If you read those personal financial profiles that the posher papers like to run on the weekends, you see one theme repeated over and over again. Your average middle-class Brit distrusts not only pensions but also just about all traditional financial assets, and is staking his/her hopes of a happy retirement almost entirely on the property market. In the old days -- say, up until the mid-1990s -- this meant downsizing from your family home, taking some cash out, once the kids had left. That doesn't work any more -- that thatched charmer in the Cotswolds now costs more than you can get for selling your suburban spread. So people for whom property is the only reliable asset have swarmed into the buy-to-let market.
There are a couple of indications this week that this trend is not only getting a bit silly, but may actually be starting to have a malign influence. First there was the story of a 102-year old gent arranging a 25-year, interest-only mortgage in order to buy a rental property. Then there was the report that the number of home-owning households in the UK has actually begun to slip, after rising steadily for many years.
These two things are linked. Lenders will always be happy to commit money to people who already have it, or who are in a position to provide security, even if they are well into their dotage. Those who already own a property can therefore buy another one without too much trouble. In contrast, the young couple with a modest income, small downpayment and limited credit history are likely to get shut out, particularly at a time when interest rates are rising and affordability is falling. By piling into the buy-to-let craze, the baby boomers are in effect trying to finance their own retirement by keeping a growing part of the next generation from getting a foothold in the housing market. This can't be socially desirable, but it's hard to see what will stop it until the property market goes into reverse. At that point the buy-to-let crowd will be the first to bail out.
One interesting sidebar to this: the Tory MP Michael Gove (a man who always seems to me to have been born middle-aged) has castigated the Government for allowing the housing market to become unaffordable for the young. Mr Gove is MP for somewhere called Walton Heath, and it's a fair bet that his constituents include a lot more buy-to-let investors than demoralised renters. Still, a big up to him for speaking out. This issue is not going to go away.
Tuesday, 27 March 2007
Thursday, 22 March 2007
If it's a con trick, it's not a bad one
If the reaction to this week's budget is anything to go by, the Tories have suddenly become a lot more worried about Gordon Brown. The right-leaning elements of the press (i.e. most of it) have been almost unanimous in writing off the unexpected 2p cut in the basic rate of income tax as "a con trick" (the Mail et al), "a ruse" (Telegraph) and "robbing Peter to pay Paul" (Times). Brown is apparently aware that this last is a perfectly viable strategy in a democracy, provided that the Pauls outnumber the Peters.
It's a sure sign that he's put one over the Opposition -- but is it a fair criticism? Well, in a sense it is: Brown has largely funded his generosity by abolishing the 10p starting rate of income tax and "aligning" the National Insurance bands with those for income tax. The distinction between these two levies now only really exists to allow the Government to maintain the fiction that it has not raised personal tax rates during its decade in office. Brown has also boosted revenues by raising the traditional "sin taxes" (booze and tobacco) and raising fuel duties and car licensing fees for the largest vehicles.
Even if these changes largely offset each other, is that a bad thing? One of the principles of "good" taxation is that you try to raise money from "bad" things, so as not to create perverse incentives. Income is mainly derived from work, which makes it a good thing, so reducing the income tax burden is in principle good for the economy. In contrast, the things Brown has taken to taxing lately -- this week's duty increases, plus the airline passenger fees that were introduced in the pre-budget review late last year -- are all things that the Government in some sense seeks to discourage. (Cheap travel has definitely been added to the traditional "sins" of boozing and smoking. The predictable anguished reaction to the higher cost of driving and the airline levies seems to confirm my working assumption about the "green-ness" of the population: people are keen to reduce pollution, as long as they don't actually have to change their own behaviour).
As for the income tax changes, you can certainly argue that they could have been done in a better way. Abolishing the 10p rate simplifies the system (though most people will recall that the 10p rate was only introduced in 1999, by the same Chancellor). But it does mean that some of the working poor will pay more tax. Supposedly this will be offset by the promised increases in the tax credit system. It would have been better and much less bureaucratic to ditch this labyrinthine scheme and raise the minimum tax threshold, if the Chancellor was really determined to cut the basic tax rate.
Even with this caveat, this doesn't look like a bad day's work, economically as well as politically. Brown has slightly simplified the income tax system and shifted part of the tax burden on individuals toward consumption, particularly consumption of items the Government wants to discourage. That's not a con -- it's tax reform. If this triggers a real debate among the major parties about how we should be taxed in the long run, that would be a damned fine thing.
