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Questions for QE

Stephanie Flanders | 14:47 UK time, Thursday, 7 January 2010

One more month, then it's make-your-mind-up time. Today, the Bank of England's policy-makers decided to leave everything as it was. It would have been a shock if they had done anything else.

Circa 1735, a columned portico and triangular tympanum at the main entrance to the Bank of England, from Maitland's 'London'But on 4 February, it will be a different story. Then, the committee members will have to decide whether to expand one more time the asset purchase programme fondly known as QE - or, as so many people expect, put it on pause. Crucially, they will also have to work out how they are going to explain it.

It's probably never been more important for the Bank of England to provide a lucid explanation of its actions - or more difficult.

We tend to focus on the gilt market piece of this. Clearly the MPC wants to avoid a big bond market sell-off in reaction to a pause in QE. If they indeed put the policy on hold, they will want to find a form of words that emphasises the conditional nature of the decision.

There may be no way to prevent City headlines proclaiming that QE is over. But you can expect them to do their best. Maybe they could have the statement bid "au revoir to QE, but not necessarily farewell". Then again, maybe not.

But, in my view, there's a much bigger problem with explaining the MPC's actions, which is that even if they all agree that a pause is the right way forward, they won't necessarily agree on why.

The "textbook" reason to pause would be that £200bn in asset purchases is enough. It may not be obvious right now, but that's just because the lead times are even more "long and variable" (in Milton Friedman's phrase) than usual.

On that view, putting even more cash into the economy could risk further distortion of the financial markets - and could even be counter-productive if it raises market fears of asset bubbles and/or excess inflation down the road, pushing up long-term interest rates as a result. All the MPC needs to is sit back and watch, as the fairly strong recovery forecast in their latest November Inflation Report takes place.

To repeat, this is the "textbook" reason to pause. MPC members refer to the same textbook when they give speeches explaining how QE has worked. David Miles ran through the litany, in passing, in a thought-provoking speech [91Kb PDF] about the future size of the UK banking system just before Christmas:

UK corporate bond spreads

"Since QE began corporate bond spreads have fallen sharply; for both investment-grade and non-investment-grade bonds, to their lowest levels since September 2008. And since the beginning of the QE policy, the FTSE All-Share Index has increased by about 45%."

UK equity price indices

"Falling corporate bond spreads and rising stock prices have encouraged companies to raise funds in the capital markets. Cumulative corporate bond and equity issuance in 2009 has been much stronger than on average during 2003-2008."

Gross corporate bond and equity issuance by PNFCs

Here endeth the lesson. But even if QE has achieved all of this, you can still view it as a deep disappointment.

David Miles goes on to mention that since the beginning of 2009, the British non-bank corporate sector has repaid £45.2bn in bank debt - more than the net £38.4bn that they have raised on the capital markets.

Monetarists like Roger Bootle, firm supporters of the policy, have been particularly dismayed that, nine months on, lending across the economy is still so weak. As he says in a note today:

"[T]here is still little evidence that the MPC's policy of quantitative easing (QE) is having the desired effect on money and credit. At its last meeting, the committee deemed the rate of broad money growth 'disappointing'. That's an understatement - the money multipliers have collapsed."

As I said, he's a fan of QE. He thinks that all this is a reason for the MPC to offer the economy another "shot in the arm" next month. The policy-makers may decide to follow his advice.

But, as I suggested in my pre-Christmas post, there will be some on the MPC who favour a pause, not because they are sure that the policy has worked, but because they think it quite possible that it will not.

I know that at least one member of the committee thinks that if £200bn hasn't worked, it's hard to believe that another 25 or 50 billion will make all the difference.

In that latest Inflation Report, the Bank was quite clear about the downside risks to the "central projection" for a decent recovery. True, the charts showed the single most likely outcome, in the Bank's view, was economic growth of more than 4% in 2011. But the mean - average - forecast was around 3%, because there was still so much in the recovery scenario that could go wrong.

And top of the list of things that could go wrong is that QE does not have the larger long-term effect on the economy that the textbook hopes for and fondly expects. The traditional channels for lending in our our post-crunch economy might simply be too bunged up for QE to turn things around.

In that same post, I said the Bank and the Treasury were quietly thinking about a Plan B. 4 February will not be the day for rolling it out. The textbook scenario could yet materialise.

As I've said, if they decide not to authorise further purchases of assets, they will want to explain that a pause in QE does not necessarily mean the end.

What they will not want to explain - in so many words - is that the end of the policy will not necessarily mean that it has worked.


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  • Comment number 1.

    Lending across the economy isn't being helped at all by banks hoarding QE monies and "repairing their balance sheets" (a.k.a. profiteering) with high interest charges and rip-off arrangement fees. Indeed, many banks are still more concerned with reducing overdrafts rather than offering new facilities. Base rate may be 0.5%, but the differential between that official rate and what we are actually paying for credit is the greatest it's been for years. Far from helping the economy, banks are still kicking firms and individuals while they're down and until that stops the economy is going nowhere. [Unsuitable/Broken URL removed by Moderator]

  • Comment number 2.

    Apart from MPC and UK I am not sure I know what the other abreviations are - is a glossary available?

    Just what was QE supposed to achieve. Surely it was a classic panic measure by people who appear to believe in monetarism and have a blind faith in our banking system. Holding up public expenditure and car scrappage arguable achieves and has achieved more. A programme of public works and creating jobs for neets and other young people needed to be the main thrust. QE and silly interest rates are more likely to lead to unsustainable inflation of shares and housing and other ways of packaging 'assets' for bubbling up speculation in a casino frenzy?

  • Comment number 3.

    QE is nothing more than a fraudulent act, the government spending mickey-mouse money after they have finally run of taxpayers' hard earned cash.

    The sooner this farce is brought to an end, the better.

  • Comment number 4.

    I bet they'll keep it on the 4th of February. Besides there have already been secret bail-outs by the Treasury so even if they declare and end of it officially, more money will be poured in between, just in case.

    It's the only way they know!

  • Comment number 5.

    The system that is being shored up no longer exist. In the old system it was in the interest of banks and investors to build the economy with loans and investments. The new financial services is about the trading of money and international banking assets. Banks and investors have no national interest and the result has been that although they have been bailout from their misdeeds by the public the public will see no benefit. The banks and investors are still operating with no changes to the very system that caused the collapse. It will all happen again and maybe next time they will be allowed to fail as that will be the only way things will change as the governments only do what they are told by the bankers. It is no coinsidence that the banks are doing well and the economy is a reflection of the problem not of the solution.

  • Comment number 6.

    5. At 4:22pm on 07 Jan 2010, ghostofsichuan wrote:

    ghostofsichuan, my admiration for the perhaps the post which described the current events most accurately and concisely.

    Nothing will change as nothing has been changed!

    I've said it before and I'll say again - The UK is being held hostage by the international banking mafia The problem is that the majority of people do not see the truth as they've been brainwashed by decades of propaganda which tells them to believe it's all a conspiracy theory.

    We can start by demanding a change of the Bank of England as it does not serve no country's interests.

  • Comment number 7.

    QE would be illegal if we were part of the Euro, because it would be stealing from the other countries who have the Euro. Now the BoE are stealing from UK savers and giving to the borrowers and there is no one to complain.

    What mandate do the BoE have to debase our currency?

    No wonder Brown did not want us in the Euro.

  • Comment number 8.

    There has been much comment about QE and its 'impact'. The main issue, it that inflation WILL spike this year AND the touted 'recovery' may be fictitious in that unemployment will at best (I think) stop increasing. It will be very interesting to see the effect of interest rate increases & higher inflation on our economy 'poised for growth'. Stagflation anyone?

    Methinks it will have to remain 'poised' for longer!

    Anyway - onward to the election and starting the hard process of sorting the economy and defecit out.

  • Comment number 9.

    QE does not prevent the necessary devaluation of capital to restore a 'true' rate of profit, it just postpones it.

    When inflation takes off wage increases will not keep up.
    How many people got 1.9% increase recently?
    We will all experience a cut in wages (unless you are on the board at a bank).

    As usual the workers will suffer most!

  • Comment number 10.

    QE Bank Bail-out 5

    Can we have the facts : what did the pension funds and overseas investors do with their liquidity from QE purchaes - buy new gilts, bank bonds, bank shares, buy new ftse 100 shares/bonds to reduce ftse 100 bank loans,boost gilt market-maker fees - meanwhile top 100 companies gain, equities boosted, banks made profitable - what about the rest of the economy? The BoE have decided to buy largely gilts and not private sector assets unless premium grade ( even those are small in value).Posen criticises this.

    If the QE gilts sitting on the APF Limited balance sheet fall in value ( have they?) how much will be lost when they are sold by the MPC. Who pays? Us again? I trust someone is keeping an eye on this.

  • Comment number 11.

    Mervyn King and his cronies have destroyed the British Economy and a petrified like scared rabbits in the headlights of the oncoming juggernaut of financial catastrophe.

    Their polices gave us the bubble economy and they are totally unfit and unable to solve the catastrophe they have created. They must go, and go now, but the gutless self serving wimps of politicians will not do what they know they must.

    The financial catastrophe they have crested will destroy the Nation - their continuing blundering incompetence is breathtaking. They have no ideas; they have no clue as to how to bring the Nation back from financial meltdown.

    Interest rates MUST go back up to 5 to 6 percent and QE must stop. We will I am very much afraid need exchange control to control outflows if sterling is to survive - my bet is now odds-on that it will not survive and that we will be forced to join the Euro on very unfavourable terms - much like Iceland. Mervyn King has reduced this Nation to the beggars of Europe. He has humiliated us all.

  • Comment number 12.

    So if industry has paid back substantially more than it has lent, where has the money gone?

    Where has the money that would have invested in gilts, but has been sidelined by QE, gone?

    Is this just another one of those banking smoke and mirrors?

    Or has it gone into the bubble of underpinning the asset prices that need to fall?

    Or a bubble of the stock markets? Will it crash once QE is reversed?

    Is it envisioned that this QE will remain in the money supply forever?

  • Comment number 13.

