Sep 16 2007
The credit crunch
The twin decisions to tighten money and to reveal the name of a bank that needed to use the lender of last resort facility have done considerable damage to confidence in the UK. Attempts to lay the blame on sub prime mortgage lending in the USA will not provide a full explanation of what has gone wrong here at home. The UK authorities decided not to intervene in the 3 month money markets, allowing a further increase in these interest rates that mattered over and above the substantial increase in Minimum Lending Rate the Bank has brought in since the election. The markets were too tight for comfort, just as they were too easy a couple of years ago when borrowing was on a big scale.
The Chancellor told me a few weeks ago that mortgage regulation was necessary and implied it was working well. He needs to rethink his position. How could we get into the current position if mortgage regulation was working so well? The government after all, increased regulation well before this problem hit. It is another case of regulation that cannot deal with the most important problems affecting the market. The difficulties have been created by the credit crunch, which has changed circumstances substantially. The crunch has been brought on by the authorities shifting belatedly from interest rates that were too low to interest rates that are too high. They are going to have to cut rates. I expect the US will start the move soon. The UK will have to follow.
John Redwood has been the Member of Parliament for Wokingham since 1987. First attending Kent College, Canterbury, he graduated from Magdalen College...
It was artificially low interest rates that have caused the nation to become so indebted and house prices to reach unsustainable levels. The worst thing now would be for interest rates to be lowered. We must weather the coming storm and we have to learn some hard lessons. An economy cannot survive on property speculation and the continued accumulation of unsustainable debt.
The 4th August 2005 will go down in history as one of the Bank of Englands worst errors. They reduced interest rates from 4.75 to 4.50 and the debt housing boom rose ever more just at a time when the housing market was showing some signs of slowing. Please we cannot repeat this mistake.
The Conservatives should be hammering Labour on their economic record. We cannot survive on an island of inflated house prices.
Gordon Brown promised no more boom and bust. Well we have had the boom we know await the…
Reply: I agree that they made a big mistake keeping rates too low. Now they are too high. Anyone who doubts that should look at the credit crunch problems we see daily on our TVs.
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I have (had!) a substantial sum in Northern Rock.
If the governor of the BoE had come out and said the money was safe I’d have left it there.
The fact that Alistair Darling said so carried no weight at all with me - and obviously none with all the other queueing savers (I wonder why!). Already he’s weaselling out by saying that he’d “been assured by the FSA that the money was safe”, so he can always blame them when the doo-doo hits the fan.
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This blog is required reading on the economy!Well done. I also wonder why King changed his position overnight and rescued a Labour Bank.! Interference by Brown perhaps!
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Your views on interest rates and interesting and will no doubt be unpalatable to the BofE (and Chancellor) but the logic seems inescapable. Imagining for a couple of minutes what would happen to the economy with another 1/4% or 1/2% shift upwards to deal with makes your conclusion entirely reasonable.
On a lighter not, now might be the time to tap Northern Rock for an unsecured loan!
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Do you want all the banks and building societies to be nationalised John? The state to resume control of the Bank of England. Or do you just want BVs and BSs to be allowed to gamble, within some limits, trouser or distribute the cash when they do well, and get bailed out when they do wrong?
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The market functions best when it is allowed to function unfettered. The Labour government by nature is obsessed with regulation. It is the way they exercize power over non-state bodies like the city. I am therefore fully behind the Conservative party plans to hack away at all unnecessary business regulation.
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John,
There is a whole raft of articles in the press today along the lines of ‘government finance policies coming home to roost’. Your contributions on this blog are as clearly stated as any.
However, Gordon Brown is more slippery than a greased piglet. As a former Conservative voter - and one increasingly inclined to vote Conservative again - I’m afraid that I don’t hold out much prospect of Cameron or George Osborne being able to inflict permanent reputational damage on the ‘clunking great fist’.
You have analysed the problem and its causes beautifully. Please would you follow up with some clear political advice on what the Shadow cabinet should do collectively to translate this into electoral advantage.
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JR, As ever your analysis is impeccable, and in fairness, your recent proposals are sound as ever, but what is ‘Dave’ Cameron up to?
At a time when Labour are in trouble, all I seem to hear from the high command is that petrol tax need to go up! (sic), flying should be discouraged and supermarkets need to charge people to park for the indignity of buying groceries!
This is no more than a doomed attempt to appease ultra-viros who would never vote for you anyway. Election winning policies these are not.
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The problem is not one of interest rates being too low or high.
It about RETURN OF CAPITAL, rather than RETURN ON CAPITAL.
The problem is one of RISK.
Businesses borrow money to invest and earn a return.
The insane collapse in lending sanity, at very low interest rates, has created a lot of low return debt with a much higher default rate, involving losses on capital.
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OK, it is about time that nice Mr Cameron stopped burbling about green issues and green taxes (for NuLabour have educated us all very well on taxes; they go up and they don’t come down) and started asking pointed questions of this current Government.
Questions on the lines of “Why are you using the Consumer Price Index (which ignores mortgage and council taxes etc) to calculate inflation, instead of the far more representative Retail Price Index?”
The reason of course is simple: the CPI gives an artificially low inflation rate, keeps interest rates artificially low at the expense of skyrocketing house prices, and gives Labour a credit-fuelled Boom. Oh look at that nice Mr Brown, look at the decade of prosperity he’s given us!
The dark side here is one Labour would really, really like to ignore. If you use the RPI to calculate inflation, then interest rates increase drastically and the housing market comes back to earth with a bump. Consumer spending drops sharply because nobody has spare money, and the only way to increase it again is to cut taxes to decrease the financial load on the consumer.
Once you force the country and Government to live within their means, you then have the highly uncomfortable (for Labour) prospect of having money supply drive public policy. The tax system needs reform (flat tax, removal of silly taxbreaks, removal of tax credits) and this reform will inevitably result in reductions in tax.
This is a traditional Conservative policy, and one which wants pursuing if you’re to win the next election. The fact is this: most people are sick up the the back teeth of Labour and their tax-grabbing ways, and we’d jump at the chance of getting (RID OF THEM), if we but thought we’d have something different in power.
Cameron isn’t telling us this.
Cameron is saying daft things like “Things will remain pretty much the same on tax policy and it may even have to go up”, and wittering on about so-called green taxes.
What the hell is the point of voting for (him)if we’re just going to get more of the same old NuLabour (RUBBISH) that we’ve had a decade of?
reply; I HAVE EDITED THE ABOVE WHERE WORDS ARE IN BRACKETS as this is a family site!
David Cameron has demanded a statement from the Chancellor on the last few days events, and is very critical of the way Labour are handling this.
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