It's a sure sign that he's put one over the Opposition -- but is it a fair criticism? Well, in a sense it is: Brown has largely funded his generosity by abolishing the 10p starting rate of income tax and "aligning" the National Insurance bands with those for income tax. The distinction between these two levies now only really exists to allow the Government to maintain the fiction that it has not raised personal tax rates during its decade in office. Brown has also boosted revenues by raising the traditional "sin taxes" (booze and tobacco) and raising fuel duties and car licensing fees for the largest vehicles.
Even if these changes largely offset each other, is that a bad thing? One of the principles of "good" taxation is that you try to raise money from "bad" things, so as not to create perverse incentives. Income is mainly derived from work, which makes it a good thing, so reducing the income tax burden is in principle good for the economy. In contrast, the things Brown has taken to taxing lately -- this week's duty increases, plus the airline passenger fees that were introduced in the pre-budget review late last year -- are all things that the Government in some sense seeks to discourage. (Cheap travel has definitely been added to the traditional "sins" of boozing and smoking. The predictable anguished reaction to the higher cost of driving and the airline levies seems to confirm my working assumption about the "green-ness" of the population: people are keen to reduce pollution, as long as they don't actually have to change their own behaviour).
As for the income tax changes, you can certainly argue that they could have been done in a better way. Abolishing the 10p rate simplifies the system (though most people will recall that the 10p rate was only introduced in 1999, by the same Chancellor). But it does mean that some of the working poor will pay more tax. Supposedly this will be offset by the promised increases in the tax credit system. It would have been better and much less bureaucratic to ditch this labyrinthine scheme and raise the minimum tax threshold, if the Chancellor was really determined to cut the basic tax rate.
Even with this caveat, this doesn't look like a bad day's work, economically as well as politically. Brown has slightly simplified the income tax system and shifted part of the tax burden on individuals toward consumption, particularly consumption of items the Government wants to discourage. That's not a con -- it's tax reform. If this triggers a real debate among the major parties about how we should be taxed in the long run, that would be a damned fine thing.
Friday, 16 March 2007
The Olympics -- another Blair quagmire
In 1976, when I was living in Canada, the Olympic Games were held in Montreal. The mayor of that city, Jean Drapeau, bragged that "the Olympics could no more have a deficit than a man can have a baby". However, despite massive lottery funding, the Games lost a prodigious sum, and the debt incurred by the city of Montreal was only paid off by its long-suffering taxpayers a few years ago. As for the sports facilities that were created, the Olympic Stadium, a concrete monstrosity, was a nightmare for spectators and athletes alike. The retractable roof never worked. The Montreal Expos baseball team, which moved there from its previous home, was forced to relocate to another city because of abysmal attendances. The Alouettes football team, which also played there, went broke, and when a new football team was set up in Montreal, it made sure to stay well away from the accursed place.
I mention all of this to show that the positive spin that the Government is trying to impart to the soaring costs for the London Olympics should be taken with massive amounts of salt. The Barcelona Olympics are widely seen as the catalyst for the revival of that city, but it's a bit of a stretch to suggest that what works on the sunny shores of the Mediterranean will work as well on the boggy banks of the River Lea. Barcelona aside, can anyone name a city that has been positively transformed by the Olympics? We're not hearing much about the residual benefits in Athens, the most recent host, which should tell you something.
Everything that's intrinsic to the Games is transitory, almost by its very nature. To cite the most obvious example, the lack of any long-term future for the Olympic Stadium is evident from the fact that it is being designed to be largely dismantled right after the games, with the capacity falling from 80,000 to 25,000. Even this latter figure is far more than can ever be expected to show up for a track and field event in this country, yet the Government has more or less ruled out allowing it to be used for football. (Based on the experience in Montreal, no football team owner in his right mind would want to move into the thing anyway).
The Government is, of course, anxious to play up the non-sporting regeneration that is expected to take place in the East End of London. I have nothing against this -- I was brought up there. However, the pictures I have seen, including the fancy morphing CG stuff that shows how the area will evolve form its current mess into the Olympic Park, fill me with dread. It looks as if the main legacy of the Games will be a spaghetti of motorways that will, once the Games are over, be both hugely excessive for the area's needs and an absolute eyesore. The "athletes' village" will be transformed into housing, which is welcome in principle, but Montreal again provides a cautionary precedent here, with its legacy of ticky-tacky concrete boxes that nobody wanted to live in.