    Hard as it is to believe, the powers that be seem to be arguing that because £200bn of QE hasn't had the desired impact then clearly what is needed is more of it! A bit like the drunk with a hangover who decides that the best cure is another drink, but when this doesn't work decides it isn't the drink that is the problem, rather that he just hasn't had enough of it! You couldn't make it up.
    So where has the money gone? Straight onto the bank's balance sheet which then leaves them free to speculate on whatever, oil, currencies, the stock market etc safe in the knowledge that reduced competition and a wall of money courtesy of me and thee makes it like shooting fish in a barrel. Time to get the bonuses out again lads and ey up, guess what, the bank's will even pick up the one-off bonus tax bill for us, whe-hey, bring out the bubbly.
    Meanwhile Joe Public tries his best to get a mortgage or a small business tries to get a loan, but the shop shut sign appears in the window. At the same time he faces tax increases, higher N.I. contributions, a wage freeze and an end to his private sector defined benefits pension fund, if indeed he is lucky enough to hang on to his job at all.
    Thanks Gordon, it has been a pleasure doing business with you.

  • Comment number 14.

    All you economic guru's talk about budget deficit. No one relates the real debt over the last ten years to our problems. It means that over ten years labour have had a 60Bn budget black hole anually.

    Yet they have the cheek to talk about a tory black hole of 34Bn.

    Real debt seems to be taboo with you economist. If the next government do not do anything about it the international community will. Thatcher made us viable and we scorn her. Thats our problem.

  • Comment number 15.

    I totally agree with ghostofsichuan, very little has changed in the world outside banking. Is anyone really lending? It doesnt seem like they are. Surely this was one of the original objectives? The banks are just holding tight hoping no more chickens are coming home to roost. Liquidity is everything at the moment.

    Unemployment may be slowing up, but as a prospective employer you need to be making some serious money before you would enter the minefield of employing someone. If the economy is to grow, employing people needs to be far less costly and straight forward.

    Anyway at least the BBC have finally realised that Jonathon Ross was being paid about 18 times the market rate!

  • Comment number 16.

    Great posts therealcost, geofffromleeds, stronghold_barricades, John_from_Hendon.

    It's time to recognise that the BoE and Mervyn King are part of the problem and must go when Brown goes.

    Bring back Maggie's torso mounted on the lower half of a dalek's pepperpot. She should rule over us Davros style and the red light on her forehead will flash when the budget deficeit threatens to overwhelm us.

  • Comment number 17.

    Re 11:

    I have read your continual plea for higher interest rates and I don't understand it. I'm not saying you're wrong, but it seems counter to common sense. Can I give you my perspective and ask you to explain what I am missing?

    My position is that I am a business owner, an exporter and a family man. My mortgage is variable, my wife works with me in the business. If interest rates go up to 5%, I expect the following:
    1) My mortgage and business loans will go up from about 4% to about 9%, doubling the repayment. This will severely limit my spare income, and may cripple my business.
    2) Sterling will rise, and my exports will also not be so competitive.
    3) My staff will feel the pinch and be looking for more money from me to survive/maintain their living.

    From my perspective, I will be seriously worse off, as will about 1/3rd (?) of the UK population whose mortgages are their largest debt.

    People who rely on saving income will obviously be better off, and the % rise in their income will be more than the % rise in my repayments. Also the countries interest repayments will cost less.

    However, the rate of imports will increase, as they will get cheaper, and we will be giving more and more of our money to other countries making them richer. Our country will get poorer.

    I am also not sure that Sterling currently is undervalued. I would go so far as to say that housing costs apart, it should be 10-20% lower than it currently is: that is if you look at what foreigners are paid, and what their Dollar/Euro can buy in the UK, compared with the opposite, the pound should be about par with the Euro and about 1.5 with the Dollar.

    I can believe that I can't see the full picture, but I don't think that the interest rate rising will actually benefit the country as a whole. Where am I going wrong?

  • Comment number 18.

    #11 - Sorry, but interest rates ARE effectively at 5% or 6% already - at least for borrowers, if not for savers - because what banks are charging for credit at the present time bears no relation to the official base rate. The differential is a rip-off and the only thing raising base rate will do is increase that rip-off. As for inflation, forget it, because once public spending cuts and tax rises kick in after the election deflation will be the problem. Caledonian Comment

  • Comment number 19.

    I'm picking up a sense where economic policy is tied to social and political aims. It's obvious that political parties support their supporters but what happens when they are in government? Do they suspend the political agenfa and focus on common issues? The world has changed a lot from the one I knew and it is a bewildering place.

    All of this economic policy will end up scrapped at the general election providing that another party is elected in and we are just going through the labourious motions until then.

    To me, health wealth and prosperity is the luck of the draw, we all take our chances in life and have plenty of scrapes and scares, but I think one of the roles of the government is to provide some stability for it's citizens, and to uphold law and order so that people can go about their business without being hassled at every turn.

    Crime and poverty, war and poverty, all these ideas are closely associated, and all that should be well understood in the 21st century.

    In these times we have every advantage so why can't we use them to their best potential?

  • Comment number 20.

    #12 Some time ago there were many posts asking "where has the money gone?" about the moey lost in the credit crunch. The truth is that that "money" never really existed. It was a volume of woth based on credit - ie credibility - and once the credibility was gone the money vaqnished like the emperor's new clothes.

    now we are asking, where has the QE money gone? It seems that the BoE bought gilts from, among others, the banks - and the "money" is now sitting to the "credit" of those banks in the BoE vaults. They are now being encouraged to buy gilts. If this is right then the new "money" is actually being recycled to sustain unsustainable government spending.

    Sooner or later the wheels must come off.

    On a broader point, there has been lot of discussion of this (and reltated0 blogs about an election to clear the air. However, I am struck by two thoughts:

    (a) An election will not change anything because the incoming government will have little choice. both would have to cut public spending (and so reverse the fiscal stimulus) in order to appease the bond markets. In effect we are now so over-borrowed that the markets take these decisions -not the government. In this regard I think a tip of the hat towards Iceland is in order (At least there the government has said no!)

    (b) The only positive way out of this mess would be for there to be a real increase in economic growth (and here I'm with the posters who want a return to real making and selling stuff and a move away from the idea that borrowing and consuming generates wealth). No-one's policies are really directed towards achieving this.

    Maybe the real choice is between not cutting, and seeing a run on the pound etc; or cutting and seeing a double dip (and maybe a run on the pound?)

  • Comment number 21.

    I am a sceptic as I am abroad and stand to gain if the pound falls

    However the problem is that people are generally getting Minimal if any pay rises This means that there is less money in peoples pockets and every extra bit Gordon grabs is making the position worse I really never followed the decision to increase the priceof a passport by 7% 'as the revenue from this source was falling' yes that Labours way of doing things and ignoring supply and demand. Taken to its logical conclusion no pay riseand increased tax means less money and therefore ordinary hardworking people will have to make further cutbacks in their expenditure will be the victims -if they have a job left when this is eventually over.

    QE is not a real answer its a temporary fudge which GB is using to try and survive as long as possible

  • Comment number 22.

    18. Caledonian Comment wrote:

    "...because what banks are charging for credit at the present time bears no relation to the official base rate."

    Further evidence that the daft policies of Mervyn King have resulted in the BoE having no control over the gross profiteering of the banks or real interest rates.

    I consider rational rates for savers should be 5 to 6 percent whilst borrowers should be a couple of points higher and the very large differentials in the savings and borrowing market need to be reduced - also bring back usury (as illegal) at 42.5 percent (as abolished by M. Thatcher.) The huge differentials in rates are the direct result of absurd abdication of control by the BoE.

  • Comment number 23.

    Yes but you have to make and produce goods that people want. It's no good borrowing a heap of money to manufacture a shop full of stuff that nobody wants. That is the problem, gambling too much and I know that from way back. The market is saturated absolutely choc a bloc with modern gadgets at rock bottom prices and as soon as you buy one the next generation comes out of the stockroom.

    So people in different niches find themselves in akward or advantageous positions depending on what is being demanded in the market. We know that, it's understood.

    People try all sorts of strategies that can blow up in their faces the issue is what is the sucessful one what should be teaching people to do? There is such a range of opportunities, you have to experiement and find a niche for yourself.

    I've been down a few dead ends in life and come off the worse for it, so that's experience but I'm still looking around to see where doors might open.

  • Comment number 24.

    Very lucid posts here.

    Stephanie - interesting technical stuff.

    What if in fact QE is as some of us have posited actually creating excess liquidity in the system? (see BoE technical paper if interested for definition)

    If businesses are not looking to borrow from banks (they're certainly not investing or hyper-stocking) and individuals are paying down debt then the QE financing to banks is effectively not needed and probably why little difference on the surface is being made.

    However, more worryingly, is 'if we have a case of excess liquidity where is it manifesting?'

    Referring to Steil and Hinds excellent recent book 'Money, markets and sovereignty' I quote:

    "When a central bank creates excess can show up in many different places. In the 1920s, it was in the stock market. In the 60s and 70s it was in the consumer price index.......In recent years, it appears to have shown up in house prices, and rather worryingly for the future survival of our fiat monies, gold."

    Mmmmm. Let's see we have house prices still defying gravity, we have a stock market rally which appears at odds with future expectation. Inflation has already appeared. We have a global commodities bull market as observed recently and of course gold has gone through the roof (remember we're not the only ones doing QE).

    What if QE is really an accelerant and that the credit crunch actually is a bit of a smokescreeen for credit that isn't needed. Has anybody seriously asked this question (or another one of those we blindingly didn't ask)?

    Because if there is any merit in this proposition we are in serious, serious trouble..............and the double dip won't be an if but a very big imminent when...................

  • Comment number 25.

    We all know that debtors don't want to be there when creditors come knocking but we engage in competition for the sake of it. When resources are scarce it's understandable that people compete but when you're not lacking in anything competition is unnessecary and this sport mentality takes over. That ought not to apply to the essentials of life, people talking about security.

    We want to sell a lifestyle rather than existence so we want to go out and about and have fun and do what we want and that's acceptable as long as we pay the piper.

    At some point in this market people have become commodities which is where we didn't think it was going to go. If you do not respect the life of another who will respect yours?

    Now the sustainablity fever has gripped the world, well we know some people think that people have having too great an impact on the planet and so on you can lecture us all day and all night on it but the world is big enough to accomodate people and if they decide that it's better for them to compete when they could be enjoying life, that's a loss to them.

