Britannia Radio

TELEGRAPH 7.3.09
1. It took exceptional brilliance not to see a crash coming.... . . 
but the clever people who got us into this mess now have more power 
than ever, cautions Charles Moore

By Charles Moore

When there is a really big disaster, those responsible for it say 
that it could not have been predicted. After the pound fell out of 
the Exchange Rate Mechanism on September 16, 1992, the then Prime 
Minister, John Major, took refuge in the fact that central bankers, 
all political parties and most newspapers and economists had 
supported Britain's membership. How was he to know that they were all 
wrong, he asked.

Now that our credit is crunched, our house prices are collapsing and 
our government spending and borrowing are out of control, Gordon 
Brown suggests that no one could have foreseen such things. The 
crisis, he implies, is like some terrifying new disease. It was 
incubated in America and reached our shores through no fault of our 
own, just as rats off ships once brought us bubonic plague.

But it is surely a function of leadership to question a theory more 
strongly the greater the consensus about it. It is proverbial that 
when every taxi driver advises you to buy a certain stock, you know 
it is oversold. The same herd stupidity infects elites. It is when 
the powerful all agree that they are least likely to be thinking 
straight.

This, indeed, is the basis of an entire theory by the late economist, 
Hyman Minsky. "Stability," he said, "is destabilising." Times seem 
good: the watchmen sleep: the enemy swarms over the walls, unnoticed. 
That is exactly what has happened to the Western world's economies 
today.

Besides, it is seldom true that no one warns of the danger when a 
consensus sets in. In France in the Thirties, a stiff-necked young 
general called Charles De Gaulle published a book on why the French 
military strategy could not resist German attack. In Britain in the 
1980s, Alan Walters, Mrs Thatcher's economic adviser, argued that the 
ERM was "half-baked", and would prove impossible for sterling.

There was no single, dominant, astonishing voice in the wilderness in 
the debate on the credit crunch, but there were a decent number of 
people who predicted what would happen. Recently, a friend pressed 
into my hand a report produced in January 2005 for the clients of 
Odey Asset Management. It is called "Crunch Time for Credit?" and was 
written by Edward Chancellor, an economic historian.

Chancellor foresaw almost everything. His report listed the common 
features of the US and British credit booms, including "a shared 
belief in the new paradigm and the ability of central bankers to save 
the day", "low income growth yet also strong growth in consumer 
spending, largely fuelled by home equity withdrawal" and "rising 
government deficits". "An Englishman's home is no longer just his 
castle - it is also a leveraged hedge fund, a pension fund, a cash 
machine and the source of limitless credit creation," said 
Chancellor, and he explained how the bubble could end:

"Rising interest rates are not the only threat to the credit bubble. 
A restriction in the supply of credit (a 'credit crunch') might also 
produce a crisis." Then the old remedies fail: "Once a bubble starts 
to deflate it cannot be revived by monetary policy . When it faces 
the next crisis, the central bank may find that it has 'run out of 
bullets'." We may just have heard the last salvo.

Although some of Chancellor's work is technical, it benefits from a 
historian's understanding of what people have done in reality rather 
than a narrower economist's obsession with "modelling". It has strong 
elements of common sense. By that same common sense, though obviously 
with much less information, the man in the street also predicted the 
credit crunch.
Almost everyone knows that when house prices go way beyond the usual 
multiple of people's incomes, they fall back. They leave borrowers 
high and dry and the economy severely damaged. By 2004, British house 
prices had reached a record peak relative to income (a ratio of 
nearly 5.5). You cannot tell exactly when prices will fall, but you 
must be exceptionally brilliant and important not to see that what 
goes up will certainly, at some point, come down.

Unfortunately, such brilliant and important people were in charge. 
Even more unfortunately, they still are. In the good years, Charles 
Bean was the Chief Economist of the Bank of England. Our level of 
savings was fine, he assured us, and there were good, fundamental 
reasons for house price rises. Today, Mr Bean has been promoted. He 
is the Deputy Governor of the Bank of England.

Across the water, in March 2004, the President of the New York 
Federal Reserve, Timothy Geithner, declared that a "Great Moderation" 
had come to economics and finance. Thanks to financial innovation, he 
declared, the system could handle shocks. Writing nine months later, 
Chancellor pointed out that the Great Moderation was actually a 
"Great Excess". Since then, the system which Mr Geithner praised has 
all but collapsed under the biggest shock ever administered. But 
today he is the US Treasury Secretary, in charge of President Obama's 
recently announced $4 trillion budget.

And Gordon Brown got the reward he so single-mindedly sought for his 
debauching of our public finances: he is Prime Minister. This week, 
he told the US Congress that Britain and America had, instead of a 
special relationship, a "partnership of purpose" to save the global 
economic system. With his approval, the Bank of England announced its 
"quantitative easing" on Thursday.