Then there are the numbers. It's true that the £9.3 billion latest estimate is an overstatement in some ways. It's not entirely clear that the cost of the athletes' village should count against the Games, if the homes really can be re-used afterwards. The VAT bill is an accounting entry, in the sense that the Government is paying itself. And the £2.7 bn contingeny may never be spent -- though from one report I read, £500 million of it has already been allocated, which bends the definition a bit.
Moreover, the £9.3 billion is not the entire cost. The cost of actually running the Games -- I've seen a figure of £ 2 billion -- is not included. Neither is a £7 billion investment in London's transport infrastructure, which the Government committed to in order to win the Games. Much of the residual benefit of the Games will be derived from this, rather than from the £9.3 billion spent on the Games facilities themselves.
If you add all these numbers together, the total spend that the Games have triggered comes close to £20 billion -- with the event itself still five years away. Can anyone imagine that there would have been any public appetite for holding the Games in London if a figure like this had been admitted at the outset? Of course not. So how did we get here? Last night Mihir Bose from the BBC offered the most plausible explanation: nobody in the Government, and very probably not even the bid team themselves, seriously imagined that London would actually be the successful bidder. So we blundered into this thing, and now we can't get out. Wow, that sounds like another part of the legacy that our Great Leader will leave behind when he moves on later this year: Iraq.
I mention all of this to show that the positive spin that the Government is trying to impart to the soaring costs for the London Olympics should be taken with massive amounts of salt. The Barcelona Olympics are widely seen as the catalyst for the revival of that city, but it's a bit of a stretch to suggest that what works on the sunny shores of the Mediterranean will work as well on the boggy banks of the River Lea. Barcelona aside, can anyone name a city that has been positively transformed by the Olympics? We're not hearing much about the residual benefits in Athens, the most recent host, which should tell you something.
Everything that's intrinsic to the Games is transitory, almost by its very nature. To cite the most obvious example, the lack of any long-term future for the Olympic Stadium is evident from the fact that it is being designed to be largely dismantled right after the games, with the capacity falling from 80,000 to 25,000. Even this latter figure is far more than can ever be expected to show up for a track and field event in this country, yet the Government has more or less ruled out allowing it to be used for football. (Based on the experience in Montreal, no football team owner in his right mind would want to move into the thing anyway).
The Government is, of course, anxious to play up the non-sporting regeneration that is expected to take place in the East End of London. I have nothing against this -- I was brought up there. However, the pictures I have seen, including the fancy morphing CG stuff that shows how the area will evolve form its current mess into the Olympic Park, fill me with dread. It looks as if the main legacy of the Games will be a spaghetti of motorways that will, once the Games are over, be both hugely excessive for the area's needs and an absolute eyesore. The "athletes' village" will be transformed into housing, which is welcome in principle, but Montreal again provides a cautionary precedent here, with its legacy of ticky-tacky concrete boxes that nobody wanted to live in.
Then there are the numbers. It's true that the £9.3 billion latest estimate is an overstatement in some ways. It's not entirely clear that the cost of the athletes' village should count against the Games, if the homes really can be re-used afterwards. The VAT bill is an accounting entry, in the sense that the Government is paying itself. And the £2.7 bn contingeny may never be spent -- though from one report I read, £500 million of it has already been allocated, which bends the definition a bit.
Moreover, the £9.3 billion is not the entire cost. The cost of actually running the Games -- I've seen a figure of £ 2 billion -- is not included. Neither is a £7 billion investment in London's transport infrastructure, which the Government committed to in order to win the Games. Much of the residual benefit of the Games will be derived from this, rather than from the £9.3 billion spent on the Games facilities themselves.
If you add all these numbers together, the total spend that the Games have triggered comes close to £20 billion -- with the event itself still five years away. Can anyone imagine that there would have been any public appetite for holding the Games in London if a figure like this had been admitted at the outset? Of course not. So how did we get here? Last night Mihir Bose from the BBC offered the most plausible explanation: nobody in the Government, and very probably not even the bid team themselves, seriously imagined that London would actually be the successful bidder. So we blundered into this thing, and now we can't get out. Wow, that sounds like another part of the legacy that our Great Leader will leave behind when he moves on later this year: Iraq.