  • Comment number 26.

    Apparently, some think that the bankers placing their hand in a different stocking puppet will somehow make everything better. The banks were able to steal twice...first the retirement accounts and fees for generating unsustainable loans and second when the government gave them public funds. The only problems that have been addressed are those of the banks. The government was sold another sorry story that somehow by saving the banks the economy would benefit, even though the two are no longer connected. Someone needs to stand up and take a different path because this one is a dead end for the public and the economy. Sorry economist but things just don't work they way you were taught in school. It is all much more dishonest.

  • Comment number 27.

    It's not dishonest but we saw the ridiculus figures that came out about the airlines and how cabin crew were paid across the idustry. They would rather sack someone on a £23,000 salary than face a strike from their workers who do not wish to accept a pay cut to sustainable levels to accomodate more workers.

    When other companies paid half the salary for the same job. It's embaressment at the goofs that is getting people all wound up. The systems, the government and society can accomodate people IF the institutions are managed properly. Nobody wants to to admit to a track record of goofs that's the end of their career it's all image but it is quite slimy underneath but only because people made mistakes that they want to cover up and it all comes out eventually.

    How you react to that is up to the individual. If we say we are going kill everyone and ruin them because they did something wrong they will never admit to it but if we say ok well this was a mess up lets just try and straighten it out then there is an opportunity and incentive to get back behind the wheel.

  • Comment number 28.

    #24. Rugbyprof wrote:

    Yes, you are, I believe, correct to summarise our present condition as still digging (the hole) when in fact we should have stopped digging.

    Further (1): the QE that has vanished into holes and piles of existing bricks in/on the ground is an astonishing, absolutely predictable result and entirely avoidable waste of QE and zero interest rates. This money has vanished! The BoE (and Mervyn King) knew that this would happen yet did absolutely nothing to avoid id - anyone would believe that they were trying their best to waste the Nation's resources and deliberately devalue Sterling.


    Further (2): This obvious symptom of the present bubble and crash is also why the slump and austerity will be long lasting and will surprise the (badly educated at Harvard etc.) present set of economists - their model of a slump is a financial slump of the 1930's that was actually quite quick to recover - yet taking a more historical approach to economics because of the huge proportion of the overvaluation of the present bubble/crash is in illiquid assets (i.e. Houses) the slump will be longer and more drawn out -like the Long Depression of the 1870's (1873 -1896 in the UK) Unless and until house prices move downwards to an affordable level for a single income employed person in each area the UK will have an unstable and depressed economy. The idiots who applauded the property market up to absurd multiples of income (as much as 16 times) and the buffoons of 'bankers' who loaned, and were allowed by the Bank of England (and Mervyn King) to make absurd multiple loans, these are the real culprits and the real cause of our long term inevitable readjustment. Mervyn King must go, as he is incapable of re-educating himself into a rational understanding of his own errors and thus incapable of correcting these gigantic errors he has himself made. (Along with the Permanent Secretary of HM Treasury (Nick Macpherson) and his predecessor (Gus O'Donnell) and the MPC etc. Just changing the politicians will never be sufficient!)

  • Comment number 29.

    #24 rugbyprof

    good points as usual!

    Where are the current bubbles then?...good question!

    Housing........Yes (QE has sustained the illusion of high asset values in housing especially in the Anglo-Saxon countries).

    Equities.....Yes (especailly in the Anglo-Saxon bourses)

    Gold.........Yes (but remember this is a truly international asset that is very liquid)

    Oil........Yes, the bubble developing again (and it's obviuosly a truly international and liquid asset [npi])

    Therefore the answer is, if you want to avoid the effects of a double dip...then invest in Black and Gold!

    Currencies and housing are national and region is supra-national

  • Comment number 30.

    For all the money invested as future commitments to tax by the British people into their banks, you would have thought that we'd have had some major structural changes forced upon them to mitigate the future risks of a re-occurance.
    You'd have thought that paying above market value for stuff the banks owned but didn't like just so as to refloat their cash reserves would have required the banks to draw a line between retail and investment banking so that the latter does not polute the former.
    You'd have thought that if the banks were doing so well selling 10 quid spades to the government for 50 quid they would have loads of money they needed to invest in the economy rather than sit on 'cash' providing little return.

    From the last query you can only conclude that the Bank's finances were in a desperately worse state than the public were made aware of. And their win at every turn fortune demontrates very poor governance in not extracting a commitment to structural seperation. Brown and Darling saved the World (apparently) by throwing money carelessly at a problem until the shrill voices from the bankers died down. The problem is .. It hasn't cured any problems it has just prevented larengitis.

  • Comment number 31.

    Borrowing money is ruin in my book. Risk and ruin is the path we went down when you take a risk we've all been told there's a chance of losing as well as winning. Banks can happily tell people to take risks when they have got their backs covered, that's irresponsible. You have seminars and lectures saying that you don't get anything without taking a risk but the banks get other people to take the risks and reap the rewards.

    It's not my problem if people are dodgy dealers and get into trouble.

  • Comment number 32.

    #31 jobsw32

    Borrowing money is not bad per-se, provided the amount borrowed is realistic and can be repaid. It's also important that money is used 'wisely', not poured down the municipal drainpipe.

    The record debts run up by Mssrs Brown, Darling and King are not realistic and will cause huge problems and hardship for decades to come and stifle any chance of a real recovery.

    The idea that you can spend your way out of recession is absurd.

    Brown accuses those who oppose his policies of wanting 'to do nothing'.

    Actually, what needs to be done is to CUT spending. Brown just doesn't get it.

  • Comment number 33.

    With all this QE being pumped into the Money Supply, then how do you in the future reduce by clawing-back the same amount in QE that was produced for the Short-Term, when you will have so very little in the way of any Capital left for Medium and Long - Term Investments once we start paying off the National Debt?

    The Answer is of course: Print even more Money by way of Quantitative Easing in an endless Merry-Go-Around format.

  • Comment number 34.

    The QE'rs should make a film and call it "saving pyrate gordon"

  • Comment number 35.

    I wonder will the Euro simply have to be introduced in the UK as a stable currency? Will Britons themselves have to use the Euro as a dependable currency in much the same way that Zimbabweans had to remonetize their financial system with the Euro and US dollar? The government can play with Sterling all they like but will ordinary people not be forced to be practical? Are ordinary Britons not beginning to look at other currencies for their savings?

  • Comment number 36.

    The rough figures I have indicate that Q4 of '09 will show a contraction. If this is not the case, put it down to being skewed to seasonal spending.

    I would not like to be in this position. What do I do? Expand QE to $300B as what was thought? Or... eke out what's currently in place, waiting it out further beyond February in order to get a better picture of where we're going as Q1 of '10 will definitely show a contraction?

  • Comment number 37.

    Having to explain and action is quite easy. It is a matter of a line that can be swallowed. As many will be keen to swallow I find it hard to believe this is a problem. All that matters to the markets is will the UK pay its bills.

    QE is a transition, it cannot be given permanence. The only question is a transiton to what.

    The cycle of growth is shorter than any QE intervention can be so sooner or later reality has to be faced. The likely outcome is the buffering of QE dissipates and the economy troughs.

    Sterling is weak versus the Euro, China will have unstoppable upward pressure on the Yuan at some point. Chinese manufacturers will move to suppling the growing chinese domestic market in preference to export, that is why the Chinese have the aim to develop their domestic market. Global transportation costs will rise due to green taxation at some point. Imports to the UK are, and will become, more costly. The UK public sector will have to contract, inevitable. Public sector unions have already postured that they will not easily allow losses, so subcontractors will bear the brunt in the blurred margin between the private sector and the public sector. The implication is less doing and more shuffling, ie less work efficiency. This mirrors what is going on genrally in the economy, less efficinecy, reduce supply chain volumes leads to less efficiency, more redundancy in the population leads to less efficiency overall.

    As public sector cuts have yet to be enacted they are quite likley to match any underlying growth in the private sector. As there has yet to be any effective HMG policy other than discounting, eg VAT cuts, Stamp duty cuts, scrappage schemes, etc, it is clear they do not have any real short term answers. Brown is now singing about the grass is greener by being green but the lead time is long and the support so conditional that take up is low or non existant, eg green car development. It is difficult to see HMG revenues growing, yet HMG forecasts all assume growth in revenues.

    Longterm the whole principle of green taxing is to reduce conventional consumerism. With an economy based on conventional consumerism economic activity has to drop. It is implicit.

    Consumer confidence meanwhile is up rather than down, simply because it is not possible to be down all the time and many feel things have bottomed so they have survived. Aclimatisation is a rapid process.

    The financial sector has now been hobbled. Manfacturing has dropped from 30% of GDP to less than 5% over 4 decades. What has taken decades cannot be undone overnight, if ever. The Service Sector is due to have less to service. HMG continues to have the desire to play at being a global player with the costs that go with that when it has no basis for it. It is difficult to see anything other than retrenchment longterm.

    Many economists appear to want to read tea leaves and build models - which when corrected after the event show what has happened - but are only coincidental in agreement with events before they happen - and have no statistical basis so are pretty useless. Much ado is made about saying the issues are complex when they are actually quite easy to identify but unpalateable.

  • Comment number 38.

    QE are just further 'back door' bail-out payments for the banks!

    We are all being defrauded by this action.

    Somebody call the fuzz!

  • Comment number 39.

    24 rugbyprof

    House prices are 'up' or 'sustained' due to subsidy via what are in reality cheap mortgages for enough buyers in a reduced volume market. The tinkering with the housing market is what lead us here, and now efforts have been made by HMG to support things so total collapse in that sector did not occur. Until the UK housing market resets to a realistic and sustainable level the economy will not progress. This is the same embedded problem as the overblown public sector. Politcal parties courting votes have to enact penalites on voters so this is swerved if at all possible - the attempt to shore up a status quo continues with a deteriorating balance sheet underpinning economic activity. Houses built on sand. In the 1930s the US moved to promote house ownership, aka house building, to create economic activity. In the 1980s Thatcher moved to promote house ownership, aka house building, to creat economic growth. NuLab continued this trend. The UK financial centre growth was based in part on this. The UK housing market is within national boudaries by definition and has grwoth limits, in fact the downside has been the importation of migrant workers and materials in this sector. The problem now is housing is difficult to expand as a domestic economic recovery strategy without damaging percieved house asset value, unless of course you introduce a house scrappage scheme.

