[PEN-L:32408] Bank of England paralysed by fear of property crash

[Chris Burford <cburford@xxxxxxxxxx>]

The commentators on the searching BBC Newsnight programme argued that the
minutes of the Bank of England, that have just been published, explaining
the reasoning for the decision earlier this month not to reduce interest
rates, shows it to be terrified that the precariously balanced British
economy is set to go over a cliff.


http://www.bankofengland.co.uk/mpc/minutes.htm

[click on] Minutes of the mtg held on 7 & 8 November (pdf file size
92k) 

In the factual preamble the report notes that house prices show rises at
an annualised rate of 30%. This is allowing remortgaging and consumption
to be maintained at unprecedented levels of consumer debt. 

The studiously formal conclusion reads:

> 24 There
> were, however, arguments for maintaining interest rates at their current
> level which, taken together, most members found more persuasive. First,
> consumption growth in the United Kingdom was expected to remain buoyant
> in the near term. Household borrowing, both secured and unsecured, had
> been remarkably strong, demand for loans was not abating, and there were
> few signs that lenders were tightening credit conditions for consumers.
> New lending products and the sharp rises in house prices had allowed more
> households to use mortgage equity withdrawal to help maintain their
> consumption in the face of slower growth in disposable income, and the
> increase in housing wealth might itself tend to stimulate consumption
> growth. Second, a reduction in interest rates now risked stimulating
> house prices and household borrowing even further, increasing the risk of
> a sharper fall in consumption at some point in the future. Third, there
> were risks to the inflation projection, but they were on both the upside
> and the downside. The central projection suggested that the current level
> of the repo rate was consistent with hitting the inflation target both on
> average over the next two years and at the end of the forecast horizon.
> Fourth, the upside risk to costs and prices from the labour market might
> be greater than the forecast allowed. The fall in hours worked might in
> part have reflected a reduction in labour supply, there were some signs
> of greater difficulties in concluding pay settlements, and above-target
> inflation in the near term might risk greater upward pressure on
> settlements. Finally, the risks to the inflation forecast posed by the
> housing market were on the upside in the near term. If any of the
> downside risks to demand began to crystallise, there would be time to
> reduce rates to help keep inflation on target around the two-year
> horizon.


The dilemma is this. They need to cut interest rates to expand the
economy but this will stoke the inflation in house prices even more than
has occurred in the USA. With an even greater risk of a crash. There are
already fears that Gordon Brown will have to borrow £50 billion to tide
the UK economy over the next few years, with no one knowing where the end
point of the cycle will be.

 From a marxist point of view the sum total of all exchange value in an
economy is finite, (unless it can gain exchange value from other
economies) and the contradiction between the need for capital to
accumulate and the limited purchasing power of the masses is absolute.
Keynesian initiatives may be more progressive than sado-monetarist
solutions, but ultimately they are illusory, if they only achieve an
increase in state or personal indebtedness.

The best result they can pray for in the UK and in the USA is a period of
grumbling stagnation. But there could be a sudden collapse. The UK
economy which seems to have been doing unbelievably well in bucking the
trend may be more vulnerable than the USA because it is smaller. Hence
perhaps the reason why Gordon Brown has chosen this moment to occupy the
front page of the Financial Times!

Brown blames UK's woes on global turbulence

http://news.ft.com/servlet/ContentServer?pagename=FT.com/StoryFT/FullStory&c=StoryFT&cid=1035873488488&p=1012571727085


> Britain cannot be immune from global economic
> turbulence, Gordon Brown has warned, as official figures showed
> government borrowing racing ahead of the chancellor's forecasts.
>
> Speaking to the Financial Times before next Wednesday's pre-Budget
> report, the chancellor sought to emphasise that the root of the UK's
> economic problems lay not at home but abroad.


Trying to shift the perspective to the global economy, Brown argues there
has been a slowing in global trade, which affects "this great
trading nation" 

His global solution is to move towards a more multipolar world:

> Although Britain's position was relatively
> robust compared to low growth in the eurozone economies and weak recovery
> in the US, the slow recovery in world trade threatened the pace of
> recovery. "If you look at what's happened over the past few years to
> the global economy, America has been the engine of growth and what we
> want is each continent to be able to pull its weight if we're going to
> sustain the momentum of recovery."


But he has got to hope that the British economy will somehow hang out
longer than Europe and the USA.  And he s not radical enough in this
interview to emphasise massive Keynesian expansion of the purchasing
power of the developing world, to boost the whole world economy, although
other initiatives have lain somewhat in this direction.

He wants the European central bank to reduce interest rates, to stimulate
the economy and the market there, which the Bank of England dare not do
here!

Chris Burford

London