Wednesday, 14 March 2007
Celebrity Death Match in Chicago
Don't miss this one folks! The trial of Conrad (aka Lord) Black gets under way in Chicago today. Black, former owner of the Daily Telegraph among other things, stands accused primarily of looting the company of which he was Chairman (Hollinger Inc) of hundreds of millions of dollars, in order to support an extravagant lifestyle. There are other charges too, including obstruction of justice. Black denies everything.
There are some parallels with the Enron trial, but this promises to be much more fun, given Black's colourful personality and his legendary pugnacity. Indeed, the stakes could not be higher for all concerned. If Black is convicted, he faces a long jail term -- here, at least, the Enron precedent may be followed, in which case Black, who is 60, may never get out of the joint alive. On the other hand, if Black is acquitted, he has promised a blizzard of libel suits against everyone who has traduced him -- a pretty long list. He plans to claim compensation totalling $3 billion, which would surely set some kind of record.
Mrs Black (aka Barbara Amiel) apparently thinks her man is going down. He professes confidence, but the fact that he has been making nice with Canada again suggests he is preparing for the possibility of asking to do his time there, rather than in the less salubrious surroundings of a US penitentiary.
The characters are larger than life, the stakes are enormous, the evidence should be amazing, and the lawyers on both sides are the best money can buy. It should all make the current series of 24 look about as exciting as Shaun the Sheep.
There are some parallels with the Enron trial, but this promises to be much more fun, given Black's colourful personality and his legendary pugnacity. Indeed, the stakes could not be higher for all concerned. If Black is convicted, he faces a long jail term -- here, at least, the Enron precedent may be followed, in which case Black, who is 60, may never get out of the joint alive. On the other hand, if Black is acquitted, he has promised a blizzard of libel suits against everyone who has traduced him -- a pretty long list. He plans to claim compensation totalling $3 billion, which would surely set some kind of record.
Mrs Black (aka Barbara Amiel) apparently thinks her man is going down. He professes confidence, but the fact that he has been making nice with Canada again suggests he is preparing for the possibility of asking to do his time there, rather than in the less salubrious surroundings of a US penitentiary.
The characters are larger than life, the stakes are enormous, the evidence should be amazing, and the lawyers on both sides are the best money can buy. It should all make the current series of 24 look about as exciting as Shaun the Sheep.
Tuesday, 13 March 2007
Cameron's ideas won't fly (and neither will you)
The micturation contest over the environment between David Cameron and Gordon Brown is starting to produce some sensational ideas. Sensationally dumb, that is. The Government, through supposed up-and-comer David Miliband (am I the only one who thinks he looks scary??) has announced "binding" carbon reduction targets for the UK. There is to be a 5-yearly carbon "budget", with an overall goal of reducing carbon emissions 60% from today's levels by the year 2050. The BBC website solemly reports that future governments "could be taken to court" if the targets are breached.
Oh yes, so the Department of the Environment or what ever it is called in 2040 is sued by a group of citizens, found guilty of crimes against green-ness, and then what? The Minister is clapped in irons? The Government pays a fine to itself? In the absence of short-term targets, which Miliband has explicitly rejected, this plan looks like the enviro-equivalent of Gordon Brown's fiscal Golden Rule, which is met every year by the time-honoured expedient of moving the goalposts.
Then there's "Dave" Cameron's wacky scheme to restrict the growth of air travel. Don't get me wrong, I think this would be a good thing, if only to get Stelios and Michael O'Leary out of the newspapers. But "Dave" doesn't really have the courage to do anything really tough (tax aviation fuel, ban short-haul flights altogether), because he knows people like to travel (and O'Leary has some good lawyers). So his plan is a mix of inadequate price-driven measures (VAT on air travel? Big deal!) and cockamamie rationing: everyone is allowed one flight a year (presumably for the all-important break on the Costas), but after that you have to pay for some sort of pollution credits in order to take further flights.
The oddest criticism I've heard of this is that it's a non-Tory idea because it proposes a new layer of regulation and restriction. Hang on a minute! If anything like this ever happens, the only people flying regularly will be those rich enough to buy the credits. That sounds pretty Tory to me.
