Yesterday, I was at the wonderful Gresham College for a seminar on housing – I posted some highlights earlier. But here’s a lightly edited version of my talk.
It explores the risks posed by the UK’s partially deflated housing bubble and sets out some radical options for reform (elucidated in more detail in the Long Finance paper from the talk is drawn).
And for those of you don’t know Gresham, I recommend Michael Mainelli’s brief history…
Sir Thomas Gresham (1519 to 1579) traded cloth and linens between England and the Low Countries at a time when Cambridge and Oxford had a duopolistic hold on higher education in England. A Cambridge man himself (Caius College), if Gresham’s skippers had visited an Oxbridge College they would, at best, have had the door of a college opened to them and then been laughed at in Latin for their ignorance.
If you’re going to backstab some one properly, do it from the front. Sir Thomas died of apoplexy in 1579 bequeathing one moiety of the Royal Exchange to the Corporation of London and the other moiety to the Mercers’ Company, charging them with the nomination of seven Professors to lecture in Astronomy, Divinity, Geometry, Law, Music, Physic and Rhetoric. He required the lectures to be in Latin and, horror horribilis, English. In effect, Sir Thomas, who pursued monopolies himself, used his will of 1575 anti-monopolistically to crack the Oxbridge oligopoly by bribing seven professors to give lectures to the public, in English.
Gresham College is about ‘new learning’. Sir Thomas felt strongly that the ‘new learning’ should be available to those who worked – merchants, tradesmen and ships’ navigators – rather than solely gentlemen scholars. In the 17th century, the Royal Society was founded to explore “natural philosophy”, new learning through experimentation. So, it is no surprise that the Royal Society was founded and housed at Gresham College for half a century (1660 to 1710) and numbered among its associates Gresham Professors Petty, Boyle and Evelyn.
I gave a talk at Gresham College yesterday, drawing on my paper for the Long Finance Foundation on risk and resilience in the UK housing market.
Also on the panel was Channel 4’s Economics correspondent, Faisal Islam. He had a couple of great quotes. This from Gordon Brown’s first budget speech in 1997 (click through to admire the retro styling of the last 1990s Treasury website):
For most people the acquisition of a house is the biggest single investment they will make. Homeowners rightly expect their investment to be protected by sensible policies pursued by Government.
I am determined that as a country we never return to the instability, speculation, and negative equity that characterised the housing market in the 1980s and 1990s. Volatility is damaging both to the housing market and to the economy as a whole.
So stability will be central to our policy to help homeowners. And we must be prepared to take the action necessary to secure it. I will not allow house prices to get out of control and put at risk the sustainability of the recovery.
When Brown spoke, the average house cost £75k – about £10k above the early 1990s nadir. A long long boom was just beginning. Prices would peak in February 2008 at an average of… £232k!!!
In other words, Brown promised not to let house prices spiral out of control and then allowed them to treble, during a period when household disposable income increased by only 30% or so.
The second quote is a more recent one – from Mervyn King, the Governor of the Bank of England. Last month, Faisal asked King whether the current re-inflation of the housing bubble was sustainable. Prices are currently only around 7% below their peak and seem overvalued by every measure. Only cheap money – pumped into the markets by the government – and very low interest rates is keeping the market afloat.
Isn’t the market going to deflate very rapidly once government funding is withdrawn? King’s response:
No one can forecast asset prices, so I don’t think you can predict that asset prices will fall back. I don’t see why that should in and of itself lead to a change in asset prices, because we all know this problem is there and that’s already reflected in to current asset prices.
As Faisal points out, this shows confidence in the efficient market hypothesis that is breathtaking given a global financial crisis that was driven by an asset price bubble. In King’s fantasy world, buyers know that there will be much less credit available in the future – so this concern is already included in current market prices.
King’s insouciance – and Brown’s negligence – both beggar belief.
Shock news that Hector Sants, chief executive of the FSA, has resigned. Though, I am sure the two events are not causally related – let me again plug my paper, published last week by the Long Finance Foundation, on risk in the UK mortgage market, which was was highly critical of the FSA’s response to the housing bubble.
In the New York Times, think tanker, James Jay Carafano (areas of expertise: homeland security, defense, military affairs, affairs, post-conflict operations, and counterrorism) gets hot under the collar about “news stories [that] play fast and loose with terms like ‘outbreak,’ ‘epidemic,’ and ‘pandemic.'”
His advice: “We should all just wash our hands and go to the doctor if we have flu symptoms.” Er, wrong. According to the Centers for Disease Control and Prevention (area of expertise: public health):
If you get sick with influenza, CDC recommends that you stay home from work or school and limit contact with others to keep from infecting them.
CDC is happy for people to contact their doctor if they need advice, but it only recommends adults seek emergency medical treatment if they have: (i) Difficulty breathing or shortness of breath; (ii) Pain or pressure in the chest or abdomen; (iii) Sudden dizziness; (iv) Confusion; (v) Severe or persistent vomiting. (The advice for children is similar – the list of warning symptoms different.)
In the UK, health authorities are even more explicit about the fact they don’t want people with flu sitting around in doctor’s waiting rooms. “If you have flu-like symptoms and have recently travelled to Mexico or been in contact with someone who has, stay at home and contact either your GP or NHS Direct on 0845 4647,” advises the NHS. Treating people without requiring face-to-face contact with healthcare professionals is at the heart of of the UK’s pandemic flu plan.
Carafano’s sins are minor compared with this preposterous Guardian article by Simon Jenkins (core expertise: frothing at the mouth). According to Jenkins, swine flu is “a panic stoked in order to posture and spend” – with the public too moronic to resist having the wool pulled over its eyes:
We appear to have lost all ability to judge risk. The cause may lie in the national curriculum, the decline of “news” or the rise of blogs and concomitant, unmediated hysteria, but people seem helpless in navigating the gulf that separates public information from their daily round.
The government was “barking mad” to convene its emergency planning committee, Jenkins argues, while the World Health Organization is not really worried – it’s just making a pathetic bid to shore up its funding. Attention-whore doctors, health and safety hysterics, and rapacious drugs companies are all in on the plot, while ‘professional expertise’ (presumably from shrinking violent newspaper columnists) is being completely ignored.
BSE, SARs and avian flu, meanwhile, provide cast iron assurance that no pandemic is on the way. (more…)