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Carney's Risky Football Analogy and the Housing Hot Potato

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United Kingdom  Bank of England  Monetary Policy Committee  Mark Carney  MPC  Financial Policy Committee 

Carney's Risky Football Analogy and the Housing Hot Potato

By - Wednesday 14 May 2014

The Pound nosedived this morning in reaction to the Bank of England's Inflation Report delivered by Canadian Mark Carney, the bank's chief.

In what can only be an attempt to ingratiate himself to the British public, Carney adopted a technique of his predecessor Mervyn King by using a football metaphor, saying that "securing the recovery is like getting through the qualifying rounds of the World Cup. It's a start, but it's not the overall goal - the prize is a strong, sustainable recovery".

I must confess to being almost totally disinterested in football but nevertheless I am mindful of the fact that most British people do not feel the same way and it is with respect that I tell you what my interpretation of this analogy is.

We are in danger of winding ourselves up to believe that something good is going to happen when in fact, the odds are completely against us. Even if we make it to qualification, the reality is that England have only held the 'prize' once in the history of the World Cup while that achievement has evaded Wales, Scotland and Northern Ireland altogether.

Returning to the analogy then, what is Carney actually saying here? Securing the recovery - the first step in the process- is completely hit and miss and may not even happen? Does that mean we will never win the prize of "strong, sustainable recovery"?

I'm sure that Carney intended a different interpretation although there is a parallel between the nation relying on the 23-man England squad to take us to glory and having to rely on a bunch of similarly overpaid bankers to restore the country to economic growth.

Methinks Mr Carney should think through his football analogies before spouting them.

During the Inflation Report Carney also caused controversy by using waffle to reinforce his decision to keep borrowing rates low against a backdrop of spiralling house prices saying that "monetary policy would not be the right tool" to approach the problem.

Using interest rates as a measure to control price inflation in property markets is a tried and tested method although Carney clearly sees the BoE's Monetary Policy Committee (MPC) as the last line of defence against a housing bubble, leaving the ball firmly in the bank's Financial Policy Committee (FPC) to come up with the right 'tools' to do the job. Hoorah for Committees!

Apparently, the FPC have a range of 'macro-prudential' tools available to slow down inflation in the housing market such as, "adjusting bank capital requirements or mortgage affordability requirements" (again??) but although the Mortgage Market Review did slow down mortgage applications slightly, the big picture hasn't changed and property prices are still increasing an average 10% year-on-year.

MPC and FPC Face-Off

Meanwhile of course, the government are nicely distanced from the true issue behind spiralling prices as they hide behind BoE interest rate policies. Superficially, the more people being able to get themselves into potential debt through borrowing on low interest rates, the 'healthier' the economy would appear to be.

Similarly, the fact that more people are employed in the UK now compared with 5 years ago gives the impression of a recovering economy but when you take into account the increase in part-timers to record levels, the picture becomes a little obscured.

Naturally, it goes without saying that the government is mindful of next year's election and so while the BoE flail around the housing crisis, they huddle together in the background and shrug their shoulders hoping it will just go away.

Lack of Housing Supply to Blame

In any case, the heart of the housing crisis lies in lack of supply and as far as I am aware, the Bank of England isn't in the homebuilding business. What the government should be doing is stimulating the economy through the construction sector and providing homes for people while the bank raises interest rates to slow down inflation in the housing market.

No-one welcomes rising interest rates but it's a simple formula that serves to slow down borrowing and encourage saving. In the last downturn, we saw interest rates of up to 18% and I remember hanging on to my home by the skin of my teeth at that time but inevitably, that time passed and order was restored albeit not without its victims.

There's too much pussy-footing going on when we need strong, committed and most importantly DECISIVE action to bring the British economy back to life.

 

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