Oh yes, so the Department of the Environment or what ever it is called in 2040 is sued by a group of citizens, found guilty of crimes against green-ness, and then what? The Minister is clapped in irons? The Government pays a fine to itself? In the absence of short-term targets, which Miliband has explicitly rejected, this plan looks like the enviro-equivalent of Gordon Brown's fiscal Golden Rule, which is met every year by the time-honoured expedient of moving the goalposts.
Then there's "Dave" Cameron's wacky scheme to restrict the growth of air travel. Don't get me wrong, I think this would be a good thing, if only to get Stelios and Michael O'Leary out of the newspapers. But "Dave" doesn't really have the courage to do anything really tough (tax aviation fuel, ban short-haul flights altogether), because he knows people like to travel (and O'Leary has some good lawyers). So his plan is a mix of inadequate price-driven measures (VAT on air travel? Big deal!) and cockamamie rationing: everyone is allowed one flight a year (presumably for the all-important break on the Costas), but after that you have to pay for some sort of pollution credits in order to take further flights.
The oddest criticism I've heard of this is that it's a non-Tory idea because it proposes a new layer of regulation and restriction. Hang on a minute! If anything like this ever happens, the only people flying regularly will be those rich enough to buy the credits. That sounds pretty Tory to me.
Monday, 12 March 2007
Albert Camus and the avian flu
The UK's latest avian flu scare, centred on the Bernard Matthews turkey farm in Norfolk, seems to be over. Restrictions on the movement of livestock in the area were lifted last week. The media, after briefly trying to blow the event out of proportion (favourite headline: "Bird flu may be in our shops" -- Daily Mail) have moved on to other, more promising crises. The only long-term victim is likely to be the Bernard Matthews brand. Given what has been learnt about its production methods, and about some of the bizarre and cruel activities at the plant, such as turkey baseball and "bagpiping", it's unlikely that too many tears will be shed for it.
I wrote when the "crisis" was at its height that the way it had been handled by Bernard Matthews, the Government and the media did not offer much hope for how things would pan out if a really serious avian flu outbreak occurred. By chance, a couple of weeks ago I found my very scruffy copy of The Plague, by Albert Camus, which provides a sharply contrasting view of a serious health crisis. The book is fiction, and can be read as an allegory for the Nazi occupation of France. However, it's based on a real outbreak of bubonic plague in the 1940s in Oran, Algeria (Camus' home town) and so has a reasonable kernel of hostorical accuracy. It's also a damn good read, though the subject matter can be a bit harrowing at times.
The striking thing about The Plague is the effort everyone in Oran makes to carry on as normal in the most difficult of circumstances. The city is quickly cut off from the outside world -- no trains, no mail, nobody allowed to leave -- and the death toll quickly mounts to hundreds per week. Yet people continue to go to work, the trams still run, cafes and cinemas continue to function. There is no more than minimal civil unrest, even as the outbreak stretches on toward a full year. Doctors and other medical personnel perform heroically, and volunteer groups spring up to carry out sanitary tasks that are beyond the capacity of the government.
It's hard to visualise such a stoic response in today's UK -- or anywhere else for that matter. Companies are expecting as many as 40% of their staff to stay away from work if their is a flu pandemic; doctors are warning of violence as people lay siege to hospitals; and there are fears of civil unrest if public services or food supplies become dangerously stretched. It should all make for some great headlines in the tabloid press -- assuming, of course, that anyone makes it into the newsroom.
Camus, who would today be called a liberal humanist, ends his story (when the plague simply peters out) on a positive note: "to state quite simply what we learn in a time of pestilence: that there are more things to admire in men than to despise". Well, maybe. The quote that stays with me occurs much earlier in the book, as Camus is describing the initial unwillingness of the population to grasp what is going on: "stupidity has a knack of getting its way". Indeed so: in fact, these days we seem quite keen to put it in positions of authority.
I wrote when the "crisis" was at its height that the way it had been handled by Bernard Matthews, the Government and the media did not offer much hope for how things would pan out if a really serious avian flu outbreak occurred. By chance, a couple of weeks ago I found my very scruffy copy of The Plague, by Albert Camus, which provides a sharply contrasting view of a serious health crisis. The book is fiction, and can be read as an allegory for the Nazi occupation of France. However, it's based on a real outbreak of bubonic plague in the 1940s in Oran, Algeria (Camus' home town) and so has a reasonable kernel of hostorical accuracy. It's also a damn good read, though the subject matter can be a bit harrowing at times.