  • Comment number 40.

    It seems that there are two possibilities:
    (i) end QE, put up interest rates - result borrowing is brought back under control by combination of higher interest and (probably more importantly) by debt deflation
    (ii) gentle QE, interest rates kept low - result borrowing grows, inflation rises gently but the debt-fuelled bubble just gets bigger and bigger until the foreign banks panic and UK plc either defaults on its sovereign debt or lets RBS go bust.

    (i) is more sensible but painful...

  • Comment number 41.

    10. shireblogger:

    "...what did the pension funds and overseas investors do with their liquidity from QE purchaes - buy new gilts...."

    Yes, they mostly bought gilts. You can see this if you look at the domestic/foreign gilts ownership split at the DMO website. Often, these UK institutions are obliged to hold specified levels of gilts (I mean, would anybody lend to the UK govt if they didn't have to?)

    Essentially, QE has been used to monetise the deficit, even though that's in breach of Maastricht rules. The way round this is to buy existing gilts from people you know will then buy newly issued ones.

    As for equity and commodity market rises, this reflects the dollar carry trade. You can borrow at ultra-low rates in dollars, and your effective rate actually turns negative if the dollar falls in value. If the dollar rallies even briefly, however, this bubble will pop very nastily.

  • Comment number 42.

    40. At 09:53am on 08 Jan 2010, Chris wrote:
    It seems that there are two possibilities:
    (i) end QE, put up interest rates - result borrowing is brought back under control by combination of higher interest and (probably more importantly) by debt deflation
    (ii) gentle QE, interest rates kept low - result borrowing grows, inflation rises gently but the debt-fuelled bubble just gets bigger and bigger until the foreign banks panic and UK plc either defaults on its sovereign debt or lets RBS go bust.

    (i) is more sensible but painful...


    I'd say it'll be (ii) until the election, (i) after it.....

  • Comment number 43.

    40 Chris

    (iii) Reverse QE, quantitative squeezing to take money out of the system. This is what is needed but it is a long term plan, and should have been started about thirty years ago.

  • Comment number 44.

    I am somewhat unclear of the practical implications of all this false money being created.

    As far as I understand it is just an entry in the UK Plc account book and given to the banks who use it for their own gain. Is there a separation here between the investment banks and the retail banks. If not the addition of this false money waters down the value of our saved money. I don't fully understand what assets this paper is buying. Who's assets. If the banks were bankrupt they had no assets. Debts? People only buy debts to screw more money out of the debtor. What are our great grandchildren buying?

    Banks are being propped up with false money and our money is being devalued. I'm pretty sure I can guess the response of most bloggers here but is there a genuine risk to retail banking... again.

  • Comment number 45.

    #41 Friendlycard

    Thanks for the information. So, the famous portfolio effect where the QE liquidity was to be used by instituions to buy riskier assets than gilts and inject the £200 billions directly into the wider home economy was a pipe-dream ?

  • Comment number 46.

    41. At 10:02am on 08 Jan 2010, Friendlycard

    I agree with your comments, the fun starts when QE finishes.

    I suspect that the financial instability of this country, along with the BOE printing money, has likely put an end to foreign investors buying fixed interest gilts.

    In short I reckon you can only get away with devaluing fixed interest gilt holder’s investment once by printing money.

    I struggle to believe they’ll let it be done to them again.

  • Comment number 47.

    Thanks to those who have acknowledged or added to my comments at #24.

    Just as an update I note that today's Economist has a front cover with the title:

    'Bubble Warning - Why assets are overvalued'

    The leader article and subsequent 3-pager offer a very good insight and though some of the analysis follows a slightly different tack to my comments the overall observation remains the same - that further bubbles are already in existence.

    You cannot discount the connection between QE (and the associated artificial low rates) and asset price inflation.

    Before QE we had leveraged debt and asset bubbles (the bursting of which that led to the credit crunch - the credit crunch being a symptom not the cause as I have stated before).

    Now, with QE and debt overhang we have asset bubbles.

    That simple equation implies big trouble and the UK is at the heart of any potential downside risk......

  • Comment number 48.

    Is it not the case that quietly the likes of Darling and Co are quite happy for the Banks to use the improved margins on lending & QE funding to prop up the Balance sheet - The sooner they become profitable and Share prices are restored the sooner we can get our money back !

  • Comment number 49.

    In addition to #24 and #47

    Many have asked about QE from a rational standpoint.

    The rationality of the UK's use of QE can be seen if you observe that a desperate government knowing of the impending gap of expenditure to tax income used it as a means of ensuring funding and keeping interest rates artificially low. Any other reason is pure hogwash.

    The Government has just delayed the inevitable by effectively creating a balloon repayment of interest (little at the beginning but mushroomed at the backend). Annually the bill will run to about £60 billion (as I stated some months ago) and that's if we manage to keep 'it' controlled.

    I suggest that all those who have praised the government for its recent actions are going to look very, very silly in a few years' time.

  • Comment number 50.

    Hi Stephanie

    Thanks for your views on this subject. It is an issue which I would imagine in one form or another many governments and central banks are facing i.e what to do next? I have been reading on notayesmanseconomics a lot about QE and also policy in the United States where there are dissenting voices even on the Federal Reserve Committee.

    We are far from the only ones wondering what to do next and when to unravel what we have already done.

  • Comment number 51.

    #32 DistantTraveller

    It is not sensible to say that spending your way out of recession is absurd. This is simply your opinion. Don't forget that the US (and most of the world, for that matter) used this Keynesian approach to pull the developed world out of the Great Depression of the 1930. In fact Keynes won a Nobel Prize with these ideas.

    Monetarist economists, who've held political sway for the last 30 years or so, may not like the Keynesian approach to economics, preferring a laise faire approach (i.e. don't interfere and the market's will look after themselves), but they've never been able to prove beyond a reasonable doubt that it doesn't work. Unfortunately, all the shining examples of laise faire economics are the same nations in the worst economic problems right now, the UK included.

  • Comment number 52.

    Post 47 thanks for the update. Assuming my copy gets to my door via Postman Pat it will make for interesting reading either tonight or over the weekend.

    I have always thought QE was little more than a desperate attempt by New Labour to try to keep the balls in the air re public finances until the next election rather than any meaningful attempt to help stimulate the economy.

    QE isn't the only big decision coming up for the bank. Surely it must have to raise interest rates as inflation ramps up over the next few months as the virtuos effects of falling base rates in Q4 2008 and Q1 2009 fall out of the figures; as does the drop in the price of oil from nearly USD 150 a barrel to USD 40 over the same period.

    Add this to the VAT increase; rising council tax and other bills, rising prices for gas and electricity and even staple goods if the freeze continues much longer.

    I expect Mervyn to have to get his pen out sooner rather than later. The question is will the B of E flunk the test of increasing interest rates before or during an election campaign?

  • Comment number 53.

    #52 ItC

    Obviously our Postman drives a snowplough.......

    Yep - the question I guess is whether BoE are actually in control anymore on interest rates (pro-active) or this has rather been ceded to the markets (BoE reactive).

    Our credibility is now on the line and thus we have much less room to maneouvre. As some have already commented real rates are already at 5-6%.

    The bond markets may well provide the answer - keep a close eye on them..........

  • Comment number 54.

    Whats confusing me is why is QE regarded as a moneterist policy?

    My understanding of moneterism is that it argues that divorcing the money supply from the natural growth (or contraction) of the economy produces inflation. And this was used as an argument as to why you shouldn't "spend your way out of a recession", as you just stoked up inflation and delayed the pain.

    Expending the money supply would only be desirable if economic activity was artificialy restricted by a lack of access to money, so pumping more in would get the economy back to its "natural" level.

    Hearsay evidence has been saying for a while that businesses don't want to borrow, i.e. economic activity is not artificialy restricted because they can't borrow, it just really IS restricted. The analysis presented here seems to back that up, equity price rises being correlated with QE appears to be evidence for classic money supply induced inflation.

    In this light moneterists should be crying "stop" - so is it that doing that would expose a great lie, that the economic theory we have been following for the last 30 years was really a political attempt to demonise government regulation and spending, and allow a handful of people to become very rich? Privatised mismanagement of the money supply (over expansion of debt)has the same effect as government mismanagement, thats why we are in the mess we are in...

    So is there an irony that the moneterists where absolutely right as far as the economics were concerned, but blinded by the politics?

  • Comment number 55.

    British households are the best judges of economic trends. Their actions speak much louder than any words on this site. Because they know best what their prospects for employment and earnings are. Moreover, what households do about savings and spending will be more powerful than any QE so far!
    Household's spent with vigour over the holidays. Which could presage a recovery in money supply as paying down debt dries up. But we won't know for sure until a few weeks after the current weather freeze-up whether that resumption of spending is a one-off - as the doom-mongers claim - or demonstrates risng confidence in the end of the world-wide recession.
    If spending is back to normal this month and next, and paying down debt is out-of-fashion, the MPC can take some satisfaction in their QE (and the Government can be happy that its policies worked). So, no change of policy will be necessary and we should expect interest rates to rise in small steps after the election.
    All of which confirms that the next GDP figures (26th January) and the news from the High Streets will be key indicators for the British Economy.

  • Comment number 56.

    45. shireblogger:

    "So, the famous portfolio effect where the QE liquidity was to be used by instituions to buy riskier assets than gilts and inject the £200 billions directly into the wider home economy was a pipe-dream ?"

    Thanks, and yes - around 99% of QE purchases have been of gilts.

  • Comment number 57.

    46. Dempster:

    "In short I reckon you can only get away with devaluing fixed interest gilt holder’s investment once by printing money."

    Yes. And a lot of them had already lost heavily anyway, given the slump in sterling which occured back in 2007-08 onwards.

  • Comment number 58.

