rate cutting that took rates to 3.5%. Too far, too soon. This time it is just too soon, and the reckoning will come

  • 78.
  • At 05:15 PM on 06 Dec 2007,
  • Doug Morgan wrote:

As a retired Estate Agent (yes, I can finally tell the truth now!), I would say that the boom in house prices has been largely underpinned by people's speculation and greed. Most of the froth in property can be put down to this speculative factor rather than the more anodyne economic factors like interest rates. Cutting interest rates won't have a big effect in curbing a slide. What is going to cause a fall is the creeping and widespread realisation that people won't be able to make money from property anymore.

  • 79.
  • At 05:19 PM on 06 Dec 2007,
  • Will wrote:

Bank of England Mandates:
Core Purpose 1 - Monetary Stability
Core Purpose 2 - Financial Stability

And November's inflation report:

On reading this, which presumably people that base their perception of future CPI on outliers don't, rate cuts are needed soon to maintain inflation over the medium term at 2%.

Presumably, the main reason it has come early is to protect Financial Stability as well. The second important, if not often touted, of the bank's policy objectives.

  • 80.
  • At 05:25 PM on 06 Dec 2007,
  • Andy wrote:

Why would anyone pay the slightest attention to anything Anatole Kaletsy says? Check out his calls on the US dollar. For the last two years he has been plastering himself across the papers calling for a major strengthening in the dollar. He is the worst commentator imaginable. His dollar call made me choke on my cornflakes. He has no understanding of the fundamentals. And neither does anyone else who does not point out that interest rate cuts devalue the pound in your pocket and lead to higher prices, whether or not government statistics are able to evade measuring them.

  • 81.
  • At 05:36 PM on 06 Dec 2007,
  • Alexander wrote:

A nice balanced piece Evan, but whatever happened to the idea that occasional recessions are a good thing to cleanse the system,

When good times tip into a lala land where senior investment bankers 'keep dancing' and BTL types bore for Britain about what a one way bet residential property is then it is a good idea to have a shallow recession I think.

Look around. What about all those huge city centre commercial properties which lie empty for years but whose massive upward only annual review relentlessly polishes the NAV of many an institutional fund....until returns inevitably falter, investors want their money out and can't have it.

Bring it on and quick is what I say.

  • 82.
  • At 05:39 PM on 06 Dec 2007,
  • confused wrote:

Could anyone advise me if I should go through with the purchase of the flat (due to exchange next week!!!)

We agreed on the price in Oct but since then I have been watching all other properties in the neighborhood falling in prices, some by even as much as 50K

Should I buy it?

Or wait a year for it to drop by 100k or so to its price from a 1-2 years ago??

No need to add that sellers are VERY keen to exchange ASAP...


  • 83.
  • At 05:51 PM on 06 Dec 2007,
  • Andrew wrote:

To poster Richard Sanders (52). Unemployment is here excpet Nu-Labor have spun it into higher education (courses in business and law presumably) and incapacity benefits.
We have out of control government spending and out of control personal lending. The solution to this was obviously to cut rates!!!!!!

The housing market has grown on a wave of easy credit which is now unavailable even following this disastrous move by the MPC. What they have done is sacrifice Sterling's buying power to save house prices. So inflation is now secondary to house prices. Inflation could in theory leap to around 7% owing to this move and the general rise in the cost of living. Well done Bank of England!

And Evan, for pity's sake get off the fence. "And in the economy right now, we can hope for the best but need to prepare for the worst." is hardly insightful economic commentating is it. Maybe it will rain maybe it won't I dunno either.

  • 84.
  • At 05:51 PM on 06 Dec 2007,
  • Andrew wrote:

Seems to me like the BoE has either given in to media pressure or implicitly admitted that house price inflation is the real driver of the British economy. Maybe we should rename the MPC as the MYPFC (Make Your Property Fortune Committee).

  • 85.
  • At 06:33 PM on 06 Dec 2007,
  • Anne Kelly wrote:

I feel the tone is rather too relaxed with regard to the deteriorating trade deficit and inflation.

