I’m your man for the job, Chancellor
HM Treasury has placed an advert in the Economist looking for a new external member of the Bank of England’s Monetary Policy Committee, the body that sets UK interest rates, to succeed David Blanchflower. I have decided that it is my duty to apply and have therefore sent this letter to Alistair Darling, who will make the decision.
Dear Mr Darling,
I would like to apply for the vacant post of external member of the Bank of England’s Monetary Policy Committee. Admittedly, beyond a grade A at ‘O’ level, I don’t have any formal qualifications in economics, but your advert does not specify these as essential. Instead, you have asked for a letter ‘summarising evidence from your career which best demonstrates your qualifications for the appointment’. So here goes.
Economist or not, I did at least foresee the housing market collapse, which is more than some members of the MPC managed to do. My eye was taken particularly with a speech made by Kate Barker on 23 October 2007, in which she declared that it was ‘not immediately obvious’ why the credit crunch and the Northern Rock crisis would provide ‘a trigger which significantly alters previous expectations of continued house price growth’.
For some years I had been arguing that the housing market was a speculative bubble which would burst the moment that lenders decided enough was enough. Here, for example, is what I wrote in the Daily Telegraph on 30 June 2007, six weeks before the beginning of the credit crunch: ‘Many explanations have been put forward for the trebling of prices over the past decade: low interest rates; poor returns on the stock market; the failure of the government to build enough houses. All, ultimately, have contributed to spiralling prices — and the resulting plight of today’s first-time buyers. But the truth is that all the above explanations miss the point. House prices cannot rise above the level which buyers can afford to pay. And that is influenced by one factor above all: the size of the mortgage loan that lenders are prepared to advance. Clearly, [the easing of lending criteria] cannot go on forever… So what happens if lenders do one day decide that they are taking too big risks, and start to tighten their lending criteria? It isn’t hard to guess.’
Even after the beginning of the credit crunch, many commentators continued to assert that there had been little irresponsible lending in Britain and that house prices would be underpinned by a shortage of housing stock. This, I argued in The Spectator on 19 September 2007, was false: ‘Our lenders are not so irresponsible as to throw loans at toothless hicks with no income, to allow them to trade up from a trailer to a three-bedroom condo, are they? Actually, British lenders have been pushing subprime mortgages for several years. It’s just that in this country they are called ‘self-certification’ mortgages and ‘buy-to-let’ mortgages, neither of which require the borrower to prove he has sufficient income to pay his debt — or any income at all.’
As for the assertion that house prices would not fall in Britain because the supply of housing had failed to keep pace with the growth in households, I went on: ‘The government’s predictions for the growth in the number of households have been proved wrong, however. Between 2001 and 2006, according to the ONS, the number of households in England and Wales grew from 23.8 million to 24.2 million — an average increase of 80,000 a year, far short of the 223,000 which [Whitehall] planners have been predicting. Their mistake was to fail to appreciate that high property prices act as a brake on household creation: the more expensive houses become, the greater the incentive for children to remain living with their parents and for warring couples to remain together.’
Last week, the CBI’s director general, Richard Lambert, who was an MPC member from 2003 to 2006, called for a debate on the way that interest rates are set, suggesting one lesson from the past 18 months is that the inflation target should include house prices. This is a point which I had been making for several years, for example in The Spectator on 18 October 2006: ‘The oddity about the Consumer Prices Index [the inflation measure which Gordon Brown instructed the MPC to use as its target] is that it excludes housing costs: if we all lived in cardboard boxes it would be a fair measure of the cost of living, but we don’t. If anyone can present a logical explanation for why we now have an inflation index which includes a flat-panel television but excludes the cost of putting a roof over one’s head, I am all ears.’
I note that the advertised salary for this position is £128,600. In view of the dire state of the public finances, I am prepared to set an example by taking a 10 per cent pay cut, to £115,740. I hope this will be of interest and I look forward to hearing from you.
Yours sincerely,
Ross Clark
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