Now, let me get this straight. The credit crisis which is supposedly engulfing the civilised world is a result, everyone agrees, of too much debt brought about by low interest rates. So, the last week the Bank of England has moved resolutely to stem the crisis by, er, cutting interest rates.
The mission statement of the Bank of England is to combat inflation by raising the cost of money. Inflation is currently running out of control in oil prices, food and commodities. So, the Bank of England has moved resolutely to combat this by cutting the cost of borrowing. This will lower the value of the pound, increase the cost of imports and therefore boost inflation.
Now, I’m no economist, but I can’t help thinking that something’s not quite right here. The Bank has acted in precisely the reverse of the way it is supposed to. It seems to think that the best way to combat an inflationary debt spiral is to encourage it just a little further. Just as we seem to think that the way to create affordable houses is to make housing more expensive.
But who cares. Happy days are here again. The stock market is jubilant, the banks are grateful and everyone is looking to cash in on their houses again. To hell with the future, lets remortgage and live for now! The Bank of England has decided that we can all go to hell in a handcart just as long as house prices don’t fall. For that is really what last week was all about.
What forced the hand of governor Mervyn King was a report from the Halifax showing that house prices had fallen for three months in succession. Shock! Horror! Prices are still rising at about 9% a year, but the merest possibility that houses just MIGHT become affordable again was enough for the Bank to panic.
We’ve been here before. The last time the cut interest rates was in August 2005, when it last looked as if house prices were about to decline. They never did. But that cut sent a disastrous message to the housing market and led to a boom in sub-prime mortgage lending by greedy banks like Northern Rock. Gullible first time buyers were sold 125% mortgages they couldn’t afford on the basis of dodgy “self-certified” incomes.
Clearly, the main purpose of interest rate policy is to protect house-prices rather than combat inflation or debt. The Bank is a misnomer. Is should really becalled the Building Society of England. Perhaps we should just recognise reality, and hand the nation’s finances over to the Nationwide.
Actually, it’s going that way anyway, now that the Bank has loaned the basket case building society, Northern Rock, £25bn. of our money. City commentators think the government is ultimately going to have to nationalise the Rock, which means that its thousands of mortgagees will effectively be living in council houses. Well I suppose that’s one way to get social housing figures up.