Economic crisis: problems and remedies

There’s an economic crisis underway. Several policy motions at Lib Dem Autumn Conference make reference to economic problems. The government’s current industrial strategy (‘Plan for Growth’) runs to 112 pages and reads more like an argument against reform rather than for it; perhaps fearful of being accused by the tabloids of ‘talking down Brexit Britain’ .

UK economic problems are deep-rooted; some even hundreds of years old. Political parties of course share the blame but that’s only a small part of the story. Perceptions of problems and remedies have changed over the many decades, independent of political oscillations. But we will need clarity and deep thinking beyond political partisanship to extricate ourselves.

The symptoms are all around us. Disposable income is collapsing as mortgage payments, rents, energy, food prices, and now taxes, are all rising. Credit card debt is accelerating. Investment is in serious decline; since 2019 British businesses have invested less, as a percentage of GDP, than any other major economy. The Bank of England forecasts that business investment will further fall by around 2 per cent in 2024. By most measures GDP performance is the worst in the G7. UK debt sustainability is worsening. Debt service is set to exceed total NHS spending within three years. Tax revenues are just a third of GDP, and only half the population pay income tax.

It is not just the fiscus which is unsustainable, the UK efforts to achieve environmental and social sustainability are suffering too.

Aggregate government spending has never been higher, but outcomes from public spending are very poor. Life expectancy, maternal and infant mortality, health outcomes such as cancer survival rates, all point to a decline in the quality of services. What’s more, tertiary education and skills training is in a terrible (and expensive) mess in the UK compared to the rest of the OECD, resulting in lamentable, mismatched skills.

There are two major underlying relative problems which, sooner or later, will have to be wrenchingly tackled if the UK wishes to start to catch up with the rest of the OECD.

First, UK governmental institutions and their income sources are both wildly inefficient and unfocused, with often absurd ‘contractisation’ across all state institutions … and conflicts of interest almost everywhere. This means that so much less can be achieved with the same amount of money. Those that deal with HMG in their professional lives know this all too well.

Paul Johnson’s incisive new book ‘Follow the Money’ provides well-documented and often breathtaking examples.

Second, the UK as an economy is highly monopolised, cartelised and ‘financialised’, with most causes being outwith the scope of standard competition policy. Self-regulation, crossholdings, unintended de jure oligopoly, financial entry barriers & enforced debt, government subsidies, and radically increased international ownership concentration all contribute. There are many consequences. Banks and investments groups are more the masters not servants of industry. Corporate governance is dominated by finance. Short term aims prevail. R&D spending is low.

The remedies for both these underlying problems are complex but can be clearly stated.

In government they come as no surprise to the liberal democratically inclined; transparency, accountability, procurement reform, fiscal decentralisation, conflicts rules, administrative stability and jurisdictional clarity.

In commerce and business reform is required in competition policy, regulatory quality, demonopolisation of key sectors including banking & finance, SME rights, and trade policy reform & facilitation. Skills paths are very flimsy in the UK, and major reform to formal tertiary education, apprenticeships and the links between the two require overhaul.

One can also easily see how one set of reforms requires the other.

The challenge is gargantuan and reform resistance from vested interests likely to be strenuous. But having a clear view of the problems and the remedies is more conducive to political and public support. The consequences of not getting a grip on the UK’s problems will be dire.

[For elaboration please see the Conference Edition of Liberator]

* Paul Reynolds works with multilateral organisations as an independent adviser on international relations, economics, and senior governance.

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30 Comments

  • Steve Trevethan 12th Sep '23 - 8:50am

    Thank you for an important article!

    If members and leaders of our party were to follow the blog of Richard Murphy (Tax Research UK / Funding the Future) they would find evidence that we are not a full democracy and that are our tax systems are neither equitable nor sufficiently staffed.

    This results in our being a second rate democracy, which favours the right wingers, and the wealthy paying, proportionally, less tax than the not wealthy.

    We also have a main stream media, not least the B B C, which fails to make these deep problems evident/connives at their continuation/increase.

    Good luck to you, and us, in trying to improve matters!

  • Paul Reynolds 12th Sep '23 - 11:01am

    I have been asked for a short glossary. This follows.