The trade deficit is hardly ever mentioned these days but is very large (comparible in % terms to the USA) and history shows is not trivial to reduce without severley impacting growth.

Inflation really looks dreadful on a real i.e. RPI basis - ca 4% per annum for the last two years with no sign of a slow down.

With so much of the economy being in the public sector (and therefore unable to generate exports) unfortunately I think there are real problems turning both these items around.

To me the prospect looks like stagflation and a sharply lower exchange rate both developing over the next 18 months.

  • 86.
  • At 06:47 PM on 06 Dec 2007,
  • John wrote:

In all of this hubris and wailing and gnashing of teeth I wonder if people will remember when they turn to the traditional safe haven of Gold,that Dear ol' Gordon Brown, Ruth Kelly and Eddie George sold half the nations Gold Reserves between 98-2002 at well under $290 dollars an ounce. The price now? heading towards $850 an ounce which by my reckoning equates to about $5Bn lost to the nation.. more when you consider that previously locked in value will have been wasted by now.

  • 87.
  • At 06:49 PM on 06 Dec 2007,
  • james walter wrote:

I heartily agree with the idea of raising interest rates, at the present time.
Surely doing this will keep inflation under control,encourage people to save,and stop house price hyper inflation.
The only losers will be the greedy and the morons who have overextended themselves with cheap credit.
James Walter

  • 88.
  • At 06:56 PM on 06 Dec 2007,
  • David Wainwright wrote:

Only an Economist would talk about a 'slowdown gathering pace'.

I agree, the slowdown is inevitable -- always has been since house prices became mere fictive numbers. I'm always surprised by 'insiders' who tell us that it's gonna be good or bad when everyone clearly sees it anyway. Almost two months ago I made this comment (

"But now large RE’s start asking questions before borrowing to banks. UK banks find it harder to get the money to pour out to first-time house buyers thus fewer buyers thus lower house prices thus restrictive consumer lending thus lower spending thus lower growth thus lower trust in the UK economy thus even higher inter-bank borrowing rates and so the spiral goes."

Now, add to this scenario that local pressure forces the central bank to make dangerous concessions ("the MPC has no semblance of independence", Mark, comment 11). Then look back two decades when "drop[ing] interest rates ... worked for about 9 months" (Greg, comment 13). These are just a few comments that they make clear that doing the right thing is no mystery.

Unfortunately, it remains a mystery for those responsible for steering our economy. Or, is it simply that"monetary policy in UK is for the rich and not the common man" (Deepak, comment 14)?

  • 90.
  • At 07:23 PM on 06 Dec 2007,
  • Sebastian Llabres wrote:

Can I just say, will people stop trying to debase an argument because they think it's "Doom and Gloom", some of us actually have rational arguments to make!

I'd love to here counter arguments as to how an economy based on debt and greed is going to sustain itself..There is no doubt that were in for a rough time.

Yeh, I love the comments by Stephen Wyman about how the UK is different despite the fact that historically we always follow suit. Hey, look, I can do it too: "This time is different" :D

  • 91.
  • At 07:52 PM on 06 Dec 2007,
  • Geoff Richmond wrote:

I am genuinely puzzled - please explain!
Being retired, bulk of my income comes from interest upon savings (with various High Street Banks)
If the SUPPLY (of money to Banks) is not keeping up with DEMAND (for money by Banks - e.g. Northern Rock) then why are
they not having to pay more for the money that they borrow from ME???

secondly, if Banks are no longer the 'safe' holders of our money to the extent that they once were, then they are surely by definition 'worse' credit risks than they once were? Same question applies - why are they not having to pay more to borrow from me?
Would genuinely appreciate your comments

  • 92.
  • At 09:58 PM on 06 Dec 2007,
  • StorminNorman wrote:

As a business start up specialist I have noticed that things have been slowing for a number of weeks and confidence is fragile. In 13 years our trends have never failed to accurately predict the economic cycle, whether in specific sectors or as a whole, for better or for worse.Normally this sector is busy from late January. This rate cut alone may not be enough to ensure things pick up in the new year and it will depend on sentiment over many festive lunches when many people are planning what to do in the coming year.I further cut early on may just send out the right signal to hesitant entreprenuers. But does it fit the Bank's plans?