    53 rugby prof

    The problem is the solution, if it is to be voluntary, is at government. If it moves to external pressure then internal strategy (internal to the country) has failed. Mandelson is now using the language of ten year plans. If it is a ten year plan the horizon is too far. It is meaningless and spin. The conflict is between government wanting to placate voters and the need to take action to reduce costs in view of the missing gap between expenditure and revenues currently foating between some 13 and 20 Billion GBP per month. When all government cabinet minsters want to talk about is salt on the roads it is designed to obscure. There are plenty of people about who can deal with salt. There are, as far as I can see, no sensible proposals to deal with likely brewing economic outcomes with HMG. This has in turn has muffled any propositions from the opposition parties as as they are then caricatured by Brown as being obsessed with cuts. And so it drifts onwards and downwards. To infinity and beyond. The amazing Mr Browns incredible perpetual bubble blowing machine. Why have one bubble when many are available. Why would anybody buy a house when the long term forecast has to have an possible outcome of a 25 percent drop back onto the affordibility curve. Beats me. The interesting events will start after the GE whoever get the poisoned chalice. Something will have to give.

  • Comment number 59.

    54. MisterGC:

    "Whats confusing me is why is QE regarded as a moneterist policy?"

    Quite right - it's actually contrary to monentarism.

    It may be that some journalists have mistakenly said 'monetarist policy' when they meant 'monetARY policy'? Seems strange, but it's the only explanation I can think of.

  • Comment number 60.

    Oh dear!...the light at the end of the tunnel IS an express train!

    'UK factory gate inflation gathers pace'

  • Comment number 61.

    And the devaluation generated inflation that so many of us predicted is now in sight:

    So does that mean we need to increase interest rates for the pound to recover, control inflation and protect what manufacturing we have?

    Or do we press on with the present lunacy (of printing money to give to bankers and the government)?

  • Comment number 62.

    'Willem Buiter warns of massive dollar collapse'

    'He said investors would, rightly, suspect that the US would have to generate major inflation to whittle away its debt and this dollar collapse means that the US has less leeway for major spending plans than politicians realise.'

  • Comment number 63.

    It might put some extra thought and some shame to the matter if reporters didnt follow the Government spin and keep refering to "Continuing QE" and reported honestly that " The Government Will Print More Money"

    But, that would need an unbiased media

  • Comment number 64.

    55 leftie

    The evidence suggests that the consumer spent November saving so that he/she could spend in December. Then Januaty and possibly February will be spent clearing down any subsequent debts.

    Then with the April pay packet there will be tax increases due.

    So March and early April are the only two bountiful months next year. Election in early April I guess. May will be far too late.

    As for QE? Well, it was dear old Denis Healey who said `when in a hole stop digging'. It hasn't done what it said on the tin. The money may have allowed the banks to partially rebuild their balance sheets and permitted the government its Augustinian moment, but it was little or no help to the real economy. An expensive experiment and a great pity. It will have to be paid for by the people it did not support. I suppose that is par for the course these days.

  • Comment number 65.

    Put DebtJuggler's (62) very reasonable expectation of a dollar collapse together with Riverside's (58) also very reasonable indication of over valuation of assets and you can see an obvious way out for our rulers: let go on, UK inflation grow and the pound devalue. And, with shear genius, re-value assets downwards without a visible price drop to upset voters (especially the ones mortgaaged to the eyeballs)! If the change relative to the dollar is small enough, people might not notice. And UKgov can always argue 'necessity of maintaining dollar competivity' or similar bunk.

    Just a few problems: like all savings and pensions going down the drain. With a weak pound, various foreign elements will be able to buy what's left of our industry for peanuts (sorry - excellent inward investment) and close it down.

    We have much to look forward to.

  • Comment number 66.

    #59. Friendlycard wrote:

    "54. MisterGC:

    "Whats confusing me is why is QE regarded as a moneterist policy?"

    Quite right - it's actually contrary to monentarism."


    What bothers me is that the apparatchiks who are running the madhouse seem to be so poorly educated or/and self-aware that they do not see the internal contradictions in their present policy. As soon as they realise the fallacy at the heart of their policies I expect their heads to explode or at least for them to resign (regular readers will know who I mean). The man quite obviously has no integrity or intellectual honesty at all and like Bunbury, is quite exploded! (O. Wilde I of B Earnest.)

  • Comment number 67.

    oops finger problems sorry monentarism in #66 should read monetarism

  • Comment number 68.

    Even GOLD,compared to 1980 is cheap in real terms.
    The current low base interest rates are entirely reasonable given the increased spread charged by the banks, and why should savers get any return on their money in a deflationary atmosphere?
    And actually, house prices are very reasonable at the moment.When interest rates were far too high ,under the Tories, house prices crashed for years and years and the end result was misery.
    What we have now is quite reasonably priced , not in terms of multiuplication of income, but rather in terms of the interest cost of a mortgage on an average house as a percentage of income.
    Also London is not just the capital of England, it is a world capital, and world capitals are expensive .
    Britain is also a world centre of excellence and culture.....with a growing population and a diverse vibrant economy....which we will soon learn has grown 0.7% in Q4 enough of this puerile doomsday gloom.
    We are going to be okay!........okay?

  • Comment number 69.

    Are economic journalists bears, bulls or level pegs?
    What is their preferred stance? there a depressive tendency that in recessions we listen to and everything gets worse, and in bull times, we say yes that is all very well, but smell the roses they are lovely ?
    The property crash was predicted in 2000, but anyone who sold up in 2000 to avoid the crash would have looked incredibly foolish in 2007 , even in 2010.
    So bears are always right at some point , but not at the right timeand certainly not all the time.
    Where are the eco-journo bulls......I seem to be the only person on these blogs not waving a white flag .
    Doomsters did not predict the huge stock market rally we have just seen.
    QE will soon not be needed......the doomsters cannot see that, because they see only worsening circumstances.
    As always,Gordon Brown will prove to have been right, and I think the Bank of England have also been resoundingly right.....what a shame that in their own country they are pilloried.
    I know through current experience all about debt, profit, tax and interest and credit criteria......and I can see that what has been done so far re QE has been just right because the property market is not even yet back at where it was, oil prices are just right, unemployment has plateaued, the pound has been stable for a year, and people I know are starting to peek out from the duvet and start new ventures.
    And I believe that what happens next will also prove to be just right.
    Let's have some journalism that can help boost economic morale........the BBC Economics pages have been very samey and doomladen of that good for our economy?
    And what growth rates do other bloggers predict for Q4 2009 and Q1 2010?

  • Comment number 70.

    69. At 9:57pm on 08 Jan 2010, onward-ho wrote:
    Doomsters did not predict the huge stock market rally we have just seen.

    You know that this must mean a "correction" later. As you imply with your other examples we just do not know when. I suggest it will be when QE ends, when spending cuts are announced, when spending cuts are not announced, when Peston sneezes, etc etc.
    Another crash but we just will never know when unless we are in the pocket of whoever benefits from instigating the scenario.

  • Comment number 71.

    A lot of people in this blog confuse the 1970s with the Noughties.
    The reasoned monetarism of 1976-9, (when Healey slashed spending, cut deficits and eliminated high inflation.....only for the Tories to bring back high inflation with stagnation and soaring deficits after going hyper-sado-monetarist)was in response to the problems of that era.
    Our problems are completely different ....there has been a collapse in lender confidence and risk tolerance which brought about a collapse in property values which further reduced lender confidence at international wholesale and domestic retail banking levels..
    Our budget deficit is due to the high cost of sorting out the mess, we did not actually have much of a a budget deficit problem before the credit crunch.
    The reasons businesses and developers do not want to borrow is because there is no point buying land , building on it and having a developed value less than it would cost to do it. And developing does not work if you can only borrow half of the cost of it.
    Maybe the reason QEis not working is because everything has an artificially low written down value at the moment ......maybe tinkering with money in QE is not working because the real problem is with value.
    We maybe need to artificially adjust our property valuations back to pre-crunch levels to increase confidence.
    It is interesting that China has survived the crunch and has seen 50% property price increases this year.....clearly their surveyors and banks are acting completely different from ours and their picture is rosy....yes they are exporters but that is not the whole story because so are Japan and Germany.
    The 95-100% mortgages of Blair's Britain were the reason for our success, not our failure.
    And I think that our economy has gone pear-shaped since Darling took over.......Brown was a much wiser chancellor, he talked us all up , when DARLING ONLY TALKS US DOWN.
    Darling is clever but he is a clever, gloomy doomster. Brown realises that that to have a good economy we have to lighten up.
    WITHOUT BUBBLES THE ECONOMY IS NOTHING........nothing gets built,nothing gets bought and nothing gets sold.....everything stops.
    We need to flip our way of looking at the present is a time of great opportunity.
    It is the cold night before the sunny day.

  • Comment number 72.

    Onward-ho #68&69

    The reason that journalists at the BBC are getting more doomladen is that eality is dawning on them as they've done a good job of being in denial throughout 2009.

    In answer to your growth rate predictions it depends on whether you're talking about true GDP are artificially boosted growth.

    The 3rd Qtr was boosted by public sector spend on structure which from memory was about 0.3+% and it still didn't get into positive territory (which was why there were howls of 'it can't be').

    I'm sure the 4th Qtr will show positive growth of some degree but that's because we've chucked the kitchen sink at it by pulling future growth forward (given the various subsidies e.g . VAT, car scrappage, the numerous regional funding initiatives, artificial employment creation and of course any public sector funds still available to boost GDP indirectly).

    Even with all of this I'm not sure if 2010 will show much above 1% growth. If you take away the artificial support it will be negative.

    On your point about house and oil prices I would ask you to check my entries at #24,47 & 49. It may provide you with a counterbalance to your argument.

    I would also point out that affordability of a home is not the same as its value (discounted future rents), as I have pointed out before. Many confuse this including so-called 'experts'.

    If you're not sure do a test. For example, does the value of a car relate to its value with regard to its cost of production or to how much you can raise on finance?

    Granted certain housing will always be subject to special localities or buyers. But remember UK house prices have over 60 years moved at the same rate as inflation bar the last ten years.

    Making money on a house is arbitrage just like investment bankers make on their trades, i.e. its just timing. Real estate can also become very illiquid just like credit but unlike cars. Don't kid yourself that real estate is different to other asset classes (bar its unique taxation which is bubble inducive).

  • Comment number 73.