The striking thing about The Plague is the effort everyone in Oran makes to carry on as normal in the most difficult of circumstances. The city is quickly cut off from the outside world -- no trains, no mail, nobody allowed to leave -- and the death toll quickly mounts to hundreds per week. Yet people continue to go to work, the trams still run, cafes and cinemas continue to function. There is no more than minimal civil unrest, even as the outbreak stretches on toward a full year. Doctors and other medical personnel perform heroically, and volunteer groups spring up to carry out sanitary tasks that are beyond the capacity of the government.
It's hard to visualise such a stoic response in today's UK -- or anywhere else for that matter. Companies are expecting as many as 40% of their staff to stay away from work if their is a flu pandemic; doctors are warning of violence as people lay siege to hospitals; and there are fears of civil unrest if public services or food supplies become dangerously stretched. It should all make for some great headlines in the tabloid press -- assuming, of course, that anyone makes it into the newsroom.
Camus, who would today be called a liberal humanist, ends his story (when the plague simply peters out) on a positive note: "to state quite simply what we learn in a time of pestilence: that there are more things to admire in men than to despise". Well, maybe. The quote that stays with me occurs much earlier in the book, as Camus is describing the initial unwillingness of the population to grasp what is going on: "stupidity has a knack of getting its way". Indeed so: in fact, these days we seem quite keen to put it in positions of authority.
Wednesday, 7 March 2007
God in the garden
There's a piece of gardener's doggerel that ends with the lines,
"one is closer to God in a garden
than anywhere else on earth."
Most of the time I am happy enough to believe this. However, I have just spent the morning raking moss out of my lawn, which now looks like the battlefield at Passchendaele. As far as I can figure out, the only possible connection between this activity and the Almighty is expiation.
"one is closer to God in a garden
than anywhere else on earth."
Most of the time I am happy enough to believe this. However, I have just spent the morning raking moss out of my lawn, which now looks like the battlefield at Passchendaele. As far as I can figure out, the only possible connection between this activity and the Almighty is expiation.
Friday, 2 March 2007
Yo Greenspan: take a look in the mirror
You may remember that Alan Greenspan was awarded a KBE a few years ago, for something like "services to the world economy". I celebrated the occasion by sticking a header at the top of my Bloomberg messages: "Alan Greenspan KBE? Must stand for King of the Bubble Economy". I sat next to the "maestro" at a couple of lunches many years ago, but was never a fan. For the last year of his term at the Fed I found myself perversely hoping that the wheels would fall off the US economy before he left office, so that he wouldn't be able to blame his successor.
That wish wasn't granted, but this week's falls in global stock markets have triggered fears that the long, credit-fuelled global economic expansion may be coming to a sticky end. And here's Greenspan, pushing the lid off his coffin, pulling the stake from his heart and telling anyone willing to shell out $100,000 (his speaking fee) that the US economy could be heading into a recession later in the year. Try to imagine how pleased current Fed Chairman Ben Bernanke is -- or better, try to imagine how Greenspan himself would have reacted if one of his predecessors had made a similar intervention when the tech bubble burst or after the 9/11 attacks. Mind you, Greenspan has form: he gave his first post-Fed public speech, involving several injudicious comments, within hours of leaving the job.
There's no doubt that Greenspan was a decisive and comforting man in a crisis -- at least, in any crisis, like the tech crash or 9/11, that could be treated by easing monetary policy. The problem with easy money is that it is a scattershot weapon -- cutting rates prevents the economy from being derailed by something sector-specific like the tech crash, but at the cost of providing unnecessary stimulus to parts of the economy that don't really need it. Similarly, while cutting rates was obviously the right thing to do after 9/11, it quickly became clear that the damage to the overall economy was very short-lived, yet Greenspan kept rates at historically low levels for much too long.
A prolonged spell of super-easy monetary policy is always going to lead to inflationary pressures. It was Greenspan's good luck that it coincided with the flood of low-cost Asian imports into the US, which kept a cap on all of the main price indices, especially the CPI and something called the private consumption expenditure deflator, which Greenspan adopted as his favourite price measure, mainly because he liked the story it was telling. Instead of showing up in prices for goods, as it did in the inflation spike of the 1970s, the flood of liquidity created a boom in asset prices, both in equity markets and in housing. The combination of rising house prices and easy credit allowed US consumers to mortgage up the old homestead and keep consuming beyond their means for several years.