  • Paul Reynolds 12th Sep '23 - 11:02am

    Debt sustainability. The ability of a nation to pay interest and capital on debt through taxes, unsustainable if there is no credible plan to manage the debt and avoid default
    Environmental sustainability. Economic activity which can be sustained without environmental damage eg pollution, emissions, destruction of habitats
    Social sustainability. Economic activity which does not increase social divisions or inequality.
    Contractisation. The practice of viewing all government activity, current and potential, as an opportunity to generate a contract, especially if the contractor is identified before the contract is formulated.
    Financialised. Where financial engineering dominates management practices eg asset striping, share buybacks, such that the company exists only to serve the short term interests of passive investors
    Standard competition policy. The legislative frame for the prevention of anti-competitive practices or undue market dominance only in the day to day conduct of product markets.

  • Paul Reynolds 12th Sep '23 - 11:03am

    Crossholdings. In Japan, keiretsu companies owning shares in each other. In the West, concentrated international ownership organisations controlling large stakes in ‘competing’ multinationals
    De jure oligopoly. Ownership concentration and cartelisation resulting from regulatory systems and legislation.
    Financial entry barriers. Banks and investment groups erecting barriers to emerging firms, to protect existing (usually quoted) companies
    Enforced debt. Imposing debt on profitable companies that don’t need it, eg via M&A, share buybacks.
    International ownership concentration. Vast ($1tn+) global ‘ultimate owner’ investment funds that arose as a consequence of the low interest, QE/monetisation period.
    Fiscal decentralisation. Raising & spending taxes locally or regionally following the failure of the central allocation system which has overwhelmingly favoured the wealthier areas of the UK.

  • Paul Reynolds 12th Sep '23 - 11:04am

    Conflicts rules. Making it unlawful for governmental staffs to have a financial interest in companies they are contracting with, or in legislative/regulatory changes.
    Administrative stability. Avoiding the practice of shifting departments and changing names, and the practice of moving civil servants around every 2 years so no-one can be held accountable for errors.
    Jurisdictional clarity. Overlaps, gaps and fuzzy responsibilities. Eg there are five UK government institutions responsible for enforcing minimum wage laws
    Regulatory quality. Not more regulation or less regulation, but better regulation. Requires a definition of ‘quality’ !
    Skills paths. A system where individuals can progress their training ie ‘from bricklayer to architect’.

  • Peter Martin 12th Sep '23 - 1:25pm

    @ Paul Reynolds,

    “Debt sustainability. The ability of a nation to pay interest and capital on debt through taxes, unsustainable if there is no credible plan to manage the debt and avoid default”

    It’s very rare that the government would pay interest and/or reduce debt out of taxation payments. There would have to be a budget surplus for that latter and at least a small deficit for the former. Unlikely.

    I’m not quite sure how the Government can have a plan to control its own debt as things are at the moment. For example I own some Premium bonds. These constitute some of the Govt debt. Most of these were bought when George Osborne was chancellor. I don’t remember getting any letter from George or the Treasury saying that they were running short and would I please buy some more? Most debt arises like this. The government only rarely goes out to actively seek loans.

    The govt could try to control their debt level by adjusting interest rates. They naturally would raise and lower them to do this. Except they’ve handed over monetary policy to the BoE. So, no control at all! The govt, presumably, must be happy that the BoE are doing the right thing and increasing rates which enables govt to borrow more. Otherwise they could take back control of monetary policy.
    So presumably you’re in favour of them doing this?

    There’s no danger of involuntary default if the borrowing is in ££ BTW.

  • Peter Martin 12th Sep ’23 – 1:25pm:
    Except they’ve handed over monetary policy to the BoE. So, no control at all!

    Of the nine members of the ‘independent’ Bank of England’s Monetary Policy Committee, which sets interest rates, eight are directly appointed by the Chancellor of the Exchequer. So the government has considerable control over its stance towards monetary policy. Like most committees its thinking is channelled by prevailing fashion and the ’official narrative’ of the day. Its deliberations would be better informed by a wider diversity of viewpoints, as independent economist Julian Jessop advocates…

    ‘Is printing too much money the real cause of inflation?’ [1st. September 2023]:
    https://www.spectator.co.uk/article/is-printing-too-much-money-the-real-cause-of-inflation/

    …there should be much more discussion of monetary variables, including monetary growth, when assessing the outlook for inflation and economic activity. Appointing someone to the Monetary Policy Committee who has a much stronger grasp of monetary economics than me would be a genuine improvement in diversity. As it is, groupthink means that the role of money is repeatedly overlooked, making further forecast errors and policy mistakes much more likely.

