Literally Incredible Interview With Bank Of England

I was watching the BBC News last night, and could not believe what I was hearing, in an interview done by Robert Peston with Bank of England Deputy Governor Paul Tucker on the Financial Policy Committee. When I say above “Literally Incredible”, that is exactly what I mean, as in totally without cred.

The Committee is intended to be the Government's new means of preventing financial crises. Consequently, we hear Robert Peston commenting its job will be to avoid the kind of bubbles we have seen in the past, caused by too lax lending policies, and too much money pumped into the economy. If for, example, a housing bubble were to emerge, he says, the job of the Bank of England through the FPC would be to pop it, by raising interest rates, and other measures to cut off the supply of cheap mortgage credit, and thereby bring prices back down.

But, hang on a minute. What does he mean by IF A HOUSING BUBBLE WERE TO EMERGE??? A house price bubble has already emerged, its already here!!! That is why a recent survey showed that two-thirds of potential first time buyers now believe they will never own a house because they are simply too expensive, and they cannot even save enough for a minimal deposit to put down for one. It is why the OECD and IMF have stated that UK house prices are 40% overvalued, as I set out in my blog OECD – UK House Prices Need To Fall 40%.

In fact, if you look at the chart provided there by Deutsche Bank, you will see that on past experience, that 40% over valuation would lead to not a 40% fall, but an 80% fall, because periods of over valuation are always followed by equal periods of undervaluation.

So, for example, the 20% over-valuation that arose in the bubble of 1988, was matched by several years of leading to a 20% undervaluation by 1995. That reflected the 40% fall in prices that occurred after the 1988 bubble, which collapsed, as interest rates began to rise, and as the early 1990's recession started. It is inevitable that the current 40% over-valuation, will be matched by a similar period of a 40% under valuation, reflected in an at least 80% fall in prices from current levels.

But, if we were to believe that the Bank of England really was going to avert such bubbles, then we would expect it to be raising interest rates now! In fact, even the 80% fall in house prices is undoubtedly an underestimation. The OECD's 40% figure is based on 2 figures. Firstly, average household income. Secondly, average house prices. But, we already know that household incomes are falling as a result of the high rate of inflation, and the freeze on wages.

In fact, as a result of the economically illiterate policies of the Liberal-Tory Government, the household incomes of a large number of people are set to drop catastrophically as they lose their jobs in the State Capitalist sector, and in all those industries, shops, and small companies dependent upon it. So, that current 40% over-valuation is set to jump much higher as real wages fall. The only reason that prices have been kept at these bubble levels is because interest rates are at a ridiculous, and usustainably low level, facilitating low mortgage rates. Even a small rise in interest rates – and it does not have to be in official interest rates, recently the credit rating agencies expressed concern at the UK's creditworthiness, as its low growth and possibility of a double dip calls into question its ability to repay its debt – would lead to a sharp fall in house prices from current levels.

With the Banks and finance houses already fearing the possibility of massive losses due to a sovereign default on Greek debt, possibly to be followed by Ireland, and Portugal, and then possibly Spain and Italy, even these massive amounts would be dwarfed if they faced large scale defaults on private credit tied up in property. That is why they are trying to talk up the market in the face of such an inevitable collapse.

But, to come back to Robert Peston's interview with the Bank of England, the implication is that were the new Financial Policy Committee to identify that lax monetary policy was leading to other signs of a bubble economy, such as we have seen in the past, then, it would intervene to prevent it. What sort of thing might that entail? Well another possible sign of a bubble economy caused by too lax monetary policy might be in addition to astronomical house prices, that inflation was above the Bank's Target Rate of 2%.

Of course, temporary rises above that limit would not be significant, just as it would be expected that temporary dips beneath it would be discounted. If, however, the rate was say double the target rate, or if the rate was persistently above the target rate for say three years, then this would probably have to be taken as an indication that lax monetary policy had resulted in at least one bubble blowing up in the economy.

Yet, hold on! The CPI measure of inflation at 4.5% IS more than twice the target rate of 2%, and has been so for many months. The RPI measure at 5.2% is more than two and a half tiems the target rate, and has been so for many months. Both are likely to rise further as a lower pound means that the cost of imported manufactured goods from China, as well as imported fuel, food and other goods will rise sharply. The announced rise of 19% in the price of Gas, and 10% in the price of electricity to come in August is an indication of that. And, in fact, the rate of inflation has been above the target rate for almost every month for the last three years!!!

So, I'm sorry Mr. Peston, and Mr. Tucker, but your assurances that the Bank of England are not going to allow another bubble to blow up are simply lacking in any credibility. The truth is that you are having to keep your head in the sand and ignore the current property, and other bubbles, because you think they are the price of the rest of the economy not collapsing itself. Its the economic policy of Mr. Micawber, of failing to address the reality of the current situation in “the hope that something will turn up”. Unfortunately, history, and not just the experience of old Wilkins, shows that not only will reality express itself, but when it does, the consequences for house prices, and every other bubble will be more pronounced than had they been tackled in the first place.