Dr Kinglove – Rocky Crunch lesson 1

This morning’s FT notes that:

“Mortgage lenders seeking public support to plug a £30bn ($59bn) funding shortfall and sustain lending to homebuyers will find little comfort in Tuesday’s speech by Mervyn King, Bank of England governor.

A tightening of credit conditions for both households and companies ‘is unlikely to be short-lived’, Mr King said, but while the consequences could be painful, he maintained that a rebalancing of Britain’s debt-laden economy was necessary.”

What the esteemed Governor appears to be saying is that he wants to see an unravelling of debt. Personally I’d say the most desirable thing would be for this to happen gradually, over a decade or two, through the careful application of a clear policy agenda determined by a painstaking analysis of the root causes of our problems, but King is quite happy, it seems, for this to happen in an entirely uncontrolled manner through what looks more and more like a coming economic cataclysm – housing market collapse, negative equity, repossessions, bankruptcies… Hmm. And it’s all his fault and he doesn’t see it.

I saw an article in yesterday’s Metro (London Underground distribution, maybe online but I can’t be bothered looking for it): “The average age for a man to become debt-free is 52 and 47 for a woman” according to a poll, it said. Let me put it to King is that the people spending recklessly are not on the whole those in debt. The people spending the money are those controlling a large proportion of the country’s wealth – predominantly older property-owners – and those on high incomes. The people running up debts are those struggling to get on the housing ladder and those on low wages. All I’m doing is extrapolating a little from the argument that is often made, that high house prices represent a transfer of wealth, mainly between the generations, but also to the property -owning classes from those families buying property for the first time. In other words, the Governor’s basic premise may well be false. Perhaps some research needs to be done before we proceed directly to Judgement Day without passing Go, à la King. Perhaps the indebtedness of the nation is not a direct result of greed. Just perhaps, I suggest, both excessive indebtedness and excessive consumption have been caused – to a large degree in separate ways – by a third factor: inequality. Oops.

And who do you think will be hammered by higher real interest rates, “risk premiums” and a squeeze on the availability of consumer credit?

Yes, house prices will come down, but this will take years to work through. In the meantime, those who will suffer are those who are already mortgaged to the hilt trying to buy a home or otherwise struggling to make ends meet.

This fool, King, has overstayed his welcome already by allowing Northern Rock to fail, and now, in a display of mind-blowing hubris, he is preparing to fiddle while we are all burned by a recession. I’m sure Gordon will not want to let Mervyn join the ranks of the unemployed, but he really must do so, so that the debate can move on to first, how we ease the immediate crisis – liquidity is what’s needed, rather than lower interest rates per se, though if the only medicine in the cabinet is a drop of Base Rate that’s what the patient should be given – and address the long-term, structural problems.

Not that it’s just King’s fault. The current consensus on what central banks should be targeting is fatally flawed. The problem has been the utterly abject total failure to control property inflation. Those responsible – the leaders of the present monetary establishment around the world – should hide their faces in shame. Perhaps the best thing they can do is emulate the late John Profumo, who after the disgrace of the eponymous affair, dedicated himself to doing good works for the needy.

Martin Wolf’s column today (and the Taylor paper it references) show clearly what’s happened. Interest rates were far too low for far too long. OECD central banks, I suggest, have all been targeting the wrong inflation measure. They’ve targeted inflation measures more influenced by global than domestic forces. It would have been preferable to target just house prices – though arguably what they really need are more levers. Here is my idea: targeting the affordability of housing by raising wages – through increases in the minimum wage – would leave them able to continue to act in concert to control global inflation by targeting the inflation indices they use today.