  • Steve Trevethan 12th Sep '23 - 6:34pm

    Might inflation be affected by the distribution of money, as those who cannot afford to feed their children properly and keep them healthily warm, do not/cannot have too much money?

    Might more money be created by computer keyboards than by printing presses?

  • Mick Taylor 12th Sep '23 - 8:03pm

    The process of creating credit, for the government for example, doesn’t involve a single printing press.
    The Bank of England simply transfers credit to the government by moving balances from one account to another. The government then spends the money, almost certainly by bank transfer and cash almost never enters into it. Businesses get credit in exactly the same way, though the lower down the chain one gets, the more likely it is that some people will be paid in cash. This is increasingly rare as more and more transactions are done on line and through phone apps.
    So, computers are clearly doing most of the work, whilst the presses remain largely idle.
    And while we’re here, a plug for Modern Monetary Economics which argues that since the UK government is a currency issuer, it can always meet its obligations and all the talk of owning money and being unable to repay it is just hot air, provided inflation is controlled.

  • Mick Taylor 12th Sep '23 - 8:04pm

    Ooops. Predictive text strikes again. Owing, not owning

  • James Fowler 12th Sep '23 - 9:18pm

    Very many things covered in the article, but one caught my eye: ‘Only half the population pays income tax’ – is this a bad thing?

  • These are both good points Paul makes – the inefficiency of the current tax and welfare system and the high levels of oligopoly embedded in the UK economy particularly in the banking system.
    All parties will be putting forward their industrial strategy/Plan for Growth. Economic growth can be delivered in three ways -working age population growth, improvements in productivity or private debt growth. Demographics point to a lower working age population. Non-productive debt growth is limited by increasing debt service costs. That leaves productivity growth.
    The key to productivity growth is public and private investment that adds to the capital stock. Credit needs to be readily available in the economy to accommodate economic growth. That credit is created in the banking system. Bank credit creation for productive investment is non-inflationary. Excess credit creation for purchases of existing assets – houses and financial investments – is inflationary and leads to asset bubbles and banking crises.
    Firms need to see current and future demand in the economy to invest – what Keynes called animal spirits. That demand needs to come from rising wages not higher levels of consumer credit. We are only recently seeing real wage increases with wage rises reaching 8.5% against CPI inflation of 6.8% last month.
    Unemployment is beginning to rise reaching 4.3% against 3.8% in the last quarter. A job guarantee program for the longer-term unemployed can both mitigate hardship and put a floor under falling demand. Coupled with an ambitious public green investment program, unemployment can be contained.
    The structural reforms Paul cites are complex and the work of one or more Parliamentary terms.

  • Paul Johnson has a recent article Abolishing inheritance tax would leave the country a terrible legacy
    “If you want higher spending, you need to accept either higher taxes or higher borrowing and debt.
    What about that higher borrowing and higher debt path? It is oh so tempting. Our debt is not especially high by G7 standards. It was higher over long periods of the 19th and 20th centuries. There are times when it is the right path. If I can put words into the mouths of the OBR, though, I think they would say, indeed shout from the rooftops, that the message of their report is “this is not that time”.
    In the period after the Second World War growth, demographics and falling defence spending were all on our side. Debt fell swiftly. They are all against us now. Growth is poor, interest rates are high, demographic change will increase spending on pensions, health and social care and defence spending is more likely to go up than down. Add to that pressures to spend more in response to climate change, the swift loss of billions of fuel duty revenues and rather regular economic crises and debt will rise and rise even without any discretionary tax cuts or spending increases. More spending equals more tax; less tax equals less spending.
    Both are possible. Taxes in the UK are at their highest level ever but they are still well below the average of our western European neighbours. We can raise them. We can get some from capital gains and non doms and the rest but significant increases will hit more of the electorate than that.
    We could cut spending but after the austerity of the 2010s it is fatuous to claim that to do so to any significant degree will be anything other than painful for our public services or for those who rely on benefits.
    Those are the trade-offs and they are starker than ever.”

