Gordon Clown .Com

Eddie George, former Bank of England governor, today admitted that he and Gordon hatched a plan a few years ago to deliberately inflate the economy by keeping interest rates artificially low in an attempt to boost consumer spending.  In order to sustain demand in the flagging economy after the .com crash of 2000, Gordon and Eddie fiddled inflation figures and cut interest rates, desperate to keep the only remaining glimmer of hope alive - high street spending.  The side effects of this have been rampant inflation and an unsustainable boom in house prices, which now it seems can only end in tears for Gordon and the country.

“But we knew that we were having to stimulate consumer spending; we knew we had pushed it up to levels which couldn’t possibly be sustained into the medium and long term.“But for the time being, if we had not done that the UK economy would have gone into recession just as has the United States.

“That pushed up house prices, it increased household debt … my legacy to the MPC if you like has been ’sort that out’.”

He told the Treasury Select Committee - investigating the record of the first decade of the MPC: “We had to take action that on the whole we would prefer not to: stimulating consumer demand because all the other elements of demand had fallen away.

“And we were very conscious of the fact that that could give rise to problems in the future.

“We tried very hard not to do more than we needed to to keep within the inflation target limits but we knew that that was going to cause problems later on which are still with us.”

Gordon and the MPC have left us in a desperate situation of spiralling inflation and massive consumer and business debt.  There is only one way this can all end, and it won’t be pretty.

With less than a week to go now until Gordon’s last ever budget speech (hopefully at least), nobody can have failed to notice the sharp slide in share prices that has reverberated around the trading floors of the world this week. Traders in London today particularly noticed, as over 150 points were wiped off the FTSE 100 leaving it teetering on the brink of the key psychological 6000 barrier.

The cause of these upsets, it seems, is a crisis of confidence in the sub-prime mortgage lender sector of the US economy, and the wider economy in general. One of the biggest sub-prime lenders, New Century, is now effectively out of business, and a whole bunch of others are lining up to follow suit. Obligingly, one enterprising blogger and former New Century employee has decided to post up his inside story of the company, and that will doubtless be worth watching over the next few days and weeks as more is revealed.

The headache for Gordon is that the bad news can’t realistically be contained just to the US. New Century’s biggest investor was none other than Barclays Bank, a name best known as one of the big four retail banks in the UK, who have been buying up Mortgage Backed Securities from other banks in an effort to increase their asset base for Basel II. One supplier of those securities it seems was New Century, and it now looks like Barclays is about to lose a whole heap of cash as the deal has turned sour. This news follows pretty soon after HSBC, another big bank in the UK, ran into trouble with its US subprime lending unit as well.

When the US economy hits trouble, and it starts costing UK banks money and threatens to hit the UK economy as a whole, you can expect the lending industry over here to sit up and take notice. Those 110%, 35 year, 5 times salary mortgages may not look quite so appealing to Abbey and the rest just now, as it becomes clear they fall right into the sub-prime category that is beset with so many difficulties in the US. And when those deals gradually dry up, the overall credit environment tightens, robbing Gordon of the “economic growth” by debt based inflation that he has been so proud of over the last 10 years. It may be too early to say that a Credit Crunch has arrived in Britain, but risks seem to be growing by the day that we’ll get one, and day by day Gordon looks ever more worried.

The outlook for our friends across the pond appears to be looking bleaker by the day, as an economy fed by rampant house price inflation on a scale never seen before, and subsequent mortgage equity withdrawl, looks to be heading into reverse at a very rapid pace. What is surprising is not that the US housing market has popped after 17 consecutive rate rises by the Federal Reserve, but that the rapid U-turn in sentiment has been so widely reported by the British press, who have been well known to keep any bearish housing market stories under wraps in their bid to sell papers. Some commentators are drawing sinister conclusions as to what may be in store for the American people in general, should their recession prove particularly bad. Still, I suppose just because it is happening in America, that shouldn’t affect Britain in any way, should it?

