The government recently proposed that schoolchildren be given lessons in personal finance. Can I ask that, alongside the Lower Fourth, room be made in the classes for the AA spokesman who recently said this: ‘People wanting to get high-aspiration vehicles at an affordable price will have been hit by the crash in [the cars’] value.’
Yes, this remark really is as stupid as it seems, but first a little context. He was talking about a form of hire purchase called ‘Personal Contract Purchase’, whereby a motorist pays a deposit, followed by two years of monthly payments. At the end of this period, the buyer has two options: he can either pay a lump sum to purchase the car outright, or he can return it to the finance company which organised the deal. The size of the final lump sum demanded by the finance company is fixed when the buyer takes out the deal, based on what the vehicle is expected to be worth in two years’ time. For example, a motorist who bought a Volvo XC90 in December 2006 was told that in January 2009 he would have an option to buy the car for £18,775.
As it turns out, the predicted value was wide of the mark: thanks to the recession, the value of a two-year-old Volvo XC90 has crashed to £12,600. Therefore, the motorist would be pretty foolish to pay £18,775 and keep the car. He would be far better off handing the car back to the finance com-pany, then buying an identical two-year-old car on the second-hand market for £6,000 less. In other words, in no sense has the motorist been hit. Far from it: he is thousands of pounds better off. What the AA man really means is that the finance companies involved have suffered.
It is all too typical of the nonsense which is spoken and written about the economic crisis. There may be very few ‘green shoots’ of recovery, despite business minister Baroness Vadera’s claim to have spotted some last week, but there is certainly a booming market in nonsense and warped logic. The housing market is a hotbed of it, many of the worst examples originating from press releases by estate agents desperate to drum up business, reproduced in the media without critical analysis. I have lost count of the number of times I have read a headline to the effect: ‘Bad news for the housing market as prices fall’. One might as well say: ‘Bad news for drinkers as beer price falls’. What the headline really means is bad news for the estate agent who wrote the press release on which the headline is based.
Take this gem, from last week: under the headline ‘Rightmove sees ray of hope for house prices’ appeared a story in one national newspaper announcing that the property website had seen ‘buyer inquiries’ rise from 199,762 in the first two weeks of 2008 to 429,560 in the first two weeks of 2009. This statistic is supposed ‘to offer hope to millions of borrowers concerned about negative equity’. Except that it does no such thing. A ‘buyer inquiry’ on the Rightmove website simply means that someone has logged on and searched for some property. What Rightmove doesn’t know is why those people looked for property: was it because they wanted to buy a place or was it because they are going to have to sell their home and want to know what sort of prices properties like theirs are fetching?
Another headline which has begun to annoy me is ‘75,000 people to lose their homes as recession bites’ attached to predictions that 75,000 properties will be repossessed in 2009. A huge number of the properties being repossessed, in fact, are not homes but buy-to-let investments, many of which have never even been lived in. In such cases, no one gets thrown out on the street: all that happens is that some get-rich-quick investors lose their dream of a fortune.
Equally irritating are some of the extravagant claims for the sums people have lost over the past year, not least the money which has vanished with Bernard Madoff’s Ponzi scheme. Sure enough, victims have lost a lot of money, but if you invest $10,000 with a fraudster who later tells you that your investment has grown to $100,000 before the scheme collapses and you are left with nothing, you haven’t lost $100,000; you have lost $10,000. The higher amount of money never existed and therefore cannot be lost.
A large section of the population, not a few hacks among them, still seem to be grappling with the concept of deflation. I have lost count of the number of times I have read that deflation will ruin the economy because people will put off purchases on the grounds that they will be cheaper in future. By that logic nobody would ever buy electronic goods, which have been in a state of deflation for decades. I came across an 1985 computer advert the other day for a bulky machine with a 128K RAM for £3,295. Buyers who were prepared to wait 24 years could have picked up a machine with 4,000 times the memory for one tenth the price. But of course buyers didn’t wait: computers have sold in their millions in spite of ever-falling prices. The real danger of deflation is not that goods and services keep getting cheaper; it is that debts grow in real terms, which could leave many homeowners un-able to pay their mortgages.
But the biggest prize in the financial nonsense awards goes to all those folksy pieces about how we are surviving the credit crunch by recreating the wartime spirit. I am going to scream if I read one more newspaper article claiming that we can all ‘beat the credit crunch by growing our own vegetables’. There may be a shortage of credit, but our food supplies are not being attacked by U-boats and there is no shortage of cheap food. Growing your own fresh vegetables is all very nice, but unless you are going to do it on an agricultural scale you are not going to save money by doing so, or certainly not enough to pay off your mortgage arrears. You could save money by eschewing processed food and making your own from raw ingredients, but you don’t have to grow them yourself: a quantity of potatoes large enough to feed a family for a week can be had for a tenner. In any case most new houses, which tend to be the most heavily mortgaged, have tiny gardens or none at all, so where are these credit-crunched families supposed to grow their subsistence nosh?
Anyone caught out by the credit crunch would do better to take off the wellies and spend their time reading a book on basic economics. They might then learn, for example, that no, it wasn’t a good idea to buy ten buy-to-lets in Newcastle on a million-pound mortgage in the belief that tenants could be conjured out of thin air and that property prices only ever go up.
Recession-balls
If you read or hear examples of ‘Recession-balls’ and other credit-crunch nonsense in the media, or in corporate PR and marketing material, please email them to business@spectator.co.uk. We will print a selection from time to time.
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