  • Chris Moore 13th Sep '23 - 8:19am

    Hello Mick, there is not a single economist who doesn’t understand that a sovereign currency issuer never needs to default on debt in its own currency.

    ((Many sovereign currency issuers have defaulted on foreign currency denominated debt.))

    So there’s nothing special about MMT in that regard.

    Unfortunately, proponents of MMT grossly underestimate the risks and potential negatives of creating new money.

    Jeff has rightly drawn attention to increases in money supply predicting future inflation.

    Likewise, there is good evidence suggesting that economic growth is depressed in countries with high levels of government debt compared to GDP.

    There is also no reason to think money creation is not subject to very basic economic law such as diminishing marginal utility of return, to take just one.

  • Peter Martin 13th Sep '23 - 8:43am

    “If you want higher spending, you need to accept either higher taxes or higher borrowing and debt.”

    Yes. This is ‘tru-ish’. Except I would say that money created by government spending comes back as taxation revenue sooner or later so it may not involve higher “borrowing and debt” in the medium to longer term. It does however mean we should accept higher tax rates rather than taxation revenue per se. It might seem a bit picky to make this distinction but it is more important than generally appreciated.

    We could have an economy which is running far too hot for example. This would mean that the government revenue could be quite high at the same time as we are experiencing a significant inflation problem. This has happened previously so it’s not just a theoretical point.

    Contrary to what some might say, including unfortunately a few MMT evangelists, the next government will not be able to manage the economy successfully and protect essential services like the NHS without raising taxes.

    As Bill Mitchell puts it “Higher taxes will be required not to fund the spending commitments but to create the fiscal space.”

    https://billmitchell.org/blog/?p=60987

  • “Contrary to what some might say, including unfortunately a few MMT evangelists, the next government will not be able to manage the economy successfully and protect essential services like the NHS without raising taxes.” This I agree with.
    When it comes to money and taxes these are a double-entry accounting record from the perspective of the government. What gives money its value is its purchasing power. That purchasing power is determined by the underlying strength of the economy – its capacity to produce real resources.
    Credit creation (i.e. the increase in money supply) – whether by banks or government deficit spending – needs to keep pace with nominal economic growth (but not too much more) to avoid creating inflation over the 2% target. An increase in money supply of around 5% to 6% annually over the business cycle is thought to be consistent with 2% inflation target + potential real growth. Borrowing and spending on existing assets should not be funded by bank credit creation to avoid asset inflation and excessive rentier extraction from the real economy (wages and production) by those with access to capital.
    Fiscal Dominance is the term used to describe a situation when a central bank’s ability to combat inflation is compromised because of decisions made by government. When government debt levels are approaching 100%, increasing interest rates may have minimal impact of inflation (or even add to it) as increasing government deficits fuelled by increasing interest payments on public debt are putting as much money back into the economy as is being extracted from household spending on consumption by banks. To contain inflation In this situation of high levels of pubic debt, taxes have to be increased to reduce the level of household consumption. Politically, those taxes have to come initially from higher earners and those with significant wealth rather than the squeezed middle and be applied to reduce deficits.

  • Peter Martin 14th Sep '23 - 11:03am

    @ Joe,

    It’s good we agree on at least something for once!

    I’d put it that the imposition of taxes which gives the £ its value and then determines what it will buy in the shops. So we can have an inflation problem develop if there is too much demand in the economy or if we have a reduction in available supply. During the Pandemic we had a reduction in supply for various and obvious reasons. Such as workers dropping out of the workforce, China closing down its economy, ships and containers being in the wrong places etc. Plus we had the Ukraine war and some will add in fewer workers from the EU which has had the effect of pushing up wages. Increased wages are a good thing but we can’t have it both ways. They are going to have an effect on prices.

    So I would say the reason we might need higher taxes now and certainly in the future is nothing to do with “money supply”. It about money that is actually spent which has to match available supply at existing prices. If it doesn’t prices will rise. As far as I know there is no known way of matching what might be termed ‘money supply’ with what is actually going to be spent.

