The blame for this lies with the government and the FSA, they watched in awe as the City boomed when they should have been regulating, mortgages should have been capped at multiples of 3 times salary with a deposit of say 10% to stop the housing bubble from growing.
Too late now, house price crash and stagflation to come.
Posted by Scott on April 24, 2008 10:45 AM

What about Sterling, the unmentionable in the woodpile? If it falls versus the US$ as it already has against the Euro the price of all those raw materials will rise because most of them are priced in dollars. Cutting interest rates would produce such a fall. Sterling at, say, $1.7 would mean an effective 15% rise in the price of oil, metals and much of our food, even if the underlying prices remain static.

The choice isn't between falling house prices and recession - it's between recession and stagflation. Keeping rates where they are will produce the former: cutting rates the latter.

I think that rates will be cut as the NuLab appointees on the MPC try to help their old mates in government. This will help to produce a classic sterling crisis, with the £ at $1.80 by autumn and $1.50 by the end of next year. This in turn will, er, inflate inflation and the result will an overdue hike in rates, leading to a deep and sustined recession.

Oh yes, and a Tory government.

The only sensible approach would be to stimulate the economy by cutting taxes, reducing state waste to pay for it. Dropping the top rate of income tax to 30% and VAT to 15% would be a good start, which would help the economy without spurring inflation. Sadly, Wee Gordy would rather support England than cut taxes, while Dave and his chums have promised to keep Labour's spending plans intact.
Posted by Bill VIncent on April 24, 2008 10:45 AM

Jeff Randall - please tell us who appoints the members of the BOE MPC committe please.

We need the equivalent of the Nuremberg trails to find out how we have got into this mess; or how we have allowed vested interests to manipulate the masses.

When house prices were climbing 20% annually, year in year out, the BOE said house prices were nothing to do with them - inflation was there only concern.

The inflation figures were conveniently rigged for the duration, lets not forget.

Now Gordons moment of truth is coming the BOE lowers interest rates due to falling house prices - even though inflation is climbing. Are we meant to have short memories?

I return to my first sentence - a Nuremberg trial to pick out the lies we have been fed.

Who appoints these people?
Posted by john samuels on April 24, 2008 10:43 AM

"But we should not count asset values as inflation anyway. Inflation should be applied to the cost of consumables as this is what really erodes the value of money savings which is saving for future consumption"
So having an increasing ammount of your income spent on one thing (consumables) is inflation, but having it spent on another thing (housing) isn't ? Sounds like you should be in government.
Besides, reducing interest rates won't help the mortgage market. Unless they start doing 125% mortgages and liar loans again. But of course, there's no market for selling on mortgage debt. Unless the British tax payer (thanks to the BoE) pays for them that is. It's a mess. I say let the house prices fall. That way less income is spent on them. That way more income is then available to spend in the wider economy.
Posted by Matt Matthers on April 24, 2008 10:42 AM

The most realistic article from the Telegraph for some time.
The solution to the debt mountain is simple- U.K must inflate and wages must go up. Average Mortgages are 5 times earnings, so wages must double to make mortgage payments more realistic for housholds. We have the belief that low wages are a good thing. They are bad if real inflation has happened. CPI, RPI are unrepresentative of U.K. inflation. The government needs calculate real U.K. inflation,for different social groups, increase wages and cut imigration and drop interest rates.
we can re-visit the idea of making Britain more competitive after we have a more healthy internal economic climate.
Posted by Neils on April 24, 2008 10:41 AM

well the bank of england seems to think that house prices are more important to us than inflation.we need to control the inflation first.you can't eat a house at disparate times but you'd need to be able to go to the shop and provide food for your family.the first goal should be to tackle the inflation.
Posted by ebbi on April 24, 2008 10:40 AM

Prudence handed some power to the Bank of England but kept most of the 'control' himself. he has even rerastined it and does not allow the puppet Darling any say or freedom of action. Until we either have a longed for change of government (can not wait until June 2010 arrives) or the Bank takes full controlof the economy the question you ask is irrelevant. Brown knows best so we all must suffer. Dither and misspeak is his way of running a once proud country. It will take 20 years to recover from the past decade of incompetence. Our children and grandchildren will all pay the price.
Posted by Jackhigh on April 24, 2008 10:37 AM

Inflation already is sky-high - the official figures are a joke, designed to keep wage claims and pensions down.

Higher interest rates can push up costs particularly in a tight labour market, but will decrease house prices.

The Bank has lost credibility through misjudgement over the last three years first in stimulating house prices by dropping interest rates and signalling further interest rate cuts, and now thinking asset values are inflated, as well as in its incredibly incompetent handling of the credit crisis.

