Wednesday, 19 March 2008

The first Darling Budget

What budget? Economy in meltdown and he takes a couple of pence here, a couple of pence there, all on the old staples like tobacco and alcohol. What's new?

It's ironic because the roots of our problems actually go back to Maggie rather than Tony and Gordon. I posted recently on this when I discussed Northern Rock, but in the light of the Bear Stearns collapse and now the news that HBOS could be in trouble there's a far bigger picture to consider.

The broad chronology goes like this:

The Thatcher government abandon controls on the selling of mortgages, saying that market forces should be the sole determinant of whether or not people get mortgages.

The building societies compete with each other, and with other providers, to lend large sums of money.

People obtain very large loans in order to buy property, regardless of ability to pay.

Because people are able to access these large sums of money, the price of property rises way beyond wage levels fuelling increases in the cost of living.

With property prices rising so fast, people who are financially stretched simply take out further loans, secured against the increased value of their homes.

Public housing is sold off on the cheap, which increases the demand for private rented property, so rent levels rise.

The returns are now so high that people start buying property 'to let'.

Governments start to live in fear of stopping property prices rising; not only do they risk upsetting 'home-owning' voters but they are aware that as soon as property prices stall the whole house of cards start falling down, as people with mortgages find themselves unable to meet their repayments. Many 'banks' (often de-mutualised building societies) are hopelessly overcommitted with high-risk mortgages, but market forces play no role at all by now as once banks start failing, they take the economy with them.

In all of this, it was the UK that led the way; the US, dazzled by our economic 'miracle', soon followed suit. And now we're both in the same boat, with property prices stalled or falling and mortgage defaults rising. Because of the general effect on the economy, the government can't conceivably allow banks to fail, so they find themselves pumping public money in and trying to bring interest rates down so that homeowners are under less financial pressure.

But we're going nowhere. We need an economy that supports higher interest rates and lower property prices. You can't continue to expand your economy on the basis of ever-increasing debt; it's the economics of the madhouse and Robert Mugabe; it can't be done.

Why do we need higher interest rates? Because it encourages investment, it encourages people to save, it provides the funding for our pensions (and god, don't we need that) and because it discourages financial institutions from reckless lending.

Why do we need lower property prices? Because it discourages speculation, it means businesses pay less rent so they don't have to charge such high prices, because it supports a thriving rural economy, because it makes it realistic for people to take a first step on the property ladder without being saddled with unrealistic debt.

Sooner or later, what goes up comes down, and property prices are no exception. Eventually it will happen, and at the moment it looks as though it will be sooner rather than later. Rather than hoping the problem will disappear, or better still that the collapse will come after the opposition have gained power, an effective chancellor would manage that process so that the worst pain is avoided, at the same time reducing the vast debt that is rife throughout our society.

We have, and have had, no economic miracle in this country. We do have a long period of apparent economic growth, financed not by hard work but by credit. We're past the point now where the government needs to call 'Time'. Not put a few pence on the price of a pint.

Thursday, 6 March 2008

That lot over the channel (aka the Treaty of Lisbon)

Another pointless parliamentary debate; the proposed EU constitution is renamed and the politicians who have promised a referendum on the constitution say they don't have to hold one any more, because it's only a treaty now. Everyone knows it's still the constitution and that the government would have lost any referendum by a country mile and then some.

It's difficult to know who's worse; the government for reneging on an unequivocal commitment, the Tories for their smugness when they weren't able to put the Maastrict treaty up for a referendum last time around, or the Lib Dems for tying themselves into knots because they've decided it would be better if we went right back to the beginning.

It might surprise Nick Clegg to learn that we had a referendum in 1975 to decide whether we wanted to be in Europe or not. All three parties recommended that we vote 'yes' and they got two-thirds of the vote as a result. We can't keep going round in circles, endlessly revisiting that decision.

In 1975 I voted to come out, but I wouldn't do so today. Not because I've changed my mind (we made the wrong decision back then) but because the world has changed since; if we came out now we'd have no economy left whatever. Only the most rabid Eurosceptic would claim otherwise. I think we should go in the other direction entirely, commit entirely to the EU, join the Eurozone, and stop seeking to maintain a halfway presence which leaves us with no influence and few of the long-term gains that accumulate with full and enthusiastic participation. By the time we join the Euro, and sooner or later we will, as surely as night follows day, it will inevitably be on less favourable terms than if we'd been in from day one. And they'll have us over a barrel into the bargain.

Sadly the politicians who run this country are a gutless bunch; scared of committing to anything if they think it might be anything less than universally popular with their electorate. They should be out there making the case but they aren't. They're too busy getting their snouts back in the trough, happy to line their own pockets regardless of any public opprobrium when they get caught. A plague on all their houses!