  • Paul Reynolds 14th Sep '23 - 11:42am

    Thank you for the comments and debate above. Most enlightening, although not always in ways intended. Three quick thoughts. 1. The focus on monetary policy (eg arguments for it being ever looser) is only a small component of the range of institutional and policy measures required to improve the standard of living and quality of life for ‘the 99%’. Macroeconomic performance and policy choices are ultimately dependent on real-world commerce. 2. The policy frame among LD party activists has become decidedly statist in recent decades, even to the extent that government institutions themselves are no longer seen as just another fallible human construct, with interests of their own. 3. Marx and Keynes (responsible for many modern underlying assumptions) both got a lot wrong, especially their predictions about the future. A key subtext of my article, exanded upon in the Liberator version, is that the post-war focus on aggregate demand management has its limitations. It can divert attention from industrial structure and for example the effect of rising input/import prices in the presence of widespread monopolisation, cartelisation and ‘financialisation’. There is also the question as to the combined effect of the two ‘problems’ highlighted; government dysfunction and monopolisation.

  • Peter Martin,
    Taxes don’t give money value, they create a level of demand (not value) for the currency that is required to settle tax payments, effectively ensuring that the currency is the unit of account. What gives money value is its acceptability as a medium of exchange exchange for goods and services that people want to buy in both the present and the future. Excessive inflation will destroy that value.
    Persistent inflation is a monetary phenomenon. Supply shocks cause people to spend more on food and energy etc and consequently less on other goods and services. They cause a shift in what disposable income is spent on but not the level of disposable income. Price increases from supply shocks reverse as supply constraints begin to ease or fall out of inflation measure after 12 months.
    As Keynes wrote “Inflation tax is an implicit tax on nominal assets, such as cash, bonds and saving accounts. Inflation reduces the value of money and therefore reduces the real income of households.” It is simply a non-transparent tax generated by governments via unsterilised monetisation of deficits or by allowing bank credit creation in excess of nominal GDP growth.
    The former Bank of England economist, Andy Haldane has recently said “the Bank had printed money through its programme of quantitative easing for longer than it needed to as it tried to help the economy recover from COVID- and also suggested it had acted too slowly to increase interest rates” Bank of England’s ‘regrettable’ mistakes fuelled inflation,
    Until the causes of inflation are understood, policy mistakes will continue to be made. If the cause of inflation is the monetisation of deficits then taxes must be increased or spending reduced. If the cause of inflation is excess bank credit creation increasing money supply too quickly, then bank lending must be constrained. Interest rates is one tool for constraining bank lending but the regulator has other means such as guidance or direction (perhaps more effective) by which it can constrain the quantity of bank credit creation.

  • Paul,

    monopolisation, cartelisation and ‘financialisation’ are key aspects of concern, particularly with respect to the unequal distribution of wealth. What is needed is policy prescriptions that can address these underlying structural weaknesess in the economy.
    One area I would suggest as a priority is the monopoly that the big banks have in the UK.
    The competition commission made several recommendations in 2002. The Commission concluded that the four largest clearing groups had made excess profits, in England and Wales, of about 725 million a year over the last three years with adverse effects on SMEs or their customers.
    One of the key areas of focus needs to be the reestablishment of community banks (preferably non-profit to avoid being taken over) that are focused in serving the needs of SME’s in their local area. This is an underlying strength of economies like Germany, the USA, Japan and even China. The UK banking cartel has been an inhibitor to SME access to credit growth for at least a century i.e. as long as these inquiries have been going on.

  • Peter Martin 14th Sep '23 - 4:27pm

    @ Joe,

    You seem to be splitting hairs in your first sentence. However you want to put it “taxes drive currency”.
    https://neweconomicperspectives.org/2014/05/need-taxes-mmt-perspective.html

    “Persistent inflation is a monetary phenomenon.”

    This is all very Milton Friedman. I’m not sure why even he thinks this. A £1 coin changing hands 100 times will create as much demand for goods and services as a £100 note changing hands once.

    Bank lending doesn’t give anyone any more spending power over the course of the loan period. Its reflationary to start with and deflationary later on. If everyone is borrowing and repaying at different times its macroeconomically neutral. It’s when everyone does the same thing at the same time that it does have an effect ie when interest rates are changed. Therefore we should decide what we want them to be and avoid changing them if at all possible.

    @ Paul,

    “.. the post-war focus on aggregate demand management has its limitations.”

    Sure, everything has its limitations but getting the basics right has to be the first priority. Keynes got more right than he got wrong, incidentally. He did pretty well to control aggregate demand, and so inflation too, during WW2 and afterwards. And, he didn’t do it by constantly fiddling around with interest rates! aka monetarist economics.