Yesterday, I telephoned Edward Chancellor for his reaction. He 
caustically referred me to the words of the Governor of the Central 
Bank of Zimbabwe, who has welcomed the fact that Britain and America 
are now pursuing the policies which, under President Mugabe, he 
pioneered. Chancellor feels that a "God-almighty inflation", with the 
"euthanasia of the rentier", may be on the way.

For myself, I do not feel qualified to say that what is happening now 
is wrong. It feels terrible, but it may be unavoidable.

A couple of things are clear, however. One is that this is a gigantic 
bluff. Having helped create a credit bubble, Mr Brown is now trying 
to create a bond bubble. People ceased to believe in a bank run by 
Sir Fred Goodwin, so he had to go. They do not believe in an economy 
run by Mr Brown, but he stays. It would be a very, very small price 
to pay Mr Brown a Sir Fred-size pension to get him to retire. We 
shall have to pay a much higher one - more tax, fewer jobs, and a 
currency crisis - before we can eject him by the more cumbersome 
process of the ballot box.

Worse still is the longer prospect which stretches before us. It has 
been decided that what we face is a crisis of capitalism, when 
actually it is a crisis of the regulation of capitalism. The 
consequence of this misdiagnosis will be that the Government will 
recover control over our wallets, our jobs, our industries and our 
lives in ways which you have to be almost 50 years old to remember. 
Being 52, I do remember, and I quail.
===============
2. Brown's reckless ruse to make money
Gordon Brown won't stop borrowing because he can't stop spending, 
says Simon Heffer.

Simon Heffer

Should anyone have doubted the truth of a well-worn theme of this 
column - that politicians today, as a general rule, haven't a clue 
what they are doing - events this week should have put you right. 
Gordon Brown, Saviour of the World, left an imploding Britain for a 
preposterous circus trip to Washington, where he met the new Messiah, 
Barack Obama, whose own radical plans to stimulate the world economy 
have prompted the Dow Jones share index to crash through the floor, 
taking the rest of the world's bourses with it. And then scarcely has 
Mr Brown's special BA jet deposited him in the Royal Suite at 
Heathrow (delusions of grandeur? What delusions?) than Britain 
finally has its long-awaited Zimbabwe moment, and starts debauching 
the currency. How the printing of £150 billion to pump "liquidity" 
into the market differs from a bunch of East End villains printing 
forged fivers in a lock-up under some railway arches is something we 
should all contemplate.

I shall deal with Mr Obama's delinquencies soon. For the moment, 
trying to come to terms with the damage Mr Brown continues to inflict 
on our country should occupy us more than enough. Rather like the 
late Emperor Hirohito of Japan, he seems determined to go to his 
grave without the slightest recognition that he has committed any 
atrocities, and might have cause to abase himself before the British 
people. I suspect the British people will force an act of abasement 
when they get to the polling booths some time in the next 15 months - 
though don't bank on it - but even then Mr Brown would be at a loss 
to understand what he has done wrong.

There was a truly comical moment this week when, displaying what 
appeared to be signs of psychological disturbance, Mr Brown conceded 
that he had made a mistake. It was the introduction of the 10p tax 
band. What that has to do with his own glittering contribution to 
world economic meltdown will remain beyond most of us. It did, of 
course, cause great harm to the fortunes of the Labour Party, which 
is, as we know, a far more pressing concern to Mr Brown than another 
million or two people losing their jobs.

Mr Brown has conducted this series of stunts, initiatives, wheezes 
and diversions for one reason only. He fears taking the course that 
would be forced upon him if, say, the International Monetary Fund 
were to come in and take over our economy: cutting our deficit. He 
won't stop borrowing because he can't bring himself to stop spending. 
Were he to slash public spending it would put many in the bloated 
public sector on the dole.

However, it would also force a reassessment of our priorities, a 
slimming down of the client state, and the freeing-up of resources 
for debt reduction and tax cuts that would stimulate demand and help 
start real recovery.

It may sound harsh, but state bureaucrats on the dole would be 
cheaper to run than in their present, often pointless occupations, 
until such times as their skills can be used in the private sector. 
It is this absurdity - wasting money creating the client state, and 
now refusing to stop it when so many others are suffering as a result 
- that is the main thing for which this reckless, profoundly wrong 
man must apologise.

Politicians, and their puppets in the central banks, simply don't get 
this. We continue to wait for the Conservative Party, in the shape of 
little George Osborne, the supposed shadow chancellor, to rail 
against the printing of money and the failure to get real with the 
British economy. We wait, I fear, in vain. The Tories are as gutless 
and clueless about this as Labour; which
means that whoever wins the next election, we are in for years of 
cripplingly high taxes, low consumption, public-sector waste and 
falling competitiveness. It is only the people who can sort this mess 
out. The politicians should withdraw, and let us get on with it.  [Up 
to the last sentence I was with Heffer!  But this just silly. HOW  
are the people to 'sort this out' or 'get on with ot'.  ? -cs]