  • 93.
  • At 10:28 PM on 06 Dec 2007,
  • Bruce wrote:


What I don't understand is that this evening on the 10 o'clock news you gave the example of 'Mr & Mrs Turner' with their £100K mortgage coming off their fixed rate deal of 4.95% next year and now having to pay 6.5% wasn't it? Yet the N/W Bldg Soc are currently offering a 5 year fixed at 5.63%. More I know than 4.95% but a lot less than 6.5%. Are you and fellow journalists not just exagerating the situation or am I missing something?

This seems odd to a simple person like me.

There is a 'credit crunch' we are told. So the reaction is to make money pay LESS well for those who might lend their savings to the banks? This looks like idiocy.

We are also told the banks are lending to one another at a higher rate, so why not match their market generated rate!

We are told of the 'poor' borrowers, coming off beneficial fixed rates having to pay a measly 2% or so more! Big deal! Rates used to do that in a couple of rate changes years ago.

House prices drop a minuscule amount and this all of a sudden is ANY problem! far from it it is grossly overdue and wanted be everyone, prices need to halve at least. Anything to help that price drop is GOOD.

So I am left assuming the important rich business owners or new peers are the only ones being served by this sort of daft move. After all inflation is rampant in the real world rather than the carefully directed 'official' figure too.

Double rates not reduce them.

  • 95.
  • At 10:35 PM on 06 Dec 2007,
  • Bonny lad wrote:

Surprised that Evan Davis has not mentioned the proposed clampdown on income shifting that is going to throttle entrepreneurs - aspiring ones and real ones. G Brown created a benign supportive environment for entrepreneurs where risk was rewarded. Now, the tax technicians are running the rulebook and A Darling is single handedly wrecking entrepreneurial Britain. Banks? Credit crunches? Plus or minus 0.25%? All nowhere near as important as people that make things happen. Watch them be airbrushed out of the economy thanks to Taxation Britain - that is the real threat.

  • 96.
  • At 10:49 PM on 06 Dec 2007,
  • Copperfield wrote:

The greatest good for the greatest number?

The potency of the current MPC, with interest rates as its only tool to promote growth and control inflation, is diminishing. Its days are numbered.

  • 97.
  • At 11:55 PM on 06 Dec 2007,
  • Chris Brown wrote:

Nice Evan... "things might go badly, or they might not." Nothing like nailing your colours to the mast, eh?

  • 98.
  • At 12:09 AM on 07 Dec 2007,
  • Jeff Gray wrote:

"a gentle fall in the value of the pound". What an interesting comment. Isn't there a danger that reducing interest rates provokes a sterling crisis as well as leading to a rise in inflation? Inflation is rising and the present fall in the value of the pound versus the euro must be adding to inflation. The Fed has cut U.S. interest rates and look what happened to the value of the dollar. Will sterling's value also collapse?

Hi Evan,
i quite understand your non committal as to what will happen to the economy.The reasons are obvious-our economy is heavily service oriented as well as consumer driven.The BOE have a balancing act to make -on the one hand to keep inflation down and with the other to keep consumer spending on the high street-very delicate balancing act which in most cases is difficult to achieve.Our exports have continued to decline not helped of course by the strenghtening of the currency.What is needed is for the BOE to be proactive in their interventional role not like the way it reacted in the Northern Rock saga as well as todays' rate cut.It had to take lobbying from industry.

  • 100.
  • At 01:09 AM on 07 Dec 2007,
  • John Montgomery wrote:

This all started because the Central Banks were too swift in putting interest rates up earlier in the year. The consequence is both a slowdown in economic growth AND increased inflation as interest rate hikes put up housing costs. Added to this are the price of petrol and wheat (which no-one can do anyhing about). So now every business that can is putting up prices. Pressures for wage rised will follow. In my view, the Central Banks did not know what they were doing back in June and July (the US Fed especially); I doubt very much if they really know what they are doing now.