  • Currency is created by the state, Most money in the economy is created by banks. Most economists understand the relationship between excessive flows or credit from bank lending and/or monetisation of deficits as Keynes did Inflationand Andy Haldane makes clear in his comments above. If the excess credit is directed at the housing and financial markets that is where inflation will appear. If excessive credit is directed at the consumer market then it will appear in consumer prices. If it is directed at productive investment that increases output and based on realistic cash flows then it is non-inflationary.
    Inflation was a major problem in WW1, in large part due to the failure of War bond sales. The FT even apologised (103 years later) for its part in covering up these failures in 1914 Bank of England covered up failed first world war bond sale. Rent, wage and price controls had to be imposed together with rationing across the economy.
    In WW2 taxes were increased, in part as forced savings, in addition to price controls and rationing. The forced savings from high taxes were supposed to be returned after the war, in part as a stimulus to demand, but this never happened. What followed was the 1947 devaluation, austerity and rationing until 1953. Inflation still hit double digits in 1952 during the Korean war. The economy began recovering in the 1950s as exports returned and mass housebuilding was ramped up. Inflation averaged around 4% until the 1967 devaluation and then began rising with a massive spike after the Barber boom and bank credit deregulation, exacerbated by the Opec oil crisis and an inflationary spiral for much of the decade. Very steep increases in money supply were seen in the years immediately prior to the 2008 financial crisis and the inflation in the decade preceding was largely seen in the Housing and financial markets M4 Money Stock

  • Peter Martin 14th Sep '23 - 8:16pm

    @ Joe,

    You say “Most economists understand the relationship between excessive flows or credit from bank lending..”

    If it is indeed excessive there are always going to adverse affects. No one is saying otherwise. But why is it excessive? Why is credit directed at the housing market rather than into productive investment? No-one is forcing the banks to do that?

    What would you say that most economists *don’t* understand?

    There must be something significant that they are missing otherwise we wouldn’t be having the economic problems we do? The Queen famously asked a group of Economic professors at LSE why no-one had seen the 2008 crash coming. What was it they didn’t understand?

  • It is excessive for the reasons Paul Reynolds outlines – “the UK as an economy is highly monopolised, cartelised and ‘financialised’, with most causes being outwith the scope of standard competition policy”. By the end of World War I successive merger waves had produced an oligopolistic, tightly cartelized, English banking system, which was widely viewed as having restricted lending to small-medium-sized firms—the famous ‘Macmillan Gap’ in industrial finance Jealous Monopolists? British Banks and Responses to the Macmillan Gap during the 1930s
    The average home in the UK cost £1,891 in 1952. Nationwide Building society calculated how much it would be now if house prices had only risen in line with inflation? The answer is £63,300 The average home in the UK cost £1,891 in 1952
    “It’s a measure of how far detached house prices have come from our salaries and how contorted the financial system has become by cheap money, that the scenario where we’d only pay just over double average earnings for a home is almost totally unimaginable. Not so long ago we weren’t that far off that: from the 1950s to the 2000s the house price to earnings ratio remained within a range of 2.8 to 3.4. Interest rates were much higher but at least that and more cautious lending kept a lid on house prices.”
    The price of a house is determined by how much a bank will lend against it. Most economic models treat money as neutral and do not factor in the impact of accelerating credit creation or credit contraction in the economy. This article discusses the impact of housing finance on the housing market Housing finance and the housing market: Lessons from the UK

  • Peter Martin 15th Sep '23 - 8:54am

    “Most economic models treat money as neutral and do not factor in the impact of accelerating credit creation or credit contraction in the economy.”

    I don’t know about “most” but it’s not true for the model the Govt uses. The idea of New Keynesianism which should really read “Not Keynesianism” is to lower interest rates to expand credit creation and to increase them to contract it.

    This works only in the short term. However it is at least economically neutral, and possibly even slightly deflationary over the term of the loan, because the loan has to be repaid with interest. See the term ‘Fishers Debt Deflation’. On the other hand a fiscal stimulus created by government, either by a tax cut or more Govt spending, puts purchasing power into our pockets and doesn’t have to be repaid.