    72 There is nothing artificial about using compost to feed a hungry withered plant.We badly needed QE and it has been our salvation not the cause of our future downfall.
    The Tories want to put weedkiller on the poor thing and kill it.
    Sorry, Tory doomsters,you just don't get it do have been out of power for so long that you have forgotten that our economy is a crop, it is not a weed that needs to be obliterated.
    Old Tory habits die hard.

  • Comment number 74.


    Also don't confuse intelligent analysis with political dogma.

    With regard to the argument, we shall see in due course who is more accurate.............

  • Comment number 75.

    It could be argued that housing became unaffordable because wages did not rise enough as the bulk of jobs switched from well-paid manual to lower paid service jobs....steelworkers and miners get paid more than shop assistants....the only light being the high paid financial services sector, which has since shrivelled....and the public sector, which is being squeezed.
    Maybe the lack of industrial action has impaired the need for productivity improvements to pay for higher wages.
    In today's Britain productivity has been the result of reductions in wages and wagebills rather than improvements in technique or value adding.
    And of course shares had to increase in 2009 , but with the FTSE lower than it was 10 years ago you could hardly call it a bubble, nor is the oil price, admittedly up form the silly $40 of a year ago , particularly high at $80 or so now versus the $150 of 18 months ago.
    The deflation of the gold bubble will help to revalue real estate and corporate and government bonds.
    A high gold price is usually the first sign of a recession and it resolves when the economy recovers.

  • Comment number 76.

    #71. onward-ho wrote:

    "We maybe need to artificially adjust our property valuations back to pre-crunch levels to increase confidence."

    It always worries me the mixing up the idea of 'Value' and 'price'. We can stick whatever number we want to as the price of a house but its value is still somewhere to live.

    Your single sentence worries me enormously on several levels, not only for what you say but also for what you do not say. I could write a whole economics these on why the statement is wrong - or more prosaicly I fundamentally economically disagree with you.

    House prices and their relationships with multiples of earnings is one rather large element that is doing (and has done) huge dame to our society. People need places to live, they need to live near where they work and have sufficient accommodation to permit family formation (i.e. the breeding of the next generation of workers) and this has to be at an affordable price so as to permit the process to occur - if this does not happen society collapses.

    Further an economically stable society requires that both savers get sufficient incentive to save and borrowers pay a fair price.

    Both of these conditions have failed.

    Your proposal will compound the failure.

    We have to find a way for the ratio of house prices (moderated through a fair interest rate) and earning to make the primary purpose of society (my first argument above) to again be viable.

    This requires that we re-establish a fair price for money to persuade savers to save: then a reasonable cost to borrowers and finally a sensible price for homes.

    This need house prices to be no more than 3.5 times average earnings in any particular area: any greater multiple and the system of economics balances collapses. (Which is precisely what it has done over the last decade - and Mervyn King and the Bank have knowingly and wantonly presided over this economic societal collapse.)

    Do you now understand why I find your single sentence so at odds with a rational economic model. Your re-establishment of 'confidence' is a false idol!!!

  • Comment number 77.

    76 You are completely want prices to be what you think they should be, not a reflection of what the market will bear, nor what they have cost and what they need to be to allow progress to be made.....and that means building, buying,selling, equity growth AND A REASONABLE ANNUAL RATE OF INCREASE.
    And three and a half times income was the limit when interest rates were is silly not to include the interest rate in your concept of affordability.
    Sense is already prevailing.The market can see that and anyone with foresight can see it .
    You need to get real, John, this is a small, crowded , rich island and property should be expensive on a small rich island......once it gets dearer again our economy will be okay....
    In the long run,a thriving real estate market is a great asset for our economy , yes it is a roller-coaster, but without it we are nothing.

  • Comment number 78.

    You are completely wrong about housing as a basic commodity........the reason we got into such amess inBrtitain was the oversupply of horrendous public sector housing which was a basic commodity no-one wanted.
    We have also had an idiotic greenbelt policy which artificially inflated land values and made us all live in shoeboxes whilst our countryside remains a desert only toffs can afford to live in.
    Let's get a bit Australian and bungalow ourselves and sprawl ourselves out of this mess.
    Let's sell off the Cotswolds and the Lake district in quarter acre plots and let the people of Britain have a bit of space!
    This era of Green tyranny needs resisting.

  • Comment number 79.

    #51 DT_1975

    You seem to be agreeing with the Brown line - it's either a fiscal stimulus backed by QE, or 'do nothing'.

    I'm certainly not suggesting doing nothing, or the laissez-faire approach!

    I believe the correct course of action when you have run out of money is to CUT spending. What you should NOT do is spend money you have not got - or worse still, start printing money. That is the road to economic ruin - as Zimbabwe could testify.

    Brown has suggested the choice is Labour 'investment' or Tory 'cuts'.

    Brown wouldn't know an investment if it painted itself purple and jumped on the mantelpiece and sang 'we're in the money' (with acknowledgement to Blackadder).

    The cuts will certainly come anyway, probably sooner than later - whatever school of economics you subscribe to!

  • Comment number 80.

    Neanderthals were not stupid, I read that just now and decided to give your latest thread ANOTHER go, Ms Flanders. No. It is no good. I gave it at least 30 seconds too. Quantative Easing. Ok! Neanderthals were not stupid? Maybe THEY weren't but the later model. lol
    Oh yes we are. Or at least I am. Dense perhaps! I thought that too - dense - when I saw my forebears wore "bling" when it wasn't even thought of a "bling". Make-up and a sort of ornamentation on their body. Handsome looking chap though - one pictorial depiction seen.
    Subject: the end of the affair
    Anagram: Faith thee offer Dna
    Make up. As an option or perhaps more relevantly - as an action. That strikes "accord"!

  • Comment number 81.

    I am convinced by the writers on this blog that many dire things are going to happen to the UK economy soon. I feel a little aggrieved as I have no mortgage (on two houses), some small amount of money in the bank and no debts other than the ones the government has run on my behalf. I have poor pension provision, but I have been contributing, so that could be considered a debt I suppose. I have reduced income on contracts I get but I have income, and I have a wife-wot-works...but who will be sacked as a teacher when things get bad.

    Soon my 'sitting-pretty' state will be kicked over by whatever whirlwind arrives first.

    What should I do for best? Surely if you can accurately forecast what is going to happen, and I believe the forecasts, you can come up with strategies to best handle what is coming?

    At the moment I'm thinking that buying a shotgun and converting all my cash to food is probably best...?

  • Comment number 82.

    62 Million people in the UK (refer to Government web site ONS) only 36.6 Million are of a working age.
    7.7 million of these are economically inactive.
    7.2 Million work part time.
    6.65 million work in the public sector.
    That leaves 16.7 million in full time employment in the private sector.
    Then subtract the low-wage,low tax(even subsidised)"Macjobs" from that 16.7 million

    There`s not much (non-State)disposable income floating about at street level is there,Stephanie?

    We`re already largely a nation of paupers really are`nt we Stephanie?

    In 1997 New Labour committed 5 billion(with a "b") to the "New Deal" employment program.

    The Tories said it was a "waste of money".

    !.3 trillion(with a "t") offered for banking bail-out(Tories agree with it).

    The British establishment is destroying this country,small business by small business,street by street,family by family.

    What do the "charts" say about that Stephanie?

    Are the British people just going to sit and whimper like abused dogs?

  • Comment number 83.

    #77. onward-ho wrote:

    "you want prices to be what you think they should be, not a reflection of what the market will bear, nor what they have cost and what they need to be to allow progress to be made.....and that means building, buying,selling, equity growth AND A REASONABLE ANNUAL RATE OF INCREASE. "

    You are fundamentally stupid and bent of the further destruction of civil society and the Nation.

    Your illogical and daft ideas that boil down to the fundamental error of 'affordability' are what got us into this situation in the first place.

    Your stupid notion of affordability relies on every lower interest rates which is itself tantamount to the destruction of money and will be reversed by the market.

    Your notions that the errors of the last decade are the new norm are fundamentally wrong and economically illiterate.

    There is one underlying fundamental about any society and this is that it is necessary that it maintains the economic conditions that foster and permit its replacement. Your stupidity (which is shared by the idiot bankers by the way - there very same bankers who got us into this appalling situation in the first place) is that the economic logic of your arguments inevitably and unavoidable lead to the devaluation of money and extreme inflation. Houses are places to live and bring up a family - necessary for societal replacement.

    Further, the direct consequence of your idiotic and totally economically illiterate and unschooled ideas has been the dramatic increase in the price of all property - including commercial property ad farmland. This extreme inflation relative to our international competitors is one main contributory reason that our business is internationally uncompetitive - this is a direct and unavoidable result of the absurdly high house prices for such a relatively poor Nation as the UK.

    You are an economic madman who see noting and is incapable of understanding what he sees. You are also intent on reducing this country's society to one feral mass of ill-educated maladjusted ignoramuses (- and I am tempted to add - like yourself!!!!)

    In short you are so wrong....

  • Comment number 84.

    78. At 00:02am on 09 Jan 2010, onward-ho wrote:

    "Let's sell off the Cotswolds and the Lake district in quarter acre plots and let the people of Britain have a bit of space!
    This era of Green tyranny needs resisting."

    What happens when you`ve sold all your property portfolio in these plots,onward-ho?

    Do you swagger off to some exotic destination and sneer over your shoulder and say:
    "So long suckers!"?

  • Comment number 85.

    I'm 54 made redundant. No chance of another job. No morgage. No debts. Some money saved. Wife in public sector.

    Government are making cuts. Large scale preparations in progress. They just don't want general public to know. Attitude seems to be "Make it all look sweet and we might get back in."

    I am trying to start a little business. I emphasize little. Just to look after myself. No point in this country trying to do too much. Too much red tape.... have to be an immigration office, tax man extra. If it's successful I'll work my b******s off to have it all taken away to pay for 'ankers bonuses.

    So I scratch my head and wonder like you where can I ensure how to make sure may little savings are safe. I started collecting tins but have eaten most as we don't seem able to create tinned food that can last more than a few months. How would Shackleton etc have coped.

  • Comment number 86.

    82 BrownbankruptsBrits

    I am afraid I think you are too late. The deed it is done and the curse it is cast. And the process was welcomed by many. The problem disappears with time, but it will be some time - about 30 years.

  • Comment number 87.