  • 101.
  • At 06:22 AM on 07 Dec 2007,
  • Mark Summers wrote:

I've been reading yours and Robert Pestons blogs over the last few weeks and I now feel the need to get a few of my thoughts out in the open.

To me, the easy supply of credit over the last few years is like a drug - you know it's doing you harm in the long term but it makes you feel good and so you become dependent on it. Yesterday the MPC had the oppotunity to start the slow, gradual withdrawl of our 'fix' by leaving interest rates unchanged. Instead it chose to keep on supplying 'credit' to all and sundry thereby making the prospect of sudden, painful withdrawl more likely in the future.

Consider this, my three children, oldest 25, youngest 18 have never known anything other than easy credit availability during their economically active years. They have been able to take out large bank loans and practically had credit cards and overdrafts thrown at them even when they were working part-time on minimum wage! Even with all this they will be unable to buy their own homes unless house prices fall significantly.

It never ceases to amaze me when I get my credit card bill how little one is required to pay off the minimum payment - AROUND £20 FOR A DEBT OF £1000! It's not surprising that people run-up thousands of pounds on their cards simply by paying only the minimum payment every month. It's a bit like only ever putting £20 of petrol in your car each time you fill up - it takes a long time to realise that you're gradually getting less far each time the price goes up.

Looking at the wider picture, until recently, I thought I had a basic laymans understanding of economics but now I'm beginning to wonder. A question - If the UK population has a trillion pounds of debt where has that money come from? I realise that some of this is secured on property but has the rest just been conjured out of thin air. Shouldn't all this extra 'unearned' money sloshing around the system have made it worth less, ie fuelled inflation more than it has? Is there another factor at work here?


  • 102.
  • At 08:42 AM on 07 Dec 2007,
  • Ian Kemmish wrote:

The thing that most struck me about the graph in Anatole's article (and the one you showed on air) is that the commercial cost of debt has recently become decoupled from what the MPC says it should be. (The test of this observation, I guess, will be what happens to the Libor rate over the coming days and weeks.)

Now, for as long as I can remember, people have complained that UK interest rates have been caught between the Scylla of being too high for business and the Charybdis of being too low for consumers. If the cost of debt in these two markets could become decoupled from each other, just as both are currently decoupled from base rates, might that be no bad thing? How might this come about? What's stopping it from coming about?

  • 103.
  • At 09:03 AM on 07 Dec 2007,
  • R Forster wrote:

Looking at a bigger picture, are we experiencing something new and fundamental to what we know as Capitalism painted with the colours of the American Dream, and the invention of mass consumerism. Are we seeing the symptoms of inherient weakness in the means of production, globalisation, the profit imperative, and credit. Are we, like global warming, running out of 'affordable markets'.

  • 104.
  • At 09:34 AM on 07 Dec 2007,
  • Andy W wrote:

High interest rates were necesary to get some reality bsck to the economy (especially wrt the daft house prices).
This seems to be happening, the impact is likely to be a slowdown in spending - as we can't contune to grow the credit mountain for ever.

The question is will a nation of shoppers (US and UK) suddenly change - I would have thought that it's a but naive to think this will be the case. Retail therapy will continue, but at a lower level (hopefully)until the books are better balanced.

Expect continued media over-reaction for three months followed by a back to normal economy based on lower borrowings, sensible credit management and more sensible house prices.

  • 105.
  • At 10:19 AM on 07 Dec 2007,
  • Chris wrote:

A tip to anyone considering buying a house on a falling market.
Ask your surveyor for a "forced-sale valuation" - in other words, its absolute rock-bottom value if you have no choice but to re-sell immediately.
The difference between the two is what you potentially stand to lose. You may be in for a shock.