The US housing boom began to deflate last year (and there are now plenty of signs of distress there -- just ask HSBC, now counting the cost of an ill-judged foray into the high-risk mortgage market). Coupled with the surge in energy prices, something that not even I can find a way to blame Greenspan for, this has put a crimp on US consumer spending. Lower US spending in turn reduces demand for imports from China, putting that country's expansion at risk. Given that the vaunted expansion of the past decade has relied on China consuming much less than it produces and the US producing much less than it consumes (and paying for it with IOUs), it's no surprise that financial markets are jittery.
Today we have a large investment bank (Dresdner) telling people to sell stocks "aggressively" and newspapers all around the world warning of a market crash. It would have been nice to hear some of this caution before doo-doo hit the fan. Far from it, however: even last week some of the remaining apologists for cheap money (notably the ludicrous Anatole Kaletsky in the Times) were urging the same tired recipe on the Eurozone, which has not discovered the joys of home equity withdrawal. It's too soon to tell whether this week's events are the start of a "healthy correction" or a pant-soiling crash. But if it turns out to be the latter, expect Greenspan to be quick to cash in by pointing the finger of blame -- in the wrong direction.
That wish wasn't granted, but this week's falls in global stock markets have triggered fears that the long, credit-fuelled global economic expansion may be coming to a sticky end. And here's Greenspan, pushing the lid off his coffin, pulling the stake from his heart and telling anyone willing to shell out $100,000 (his speaking fee) that the US economy could be heading into a recession later in the year. Try to imagine how pleased current Fed Chairman Ben Bernanke is -- or better, try to imagine how Greenspan himself would have reacted if one of his predecessors had made a similar intervention when the tech bubble burst or after the 9/11 attacks. Mind you, Greenspan has form: he gave his first post-Fed public speech, involving several injudicious comments, within hours of leaving the job.
There's no doubt that Greenspan was a decisive and comforting man in a crisis -- at least, in any crisis, like the tech crash or 9/11, that could be treated by easing monetary policy. The problem with easy money is that it is a scattershot weapon -- cutting rates prevents the economy from being derailed by something sector-specific like the tech crash, but at the cost of providing unnecessary stimulus to parts of the economy that don't really need it. Similarly, while cutting rates was obviously the right thing to do after 9/11, it quickly became clear that the damage to the overall economy was very short-lived, yet Greenspan kept rates at historically low levels for much too long.
A prolonged spell of super-easy monetary policy is always going to lead to inflationary pressures. It was Greenspan's good luck that it coincided with the flood of low-cost Asian imports into the US, which kept a cap on all of the main price indices, especially the CPI and something called the private consumption expenditure deflator, which Greenspan adopted as his favourite price measure, mainly because he liked the story it was telling. Instead of showing up in prices for goods, as it did in the inflation spike of the 1970s, the flood of liquidity created a boom in asset prices, both in equity markets and in housing. The combination of rising house prices and easy credit allowed US consumers to mortgage up the old homestead and keep consuming beyond their means for several years.
The US housing boom began to deflate last year (and there are now plenty of signs of distress there -- just ask HSBC, now counting the cost of an ill-judged foray into the high-risk mortgage market). Coupled with the surge in energy prices, something that not even I can find a way to blame Greenspan for, this has put a crimp on US consumer spending. Lower US spending in turn reduces demand for imports from China, putting that country's expansion at risk. Given that the vaunted expansion of the past decade has relied on China consuming much less than it produces and the US producing much less than it consumes (and paying for it with IOUs), it's no surprise that financial markets are jittery.
Today we have a large investment bank (Dresdner) telling people to sell stocks "aggressively" and newspapers all around the world warning of a market crash. It would have been nice to hear some of this caution before doo-doo hit the fan. Far from it, however: even last week some of the remaining apologists for cheap money (notably the ludicrous Anatole Kaletsky in the Times) were urging the same tired recipe on the Eurozone, which has not discovered the joys of home equity withdrawal. It's too soon to tell whether this week's events are the start of a "healthy correction" or a pant-soiling crash. But if it turns out to be the latter, expect Greenspan to be quick to cash in by pointing the finger of blame -- in the wrong direction.
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