    85 DenseSingularity

    In view of the fact that the dispersal of the massive public debt throughout the economy will result in the destruction of asset value and savings, the objective imho has to be to create an business which gives a reasonable income beyond conventional retirement age. You need, preferably, a wide spread of customers in as many socioeconomic groups and as many geographic locations as possible. This points to the internet. There are no niche markets anymore, niches across the entire world consolidate into sizeable markets but big businesses at present fail to address them effectively leaving opportunity. The access portals to these markets are social networks and specialist interest forums. There are a big proportion of a billion english speakers who have interent access globally. How many customers do you need. The only problem is contacting them and networks provide the gateway. These customers can be supplied from any geographic location providing the product or service they buy is easily and cheaply transportable. As the product or service to be supplied has to be something not easily supplied 'en masse' that also defines to some extent what type of product or service needs to be offered.

  • Comment number 88.

    Oh Dear - do I detect a certain level of aggression against Mr Ho? One of the things that most of us that have been in business for more than 10 minutes are very suspicious of is absolute certainty. So, while W-H's rather rosy view of the future may not be to everybody's taste, neither do I find the doom and absolute destruction postulated by some to be any more likely. In particular those that try to fit the UK housing industry into models that apply in other markets are simply cruising for a bruising.
    About two years ago, at the absolute low point in the market I predicted (on Rob Peston's blog) that because the fundemental undersupply in the housing market (for 30 years plus!!!!) hadn't gone away and neither had the average Brits addiction to ownership rather than rental, that prices would recover in full in three years. I'm on track, if not ahead of target so far. The real economy (in which I earn a living) is bloody hard work, my business has seen two years in which turnover has dropped 20% - in each year. Our staff levels are down, we're only breaking even. We are all on 80% money, but we are still there. January - in spite of the weather - has opened with a much more positive feel to it than I would have dared hope. Our overdraft is at full stretch for the next two months but it's still available to us (thanks Barclays) and is (just) adaquate. We have worked hard to adjust to changing circumstances and we aren't managed by idiots.
    Where I see problems is in persuading the public sector (and the financial services shambles as well) that their party is over too. It's all part of the political will, and associated financial hardness that, so far, I simply can't see. Will any of the parties have the courage to cut back on the fat cats in both the civil service and the banks? We'll see in April.
    In the meanwhile, be nice to Mr Ho - he's a litttle ray of sunshine on a gloomy day....
    Tony StH

  • Comment number 89.

    Actually remoteislander I'd have to disagree. I think JfH comments are very valid even if it portrays anger.

    I've been very diplomatic with onward-ho but note when I've challenged there has been no evidence based approach from o-h. It's not optimism - I think o-ho would have been right there in the tulip craze saying tulips aren't overvalued its ok....don't worry.....

    As to yourself you - don't state what industry you're in but if it's connected to real estate be wary of any self-bias.

    You paint a survival picture which is fair enough. Most of us who own SMEs are a pretty optimistic bunch but that does not mean we are blinded to information out there which is pretty scary.

    Part of my job is being able to predict where the economy (and subsets within are going).

    Please read my earlier comments on this thread. All I'll say is that we've been going for 9 years and started with nothing other than our own money. We saw signs of the economic meltdown as far back as 2006 and took steps in 2007. So far our analysis has proved pretty spot on.........

    My forecast for 2010 is (i) as tough as 2009, or as events unfold (ii) worse than 2009.

    There appears to be a number of top businessman who agree. I wish you well in your own endeavour because your nation needs you (as much as your government doesn't give a monkeys - but that's socialism's view of small business) but if I'm brutally honest the world does not need the onward-hos.......there's nothing wrong with being realistic - unless one is in denial and there's been plenty of that recently........

  • Comment number 90.

    Several posters asking, "where has the QE money gone?"

    As Stephanie pointed out in an earlier blog most, (95%'ish,) of the QE money went straight into buying newly issued Gilts by the Government. The government would really only be issuing new Gilts if it couldn't fully repay the expiring ones. In effect the QE money is/was going into "re-mortgaging" the Government debt. A bit like an ordinary person maxxed out on the credit cards transferring the balance to a new one whilst only paying off interest, and fees in the meantime. QE was needed because all the usual lenders to the Government had "pulled ALL of their credit card-like rollover deals!" (Remember how the 125% mortgages, even 100% mortgages vanished in seconds when the banks crashed...) It's why Government's of the last 40 years have loved it's own people borrowing unsensible amounts of money. You can't seriously blame the government for being poor with money, if you are! They'd be very quick to point out your hypocrisy!

    THE question is, are those former lenders to the government back? As pointed out in Robert Peston's blog, they may be, because in the first auction for a modest amount of debt it was over-subscribed. They took £4bn, (so that leaves another £196billion to go!)

    If some sort of QE is still needed could the Bank of England even say NO!? If it did say No and the Government had to cut spending (by making redundancies and lord knows what else,) would the Government accept it was necessary to make cuts and accept responsibility for spending too much(borrowed money) in the past?

    Course it won't! Just like you would if the bank refused you a 100% mortgage you would blame....the bank for "failing to lend to you!"

    Frankly the "Independent" credibility of the BofE is at stake. Will it buckle?

  • Comment number 91.

    88 remote islander

    I might have you mixed up with somebody else but my recollection is you posted some time ago complaining that you lived in St Helena in the middle of the Ocean and were at that time complained that HMG had put back funding an airport on St Helena. Hence your moniker. If that is the case then I question your comment.

    Personaly I do not have any overbearing problem with the current economic situation but that is not the issue. The issue is that collapse is still ongoing although it is now probably more of a ballet than a house of cards. To this has to be added the inevitable public spending cuts. These public sector cuts are probably due to affect the blurred boundary between private and public sectors rather than the central public sector. This will reduce the national efficiency of 'doing' things again following the private sector slump. By 'doing' I mean people who actually do things rather than paper barons farming paperwork. On top of this we have the young generation being disenfranchised from work and earning - and participating fully in society.

    Everthing points to increased inefficiency or redundancy in the economy amd increased failure on the inclusion front. The icing on this particular cake is deferred public pension provision which will be extremely difficult to fund alongside a growing health problem and aging population.

    This is not a environment to be comfortable in. As far as housing goes things are held up by negative equity keeping property of the market if at all possible, and cheap interest rates. The Conservatives will lean to cuts and swerve inflation if possible is my guess, Labour will swerve cuts and favour inflation at some point is my other guess. The likelihood is the worse of all worlds - inflation and cuts. With inflation will come higher interest rates and house finance problems. This game is far from over.

    Houses appear to still be overvalued and however deferred, it is at some time, highly likely it will bite. The public debt will overwhelm freedom of policy and it is unlikley to matter who is in Number 10, although personally I do not see that those who helped create this truely massive problem should remain in residence.

  • Comment number 92.

    Rugbyprof and riverside
    1/ rugby prof I have read your earlier posts and I detect a Consultant - I'm in manufacturing - which is real work, something I didn't know when I was a Financial and Business Consultant. Am I right about what you do? I've been in business about twice as long as you and we also had the hatches battened down in 2007. I read the tea leaves as well as anybody, better than most. I have predicted and invested in the last three property booms and got out at the top having bought at the bottom. I bought my business for 50p from a receiver. It now operates assets worth about half a million, with debt of less than £80K. I will be debt free by next year. I do know what works in business and how to read a marketplace.
    2/ That is why I can afford to live here (for riverside's information) for most of the year, while still owning and running a business in the UK. I still see every email that comes into the business and by means of a virtual network, sit at my "own" UK desk for three hours a day. If you (riverside) own and manage your own business, you're entitled to your view on my comments - if you don't well never mind. Your view on property is a common one and has been consistently wrong for the last 15 years - the basic fundamental of under supply remains. See some of the blogs, including mine, on Robert Pestons current blog.
    Life's a bitch, but you don't have to take it seriously, carry on Mr Ho!
    TM StH

  • Comment number 93.

    Picture the scene, Feb 4, MPC meet in a swanky room, coffee and biscuits on a silver tray in the corner.

    Mother Superior/The White Swan asks 'what's it to be today ?'

    Sick Boy pipes up 'It's time to go cold turkey, we've had our fun, pay the price, have you no character ?'

    Renton responds 'character has nothing to do with it, passing the day has. Trial and retribution is for all our tomorrows'

    White Swan: 'He might have no character but he knows an awful lot about Sean Connery'

    Spud: 'Well, I don't know, I'll have to go with Renton as I owe him some cash'

    Dianne: 'Have you got any bottle or what, man/mouse, what are you ?'

    White Swan: 'I'll cook up then'.

    Another 25bn QE Feb 4 2010.

  • Comment number 94.

    #92 remoteislander

    Seems we'll have to agree to disagree with the likes of O-Ho. Glad to see you're from the 'real world'.

    On the point of real estate, you're comment regarding 'selling at the top of the market' underlines my point that it is all about timing in property i.e. temporal arbitrage (it's a zero sum industry - negative if you include taxes and transactions costs but Governments like it).

    I'll restate that long-term analysis shows UK house prices long term trend equals inflation rate (rather like Gold's). Though most of the time prices are either above or below the line essentially its actually a mean reversion play (and thus arbitrageable - see above). It's currently from various estimates about 20%+ still above trend line.....

    Secondly good to see you as others who were ahead of the curve when everybody in the media states that nobody saw the current predicament coming - a slient minority across a sea of mass idiocy who receive no acknowledgement. It's also good to see manufacturing surviving (thriving). No problem with credentials stated in 1.

    As for myself, our business is software driven though it involves a certain degree of processing akin to manufacturing and we operate in a niche market. We do some 'expert advisory' work in terms of solutions for clients.

    When I think of remote islands, I instantly think 'Atlas Shrugged' - should be on everybody's reading list..............

  • Comment number 95.

    92 remoteislander

    So you live in St Helena and commute to the UK via boat which takes 2 weeks each way. No wonder you want the UK taxpayer to build an airport for you.

    Housing - you claim my view is consistently wrong for 15 years. Mr Brown and the banks have been manipulating the for 12 of them. Despite the 97 election pledge to try and not see a housing boom and bust. What a joke.