  • 106.
  • At 11:04 AM on 07 Dec 2007,
  • john-henry wrote:

Rate cuts won't be able to keep property prices at current heights, that's for sure. What's also sure is that Sterling has dropped significantly, and by that, will push up inflation in our import based economy in the next coming months. Whatever way you look at it, we have robbed the future for too long and are now footing the bill. Further rate cuts merely prolong the process. The most indebted nation in the developed world. Who was chancellor of the last 10 years?

  • 107.
  • At 12:13 PM on 07 Dec 2007,
  • Newbie (Kevin Chadwick) wrote:

Is the rate cut also to do with all those people with their fixed mortgages coming to an end next year.

So the bank has reduced the rate to help them get a slightly better deal when they look to renew?

  • 108.
  • At 12:15 PM on 07 Dec 2007,
  • Nick Molyneux wrote:

Wow Evan! "next year things might go quite well. But they might go badly, or very badly". With predictions like these have you considered a career as a fortune teller? I predict that next week, the weather might be quite sunny and dry, but equally it could be a bit wet, or very wet.

  • 109.
  • At 11:42 AM on 17 Dec 2007,
  • gg poullain wrote:

If British companies are profitable, which is debateable, working for them isn't. Most UK workers don't earn enough to pay for the basics. They (we) have to use credit cards, overdrafts and loans to pay the bills and buy food.

  • 110.
  • At 06:07 PM on 19 Dec 2007,
  • Alan wrote:

I agree with John Henry - who was chancellor for the last 10 years and who also said no more boom and bust economy under Labour - but this is the mob that sent our hard pressed troops into Iraq looking for wmd that did nt exist so I dont believe a single thing they tell me now - its time they resigned for being incompetent and untruthful and for not representing the people that voted for them.

  • 111.
  • At 09:04 AM on 20 Dec 2007,
  • ExPat wrote:

How can I get LIBOR rates on my savings instead of the totally artificial rates offered by my BS?

  • 112.
  • At 04:36 PM on 20 Dec 2007,
  • Andrew Dundas wrote:

On balance I fear that the negative stories owe much more to the preference for bad news over good. There is a smallish risk that things could go horribly wrong but I doubt it for these reasons: the pound is now valued (for the first time in 12 years) at a sustainable value vs the Euro & related currencies wherein 65% of our exports lie; banks make profits by lending money and currently the BoE is making the most of their withdrawal from lending. Moreover, worldwide GDP is likely to continue growing strongly in 2008. Employment remains strong in the UK and that is the prime driver of our optimism. So why be gloomy, when there's little need?

  • 113.
  • At 04:55 PM on 20 Dec 2007,
  • Vidar Hokstad wrote:

Please, please, please let house prices drop. I say that as a house owner. For most of us a house price drop is a good thing in the long term. The ones who are hurt are the ones who want to trade down in size/value or who get into negative equity and have to sell for whatever reason.

For the rest of us lower house prices means it cost less to trade up, which is what most of us spend a good part of our working life doing.

I don't mind if my house lose 1/3 of it's value, because it means the bigger house I'd love to be able to afford will likely have lost far more in absolute terms than my house, and it'll be far closer to be within reach.

I just wanted to mention this since peope seems obsessed with the growing equity they have tied up in their houses, and often forget that while increasing house prices increase the equity it also reduces the value of it for the purpose of trading up to a larger house.

  • 114.
  • At 12:52 PM on 28 Dec 2007,
  • Duncan wrote:

In response to Ex-pat's comments - how about borrowing £50million at a time for a 3 month period (re-mortgaging every 3 months. Then you can get the LIBOR rate!!

It will all end in tears! It’s cyclical, but this time it could be much worse. Maybe not this year but then next year. Get into cash aka go liquid (but they print that stuff) so it’s gold and resources. That’s been my modus operanti for 5 years, and I was late (in my view) joining the party! Have a good year, not many will, oh and if you dont believe in global warming, do you trust the despots and dictators who'll strangle us if we want there oil & gas?

Post a comment

Please note Name and E-mail are required.

Comments are moderated, and will not appear on this weblog until the author has approved them.

Required (not displayed)

The BBC is not responsible for the content of external internet sites