    So shortly before the Pandemic we’d got ourselves into the silly position of having to have an ultra loose monetary policy to create even more private sector debt to counteract the slightly less loose monetary policy which had created too much private debt previously. Naturally this will push up house prices as you’ve explained.

  • The largest house price acceleration in the UK occurred during the period 1995 to 2007 when mortgage rates were circa 8% and very low deficits run(surpluses for two years). After 2008 when interest rates were lowered to near zero, QE introduced and vary large deficits run house prices fell for 5.5 years. They began recovering as the government introduced various support measure to restart mortgage lending. See the linked article Housing finance and the housing market for details.
    The key to house price inflation is credit creation in the mortgage market. Fiscal stimulus has little if any impact on debt creation for house purchases. New builds comprise less than 1% of the housing stock. 99% of purchases are existing stock. The sae of existing houses has no impact on GDP. There is no new production or added value to stimulate in these housing market sales. It is simply inflating the price of existing assets.

  • Peter Martin 15th Sep '23 - 3:34pm

    @ Joe,

    The crash of 2008 were caused by having a monetary policy which was too loose in the 1995 – 2007 period you mention. This was in the USA, the UK, the EU and elsewhere too. Too much private debt was created, leading to a boom in house prices, which was insufficiently supported by real collateral. So when the central banks started to try to reduce it by raising interest rates they caused a system collapse.

    They seem to be doing much the same right now.

    https://www.bis.org/publ/work991.pdf

  • The UK did not have as low a bank rate as set by the US Federal reserve and particularly the ECB, but UK mortgage lenders could access International wholesale money market funds at lower rates The collapse of Northern Rock Then, as now, the BofE rate averaged around 5% in the years before the crisis.
    As the Housing finance article above notes “With the global decline in interest rates, an expansion of wholesale money markets (not least the securitisation market in the 1990s) and the demutualisation of a number of large building societies and their transformation into mortgage banks, the UK saw a significant growth in competition and product innovation in the mortgage market. This opened up home ownership to households who had previously found it difficult to get mortgages, for example, those with poor credit histories and the self-employed. Mortgage lending surged from around £200 billion of gross lending in the early 2000s to £360 billion in 2007 and at very low rates of interest and over long repayment terms. House prices rose accordingly and soon began to exceed increases in earnings. This proved to be unsustainable not least due to the sudden contraction in funding markets reflecting the collapse of confidence in the US housing market and residential real estate assets”
    Gordon Brown tried cooling the housing market with higher levels of stamp duty, but it had little impact overall. It was not UK monetary policy or deficits that led to the crisis in the UK. It was a feeding frenzy in the banking sector that inflated house prices to unsustainable levels.
    As for what is happening now. Gillian Tett, the US managing editor of the Financial Times, and a close observer of the banking crisis, says that while individual banks might be on a sounder footing, the wider problem is debt. “What has happened is a reliance on private debt – heroin, if you like – has been replaced by a reliance on public debt – morphine. The system as a whole is still unbalanced.”

  • Peter Martin 16th Sep '23 - 10:14am

    @ Joe,

    Bankers will always do what they’ve always done – make money the fastest and easiest way they can. If you throw food to the sharks you’ll see a “feeding frenzy”. There’s no point in blaming them! Bankers or sharks!

    You say it wasn’t UK monetary policy that has led to the crisis but the objective since at least 1995 has been to encourage everyone else to borrow more so the Govt can borrow less. The increasing price of assets: housing, land, stocks and shares etc has been used as collateral to support this borrowing.

    It’s all looking like a house of cards at the moment. It could collapse at any time.

  • Peter Hirst 9th Oct '23 - 4:00pm

    Investment must be our key policy in helping our economy. Investment in green technology, investment in infrastructure and investment in nature. Never has it been more important to plan long term and we’re the only party capable of doing it. The least we can do for those who follow us is to start building a country that is fit for the 21st and coming centuries.

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    @John Waller Kazakhstan is part of NATO's Partnership for Peace (PfP), as were both Russia and Belarus until their membership was suspended for obvious reasons...
  • David Raw
    @ David "the monarchy is also an office, held at the will and pleasure of the people, and not a sacred obligation vested by Heaven in one man". I think, whe...
  • David
    Ultimately the question is one about the source of power. Does it lie with the sovereign rights of the monarch, ultimately attributed to the backing of divine p...