Economic Non-Measures

We've had the Chancellor say here comes the worst economic situation for 60 years, and a series of small measures to try to rescue the housing market. The basis of this is the housing market is seen as a British economy engine of growth.

If it is, then this is surely wrong-headed. No matter how often you go to the toilet, if you keep eating you get fat, and fat has to go somewhere. In the British economy, this fat or credit it goes into housing because of the large scale private housing market and a shortage of accommodation.

Credit is money that we have and ought not to have. If it is not inflated out, then it is going to store up in some unusual places. The problem is that it will have to be lost, and there will be winners and losers.

The person who buys an expensive house on borrowed money and then pays towards the debt even after the asset value has collapsed is, in essence, taking on the debt that was in the house price during the boom time. The solution to this is not to pump up the house market again, but to say sorry but the boom was a mirage. Gordon Brown was yet another Chancellor who did rule over boom and bust, despite his claims otherwise at the time of rising values.

We know this because house prices went well outside the reach of buyers and their salaries, and schemes then to help people get more credit just banged up the prices even higher. In the end, that had to fail, and it is doing now.

The trend is upwards, and will be because the population is growing, households are smaller and housing falls into disrepair and the rate of restoration and building has to cover growth.

Inflated house prices are, in effect, a form of inflation, stored up and hidden, as a brought forward wealth effect to be discharged later, and therefore inflated house prices are to be avoided as much as inflation. The Chancellor's measures now are pathetic: he may as well order the Bank of England to print money and let inflation take over. But the Bank of England is independent.

House prices have gone through boom and bust: something like this graph shows the trend (as on BBC: Newsnight) over 30 years or so from 1975. The key policy should be to smooth out the actual to the trend, and flatten the trend through enhanced supply. If there is symmetry into the future, there will be a prolonged slump - but my point is, painful as it may be, there ought to be such a slump for significant readjustment. Housing relates to demand as well as supply: people have to afford housing over a working life or housing is not purchased.

But here is the problem: our so called strong economy is post-industrial. Its added value, in financial services and information, and services in general, dance on the head of a pin. Chunks can vanish instantly, and invisibly, whereas people could see the closure of a factory. Such an economy can start up again quickly too, but there is something of the mirage about an economy financed on make-believe.

Real growth can be built while you have a wealth effect being deposited into property, just as you can get real growth from an inflationary period. But at some point it has to stop, and a reversal involves real, if potentially temporary, decline.

The pound is tumbling at present. Oil prices did not rise on the European continent as they did here. A falling pound simply means the British economy is worth less. We pay more for imports and sell at a reduced price. Plus let's not believe that rising oil and other commodity prices fuel inflation. They don't: their prices rise, money diverts to them, and other prices have to fall. If other prices don't fall, they don't sell - and indeed, what does happen is they go out of business. Forced to lower prices and yet facing higher fuel bills, firms go bust.

What is the answer? First of all, join the Euro. It will cost (because the pound is weak) but it will have an instant stabilising payback. That was another missed Blair initiative, partly thanks to Gordon Brown's obstinacy. So lock in to the European market. Secondly build back mass public housing and accommodation. Plus, see the value of broad based public services, as people are already getting poorer, and many will rely on public provision. Allow the economy to recover gently, and when it builds in the future, this time don't have the debt of Private Finance Initiatives and lack of taxes, and other pay later schemes to cook the Treasury books, but actually pay off public debt. Have a house price policy to reduce wealth effects: they are a mirage and they end in tears: they give wealth to the wealthy and remove wealth from the poorer.