    We are mainly where we are due to excessive housing loan criteria. Take BTL away - in progress, take 125% mortgages away - done, bar a few remortgage deals for safe customers, take no deposit deals away - done. Take away liar loans, 49 percent were self cert at the peak, and prices will drop. Take second home purchasing on a rising market away - done. Make life more difficult for first time buyers - done. Take jobs away - done.

    A bank which follows the rules should have no loss due to mortgage fraud, yet C&G alone posted 230Million fraud write-off last year. That is why the FSA has now said if the bank do not check the data and verify they take the loss at the bank and cannot chase the customer. If the environment changes the actions within it change. It is generally acknowledged that house prices are being held up by scarcity due to negative equity problems and low interest rates. But if you want to think otherwise that is up to you.

    Here we manufacture and retail direct to customers in over a dozen countries, but I am entitled to an opinion whether or not that is the case.

    rugbyprof appears to be probably calling it right more than most but time will tell. As for not taking it seriously. Losing your job is a serious matter and it is still happening and the young are being hit hard. But if you dont live in the community all you get are news reports persumably.

  • Comment number 96.

    #95 wrote : "Take BTL away - in progress, take 125% mortgages away - done, bar a few remortgage deals for safe customers, take no deposit deals away - done. Take away liar loans, 49 percent were self cert at the peak, and prices will drop. Take second home purchasing on a rising market away - done. Make life more difficult for first time buyers - done. Take jobs away - done."
    And all this, which could come straight from the economic pages of the Daily Mail, is cause for celebration ? I don't think so. Don't some people ever get tired of the same dreary old mantra, blaming all these mythical alleged "irresponsible borrowers" ? It seems to me that on this blog (and many others) the battle lines over interest rates are clear. Those with money want them to go up - those with debts want them to stay low. So as usual our economic policy is in danger of being dictated by self-interest rather than rational thought. Over the next period, inflation will NOT be a major problem, because the inevitable spending cuts and tax rises after the election will squeeze so much out of the economy that deflation might well become the worry. And as for QE being inflationary - it didn't happen, because wherever the £200 billion has actually gone, it most certainly DIDN'T feed through to the wider economy. And as for low base rate being inflationary - well that's not true either with banks still charging criminally high rates of interest for loans. So if the MPC's brief is to control inflation and after the springtime spike it's not going to be a long term problem, why should we raise interest rates just to heap more misery on the economy and fill the coffers of banks that got us into this mess in the first place ?
    Caledonian Comment

  • Comment number 97.

    The problem with people in this country and the developed countries is the cycle of greed that continues to spiral out of control. Until we as a nation recognise and reconcile ourselves to the fact that we have been living beyond our means for about 100 years (through our miserable failure to reinvest in the Victorian infrastructure) then we are going to be constantly surprised and disappointed by our economic position. The riches of empire/North Sea have largely gone, our employess are overpaid and not productive enough and the rest of the world is waking up to their potential to play catch up. In the meantime we pay ourselves what we cannot afford, we work less than most of the world and happily consume 2 cars per family (probably a BMW or 4x4), 3 or 4 holidays a year and multiple plasma TVs,DVD players,playstations and enough clothes and shoes in one house for a small African village. Given the bizarre elements of our economic model that allows us to pay talentless middle managers and bankers 10 times more than a nurse or doctor, don't expect any changes in the feckless politicians' ability to actually change anything until you are prepared to accept your own greed is a contributory factor to the mess we are all in.

  • Comment number 98.

    95 Riverside
    It's no good just repeating the same sad mantras about property. Look through your window - an undersupplied market (and not just for the obvious financial reasons you indicate) is balanced by a "need to move" demand, which is already, particularly in the south east - which always drives the UK market with an appropriate regional lag - pushing London prices above '08 levels. The supply side is already at least 500,000 housing units (on HMG figures)below demand. That's why financials are not the key driver(and haven't been these last 20 years) and that's without factoring in Britain's illogical addiction to ownership. It may not make sense, but that's the reality. All that you say is true - just only partialy relevant as far as the property market is concerned. I also share many of rugby profs views, but his assertion that you can (effectively) forecast future property prices on the 60 year link between inflation and house prices is, in my opinion, simply wrong. At least for the last 30 years and for two reasons.
    Firstly - Pre Thatcher social housing effectively capped the acceptable cost of housing to the "working" working class - why should you spend more on a mortgage than on rent, where somebody else also picked up the bills for maintaining the place? The rents charged bore no recognisable link to the cost of providing the housing stock (particularly in the various Socialist Republics that were prime Thatcher targets). As a proportion of the population (however you define it) the middle classes - with their property buying habits - were less significant, probably insignificant outside London and the leafy shires. Thatcher de-nationalised about 30% of the nations housing stock (anybody out there can give me a better figure?) and created a new market. Do the stats from 1985 and I don't think rugby profs figures will stack up. Let me know prof?
    Secondly - pre crash - the market was adjusting to sharply higher ("unaffordable")house prices and the supply of rental properties was increasing rapidly, based on both "silly" terms and very, very cheap cost of money. Rents were being effectively subsidised by rapid capital appreciation. Any cash flow problems were eliminated by equity release and all was done on somebody else's money. I know - I did it. As you so accurately say, "take away BTL" and what happens? You remove the cheaper housing acquisition option that renting had become. Domestic rents have recovered sharply in the south east and and held up pretty well over England generally.(no info on Wales and Scotland). So renting is now increasingly more expensive. Not something that reduces housing prices.
    So the current market place - look up the Land Reg figures for both volume and regional prices (all other stats are speculation and might be's) - shows steady recovery at sustainable levels in both price and volume. Combine that with the number of people in work - which I feel is a much better indicator of the demand side of the equation than unemployment (which always hits the CDs of the population disproportionately harder than the property buying ABs)and you might start to understand why the property market is "defying gravity" as one blogger on Steph's or Peston's blog put it. Add in relaxing terms (as compared with a year ago) with many more 90% deals available and an increase in the amount of cash available for purchasing houses and 2010 is not going to be the year that house prices face a "correction". Don't be diverted by the silly numbers flying around about the destruction of the equity release/re-mortgage market- that market never influenced house prices - it was just a dumping ground for funny money and the removal of that money has not and will not depress prices.
    One of the problems with theories that don't fit the market place, is sometimes some people don't understand that it's the theory that's wrong - not the market place. If you can give me a proper explanation of why house prices are where they are (please not it's all the Banks and Gordon Brown's fault - but a reasoned analysis that's better than mine), I'll happily conceed to your higher wisdom and be rude to Westward Ho as well.
    Last point on your "economics" - you make the point that no Bank should experience losses on mortgage business and C&G wrote of £200M+ - no they didn't - they made provisions against it. I like many are quite certain that a very significant - maybe as much as 60 to 70% of the huge provisions made throughout the sector will be reverved within 4 ot 5 years - basically when they can afford to pay the tax or have thought up another wheeze to further defer it. Like the property market we will have to wait and see.
    Your somewhat cheap crack at were I choose to live merely demonstates that your lack of knowledge is more comprehensive than simply covering the housing market. Would the Outer Hebrides be more acceptable to you? If you have 5 or 6 hours to spare to discuss how badly this part of Britain (yep british citizens here) has been treated by the Labour Government, I'll happily oblige. Suffice it to say it makes Brown's handling of the credit crunch look transparent, timely, ethical and entirely in the interests of the british taxpayer.
    I'm here because I can be, I like the place and I can afford to come "home" whenever I wish. My telecommunication facilities are adaquate to continue to manage my business and my wife does an excellent job here. However people die here for lack of facilities and the lack of the ability to get off island quickly. Money is important, but in the UK we think nothing of flying sick people from the Scillies or North Uist to a mainland Hospital. The expense doesn't come into it. Here we let them die. Judging from your comment, presumably with your approval.
    TM StH.

  • Comment number 99.

    Its interesting to read some of the comments about house prices in the posts, the thing to do is look at the rest of the world. In America house prices are down up to 60 percent in many places and you won't get a mortgage where the payments are higher than 30 percent of a borrowers monthly income so as to insure that people have disposable income left over to spend in the wider economy, thereby providing an ongoing boost to economic growth. In Japan, who's bubble burst 20 years ago, even today house prices are 40 percent lower than they were in 1989, even though their supply to demand ratio has always been far more accute than here, again because high house prices are fine when most of the value is equity and the owner is paying a manageable mortgage, but when it comes to shouldering that entire cost as a real debt then not many people have the stomach for it. Another reason is that in the future people are not going to be able to get into the same levels of personal debt as in the last 15 years. Take a person on the average wage living in a house worth 200 grand that he bought 10 years ago with a 90 grand mortgage, he has a 20 grand car loan, a 10 grand bank loan and credit card debts of 5 grand, that gives a total debt of 125 grand, and the bank says he is in to much debt in relation to what he earns. Now think of a first time buyer, again on the average wage coming along with no equity and buying the house next door, he has to get into 200 grand of debt just to get a roof over his head, does that mean that he won't get any further access to credit until he has payed down his mortgage? If so then that will have a knock on effect with the rest of the economy as he won't be able to buy anything that he can't pay cash for. Or will house prices fall to a level that enable him to own a home and run a car, buy clothes, go on holiday, save for a pension and so on....

  • Comment number 100.

    A large part of our problem is government debt and a lot of us are afraid that cutting public expenditure means cutting services. And those in power are even more afraid that it will lead to a loss of votes. I advise you (and present and future governments) to read two books written by Leslie Chapman. The titles are: ‘Your Disobedient Servant’ (1978) and ‘Waste Away’ (1982) both published by Chatto. Amongst other matters, the first book covers how the author reduced waste and, thereby, reduced expenditure by over one third in his section of the civil service

    These books are a revelation on how the civil service and public bodies operate. I would guess that even a half way attempt at applying the ideas of Chapman would reduce the government’s expenditure by 15 % without influencing public services. Applied fully, with some other well judged cuts, and intelligent investment, we could be out of trouble and on the way to a world beating economy within a few years.

    I accept the books cover the situation of 30 years ago, but I doubt very much that things have changed.

    If I sent copies to Brown, Darling, Cameron and Osborne, are they desperate enough to read them and take action? Isn't it better, even for them, to take courage and be unpopular with the civil service rather than with the voters?


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