As a result bank base rates do not determine borrowing costs - the only way to force this is for the Bank to offer money at rates closer to the base rate which it clearly is not prepared to do.

We are in a mess which requires good leadership which presently and unfortunately we have not got.


Posted by David on April 24, 2008 10:36 AM

I would prefer a stable money supply or a monetary unit that is backed by a commodity so that a central bank cannot create booms and busts at its whim.
Posted by John on April 24, 2008 10:36 AM

You should all.....all look up one thing if you want to understand what's going on. Derivatives! How is the world going to deal with the shadow banking system and (according to the Bank of International settlements), 516,000,000,000,000, that's right, one half of a quadrillion dollars of largely junk bonds, in the international monetary system. The biggest Ponzi scheme ever. This is why the system is in gridlock. This amount has to be accounted for and it's mostly worthless junk. The amount is equal to 10 years of the entire world's GDP.
Posted by CvLH on April 24, 2008 10:27 AM

How do the BOE and the MPC reconcile themselves against keeping inflation low when the method concocted by Brown for determining inflation is wholly misleading and weighted against the true measure of actual inflation in order to support his own political position? surely economic policy should be based on the true cost of a nation to exist both in growth terms and in those of consumption - to politically inflate one through the expenditure of state capital whilst deflating the other through questionable interpretation or exclusion of factual data means that any policy developed in real terms on the basis of Gordon Brown's claims are at best misguided and at worst a financial catastrophe. I am no economist and don't profess to understand the complex economic machinations that drive a country forward, however I would suspect that basing any planning or policies that affect the population on known lies and misinformation would be utter folly. Telling people that inflation is running at 2.5 or 3% when the cost of raw materials, their housing, their food, their fuel, their transport and of course their level of local taxation and national taxation(through stealth)are soaring way above this seems to me to be ridiculous. Now economists may argue the point, but to us here on the ground we simply can't believe a word anyone says, in particular when the information stems from Gordon Brown's socialist propaganda machine - how about a bit of honesty for a change and, in laymans terms,a breakdown of the true cost of inflation, say measured as it was in the last recession so we can compare the state of our parlousness with that ?
Posted by Bryan on April 24, 2008 10:24 AM

MD at 7:16 am thinks that property prices are 100% above where they should be? So they should all cost nothing at all?

I think I'll take my financial advice from someone who knows some primary school maths, thanks.

On your way!

PS: If you want to know the future, try 10% off property max slowly over the next 23 years, then another rise above today's prices.
Posted by JJ on April 24, 2008 10:24 AM

The only way I can see out of the mess the is in is to join the Euro. For 15 years I have been vehemently against giving up the pound for the Euro but having seen the total miss management of the economy in Labours hands over the last ten years I now feel it is the lesser of two evils. The UK no longer exists as a country the breakup of the UK and the simultaneous transition to the Euro may be the very thing we need to rescue millions of people from the stupidity of Tony Blair and Gordon Brown.
Posted by Bruce Mcaaw on April 24, 2008 10:22 AM

It is 'DEPRESSION' stupid. Inflation, Agflation, Recession and Bush's and Brown's economic slowdown is all, well pass sell by date. You ain't seen nothing yet! There is worst to come. We might see both Brown and Darling resigning at the same time over these mess up.
Posted by Harish on April 24, 2008 10:20 AM

We are just at the start of this. The key problem is unemployment and so far employment has held up with just signs here and there of some redundancies. We have to go back to the early eighties and the lay-offs of that time. In my opinion unemployment will gather pace soon certainly within six months. Unless government can assist householders who are defaulting the economy will unravel. The scale of the problem is just too large for this. There is just a mountain of unsustainable debt.
Posted by Chris Stuart on April 24, 2008 10:19 AM
There used to be an old saying that "if you owe the Bank £1000 and can't pay then you are in trouble", but "if you owe the Bank £50000 and can't pay then they are in trouble".

The current economic situation is an amplified version of this - banks can take repossession action against individuals, but if their whole mortgage asset base rapidly diminishes in value then repossession will become pointless, as they will not recover their money, with resulting damage to their balance sheets, assets registers and capital ratios. They need to preserve the status quo of a sound asset base for their activities.

This is why the Government and the BoE are so desperate to produce a "soft landing" for the economy, as the great socialist Broon has left no slack in the coffers to weather the fallout from the hard landing that would result from the correct action to combat inflation.

It will be interesting to see how successful are the "Emperor's new clothes" attempts to preserve the housing market/economy/banking assets base in the face of increasing commodity prices and reducing economic activity.

But they must try - the alternatives would be disastrous for the economy.


Posted by Ford Macfarlane on April 24, 2008 10:15 AM