Bank of England to the assembled Punters – Next Time It Will Be Different

When you know you’re leaving a job, you can say things that you normally can’t. It’s one of the perks old gits get at the end of their careers, and it’s a good thing to savour. It makes work actually fun at times.

Mervyn King, no child of the 1930s...

Looks like Mervyn King availed himself of the pleasure, in his Today Programme Lecture (Iplayer). There’s a lot of sense in what he said, but two parts of what he said don’t ring true to me.

This was not a Bust without a Boom

One member of the audience did call him out on this one. Mervyn King said

Let me start by pointing out what did not go wrong. In the five years before the onset of the crisis, across the industrialised world growth was steady and both unemployment and inflation were low and stable. Whether in this country, the United States or Europe, there was no unsustainable boom like that seen in the 1980s; this was a bust without a boom.

I’m not sure where Mervyn King was living in 2006 and 2007, but you could smell the boom in the air. House prices were skyrocketing, and in Britain when you have skyrocketing house prices, then home owners feel richer. They go out and splurge on holidays, aspirational knick-knacks like fractional yachts and helicopters, overpriced coffee bars and go out on the town drinking expensive cocktails. Companies launched Shattered! magazine for stressed professional women. It went down sometime in 2008. There’s only so much aspirational twaddle the world needed in 2008, though arguably all those professional women were even more stressed doing the jobs of their sisters made redundant in the crossfire as well as their own.

This boom in the UK, came about because unlike in other countries, home owners in the UK don’t believe in paying off their mortgages. So if their house is worth more, the response is to go to the mortgage company and ask for a bigger mortgage, on the higher price, and preferably interest-only, if you please. That way you get extra money which is the difference between what your house was worth before and it’s worth now, and you go spend it. On Christmas, on holidays, or new cars, or goodies for Tarquin and Jemima.

Everybody in Britain knows you don’t ever have to pay the capital on a house. They bleat like sheep when people have the temerity to clamp down on interest only deals, carping that this puts house prices out of the reach of first time buyers.

Guess what? It’s house prices getting out of reach of first time buyers that is the only brake on house prices in the UK! That’s capitalism for you. For what it’s worth the same sort of thing went on in the US, though a crucial difference in the US is you get to walk away from negative equity due to non-recourse loans.

When I was a child, in Britain we used to believe in social provision of housing for families – you had council houses and families with people in up to junior white-collar jobs quite happy to live in them. A lot of of my schoolmates lived in council housing. The along came Thatcher, who bought aspirational blue collar and middle class votes by giving massive bungs to people to buy these houses at below the market price. They took the bungs, moved on, and people wonder why the average income of social housing tenants slipped down somewhat. It’s because Thatcher paid everybody who could muster enough for a mortgage at the time to move the hell out and up. We still haven’t bloody well learned in 2012 what was wrong with that.

The housing market of the UK has been dysfunctional ever since. It is a toxic swamp of emotionally charged Stuff, sitting there ready to soak up an endless amount of debt. Lower interest rates, and house prices go up. King admitted as much, but thought it was fine, because interest rates and inflation were low.

Merv, me old mate, why is it good that such a huge amount of the UK GDP get’s sucked into housing? It’s an insatiable Beast that keeps us all poor. Buy a house in the 1980s, and you get to pay high interest rates but the house prices were relatively low most of the time. Buy them now and you have to pay stratospheric prices, but hey, interest rates are low.

We did have a boom, Merv. In property, the most dangerous of all assets to the UK psyche. It’s our Jungian Shadow, released by Thatcher giving voice to our innermost darkness, and it feeds insatiably on our finances.

You won’t take the punch-bowl away when the party gets swinging, Merv.

The Americans were chastened by the experience of the Depression, and the nasty tendency of banks to start gambling with depositors’ cash and occasionally blowing the lot. Merv even played out the fireside chat on the radio from FDR talking about the ‘bad banking experience’ that precipitated the Depression after the Roaring Twenties. In 1933 the US enacted

An Act to provide for the safer and more effective use of the assets of banks, to regulate interbank control, to prevent the undue diversion of funds into speculative operations, and for other purposes.

Nearly seven long decades rolled by, a typical human lifetime, and the people traumatised by the Depression no longer raised hoary fingers against the ambitious young Turks wanting to speculate with those deposits. These safeguards were eroded – first US banks could buy speculative operations, and Wall Street chipped away at the firewall that had been installed in the Depression. In 1999 they finally eliminated it, with the repeal of the Glass-Steagall act by Bill Clinton. Heck, those old-fashoned regulations were getting in the way of the free market and the Constitutional freedoms of the pursuit of happiness through speculating and getting lots of money. It’s all different now, what on earth could go wrong?

Seven years later, we learned once again what happens when people running banks speculate with depositors’ money.

So, Mervyn, it will happen again. Those grandchildren you speak of will dismantle the ties that bind the leverage of the banks, because “it’s all different now”.  Another Bank of England governor, as yet unborn, will make the same promise, and it too will be dismantled or rendered toothless before its time is come.

No son of Glass-Steagall will hold the line against the forces of human greed.