Gordon is certainly hoping so. Against all the odds, perhaps the oft-used proverb that when “America sneezes, the world catches a cold” will not apply to us this time. This is clearly highly unlikely. The prospect of a deep recession in America is highly likely to send the economies of various overheated debt-laden nations, not least Britain, into sharp reverse as well. It does seem, based on this recent statistic-laden article, that debt in Brown’s Britain continues to rampantly charge onward and upward, making the recent 0.25% interest rate rise look rather woeful and pathetic, with surely more to follow. The press, of course, not wishing to be the bearer of bad news, will likely seek to deny this fact as long as possible, and instead continue with the time honoured tradition of only reporting certain economic downturns well after the story is already old. Can Gordon reach Number 10 before Britain begins to show the symptoms of America’s economic strife? If not, surely Blair will lay the blame firmly at Number 11, and it will be goodbye Gordon.

Against all odds, the various corners of the press continue to come out of the woodwork with various comments and views on the 0.25% rate rise. Surely this is old news by now? A week after his deputy suggested that the bank’s rate rises could continue further than expected, and are designed to shock the markets, David Smith (economics editor of the Murdoch-owned Times newspaper) has come out with soothing comforting talk that rates will never go over 5%. Incidentally this is the same David Smith who has been predicting for the past year that the next move in interest rates will definitely definitely be down, so it’s probably best to take his predictions of a 5% absolute cap with a pinch of salt. Elsewhere, the Independent takes a more precautionary and sensible approach, warning borrowers that the August rise will probably not be the last, given the recent rumblings from Mervyn and Co. Interestingly they point out that a 0.25% rise is not the only option available to the Bank, something many commentators appear to have forgotten recently.

Roger Bootle in the Telegraph suggests that the US economy is in for a tough 2007, due to the US housing market (the “leading support for consumer spending”) hitting the rocks, but of course the same situation replicated over here would not apply to Britain in the same way would it? Apparently a couple more interest rate rises could see Britain following the US where housing is concerned, but I’m sure Gordon must have thought of this.

The Sunday Herald add an interesting wrinkle to the whole interest rates debate by correctly pointing out that around half of consumer and business debt is actually lent out on a fixed-rate deal basis at the moment. Presumably this means that the Bank will need to raise IR even higher before it starts to have the desired effect? The Telegraph asks numerous “city experts” to comment on whether interest rates have peaked at 4.75% and comes to the conclusion that they almost definitely have not.
Perhaps most surprisingly of all, the BBC have reported today that even though CPI has just fallen by 0.1 whole percent, to 2.4%, this may not save us from more IR rises. Shocking really, as the BBC would usually use such news to persuade us all into thinking that rates must be about to go down again!

On a separate issue, Channel 4’s Dispatches programme have shown themselves to once again be the true masters of stating the bleeding obvious by revealing that apparently the various Private Finance Initiative projects that have been dreamt up by Brown and Blair since 1997 have all been huge rip-offs and terrible value for the taxpayer. Given that the Government effectively has the ability to borrow as much money as it likes at the lowest interest rates known to man, it seems flabbergasting that so much of the running of the country has been handed over to the private sector, at many many times the overall cost as in the pre PFI days. Brown’s famous promise that he would “only borrow to invest over the economic cycle”, despite a couple of tweaks by redefining the length of said cycle, redefining the definition of “invest” and the definition of “borrow”, would still be met even if the PFI deals had been done entirely within the public sector, as surely these works would have come under the “invest” column. Then again, borrowing all the extra money may have rung alarm bells in some areas, and the Government already obviously need plenty of it to pay for all their wars etc. Once Brown and Blair dream up the idea of using PFI to pay for wars, then maybe they will really be onto something.

On a lighter note, aside from all the doom and gloom of impending rate rises that is floating around at the moment, the Telegraph gives us a fascinating glimpse into the psyche and inner frustrations of the Iron Chancellor by revealing that he has decorated the treasury with, amongst other paintings, Graham Sutherland’s “Expulsion and Killing of an Enemy”. Something for Tony to ponder, perhaps?