Party Political Animal

Archive for the ‘Credit Crunch’ Category

This time last year, the sight of former Lehman Brothers bankers leaving their gleaming (former) offices dressed in polo shirts and clutching boxes of personal possessions, signalled the credit crisis had reached a new intensity.

Cue a drab procession of old ’70s socialists (Larry Elliot of the Guardian, Will Hutton of everything and anything etc etc) to predict the end of capitalism-as-we-know-it and the rebirth of big government.

One year on, the main parties are arguing about how much they are going to cut government spending – Labour are proposing to reduce public spending back to 1997 levels within 10 years.

It’s increasingly clear that the recession/depression will result not in bigger, but smaller government. We shouldn’t be surprised. Larry and Will have been wrong about pretty well everything for the past 30 years.

The government has once again have got it wrong in its latest ’steady the core vote’ announcement that unsolicited credit card cheques and increased card limits may be banned.

If my own experience is anything to go by, sudden reductions in limits with no notice are more of a problem.

Last November I told Amazon’s Halifax card I was going to Cuba on business, to avoid the card being automatically blocked. This happens in some of the more exotic countries. When I got there a couple of days later, the card was blocked, causing some inconvenience when I was trying to hire a car to drive 600 miles to a coffee plantation on top of a mountain.

I got home to find a letter from Halifax saying that my admittedly very high credit limit (which I had enjoyed for some years with no problems) was being reduced to a pathetic amount – a few hundred pounds in fact, which explained why the card had been declined. The new limit was apparently because the Halifax had “reviewed” my credit status, which I was invited to inspect for myself. I did. There were no problems.

I pressed the Halifax who changed tack. This time they claimed that as a “responsible lender” they were changing their credit policies “in line with the Treasury Select Committee report on responsible lending.”

All fine, but that report was issued in 2004.

Of course the real reason was not my financial problems, but the bank’s. It was Halifax’s, or rather HBOS’s, own credit rating that had fallen somewhat – so somewhat, in fact, that they pretty soon they had to ask me for quite a large a loan – me and a few million other taxpayers, that is. Perhaps if they had taken note of that select committee report in 2004, rather than four years later, they wouldn’t have required my dosh to bail them out. Either way, it doesn’t help when they treat customers to such bollocks. Who writes these letters? Ex-government spin-doctors? Probably, come to think of it.

No, I suspect most people people greet an increased credit limit with a yelp of delight. The government gets it wrong again. Perhaps that’s because ministers haven’t had to use credit cards much in recent years. They just make a claim to the Commons Fees Office. Tough world out there for the rest of us, guys – you may find that out for yourselves pretty soon.

You had some spare cash. What did you with it?

Did you put it on deposit and get clobbered by tax?

Did you buy shares and get hit by tax on the dividend and capital gains tax if you were lucky enough to get out before the crash?

Did you save it in a complex tax-free savings instrument like an ISA, with fees and middle men which lock you in?

Did you put it into a pension, locking the money up for decades, 2% being raked off each year by the provider, with the possibility of losing the lot through fraud as many did, or never seeing it if you die young? And even if you make it to 65, then having to sort out an annuity and paying tax on the proceeds?

Or did you put it into a house? Ah, thought so. Nice, tax free shelter. The gains roll up year on year, with no tax. If you sell, it’s tax free. And in the meantime, it has its uses as another sort of shelter. 

That of course, is what so many of us did.

Understandably unwilling to pay high taxes on savings, rightly suspicious of the labrynthine tax free savings and pensions systems which have spawned a massive industry of unproductive “independent” financial advisers and other spivs whose life is dedicated to ripping off their 1% – or usually more like 2% – we bought property.

And in a crowded country with vicious planning restrictions, another twist was added to the upward spiral, making the whole business self-fulfilling.

Then – and this is the good bit – we borrowed easy money on our ever upward property value to spend on goodies.

So our economy was distorted towards consumption and property. We saved less and less and the bye-products of high consumption and low savings were low investment, rising imports and a tendency to inflation.

You can’t blame this government for all of that. Both Thatcher and Major encouraged property ownership to give people a stake in society. That was fine, but they never really addressed the issue of high consumption and low savings.

True, Major tentatively introduced tax-free savings, but pensions were never reformed.
Blair and Brown had the chance to introduce simple tax-free savings systems which give the Japanese, French and Germans the high savings and investment levels which have helped their economies to overcome their other problems like over-regulation. It’s no coincidence that those countries all invest more and are more productive than we are.

Blair and Brown  had their chance because they inherited a half-way decent economy in ’97. But despite promises radically to overhaul the system, they gave the job to the useless Geoffrey Robinson, former gofer to the unlamented fraudster Robert Maxwell who did nothing. Eventually we did get a half-baked pensions reform that is still not in place. And more than eleven years on, we save and invest less in real terms than we did in ’97. And now we are paying the price.      

Phillip Oppenheim

Yesterday, the financial system quivered and markets crashed. Today, inflation figures gave rise to familiar cries that real inflation is higher than the headline figure.

Put the two together and you begin to answer the question of how we got where we are.

For the crunch and inflation are intimately connected. Diana Choylevska of Lombard Street Research gets it. On Newsnight last night she made the crucial point that central banks had kept interest rates too low over the past few years, encouraging easy credit at all levels. For this insight, she merited a lip-curling sneer from Jeremy Paxman, eager to pin the blame on greedy hedge fund managers. He clearly did not get it.

So why did central banks keep credit so loose for so long? In the UK, after all, the Bank of England has set interest rates to achieve an inflation target since 1997.

The answer lies in those inflation figures. People are right to complain that their personal inflation experience does not match the headline rate. For much of the past decade, we have in effect had two inflation rates. Imported deflation in the form of cheap and cheaper TVs, DVD players, toys and clothes from China and Asia; and domestic inflation at much higher rates due to an overheated economy and rising indirect taxes.

If you lived off wide screen LCDs, you were fine. For everyone else, domestic services, housing costs, tax, etc. etc. etc. were rising at well over 5% a year – twice the Bank’s target rate – and that was long before rising oil, food and commodity prices kicked in. But the headline inflation figure was an average of the two and that artificially low rate was what the Bank was targeting. Result: boom – and bust.

In other words the target was flawed by being too dependent on the overall inflation index and not taking account of the divergence between home-grown inflation  (worryingly high) and imported deflation (low).

To blame the American housing crisis for our problems is to miss the point. Yes, our economy is globalised. Yes, US policy was as flawed as ours. But yes, we are just as much to blame.

So to the catalogue of achievements of the man who not so long ago people like Paxman were trumpeting as “the greatest Chancellor this century”, we have to add a slow-burning monetary policy disaster, for he set the inflation target and he knew what was going on in the real economy.

In 2000 I wrote for the Sunday Times that: “Big reputations can take big tumbles. Brown has made the poor richer and the rich richer. Practically everyone else is marginally worse off,” adding that the boom could turn to bust in the next parliament.

I, of course, was wrong. The bust came in the parliament after that.

Phillip Oppenheim