IT’S the macho stroke that governments like to pull to persuade voters that they are acting “tough” in the public’s interest. Gordon Brown’s gesture was the Monetary Policy Committee (MPC) back in 1997. George Osborne’s stunt is the Financial Policy Committee, which he calls “a new settlement between our banks and the rest of our society”. It’s as much a fraud as his predecessor’s.
Brown trumpeted his initiative as taking the politics out of monetary policy and deliver stable growth. It did no such thing. And now we have to go through it all again, with Osborne claiming that his Committee can steer the UK away from future economic threats. It will fail as abjectly as the MPC.
Osborne’s is another gesture in buck passing. Politicians do not know how to avoid the violent end to business cycles, so it makes reputational sense to offload responsibility on to others. But this adds to the democratic deficit. Our fate is placed in the hands of unelected experts who are expected to bear the burdens and avoid the temptations which ministries of finance wish to avoid.
The bleak outlook arises because Britain’s coalition government frames policy in terms set by the post-classical economic paradigm. And so, the new stability committee – according to leaks to the media – will regulate the flow of money from banks into the mortgage market. People won’t be able to borrow 125% of the value of the house they want to buy. Banks will be obliged to confine debt to limits below the levels achieved in 2007.
This will not stop the new property cycle from terminating in 2025, followed by a bust that will be every bit as grievous as the present one. Osborne’s doctrine is nothing more than a warmed up melange of the policies that prevailed for 200 years in Britain.
Read the history books
Beginning with the terminating societies of the late 18th century, people pooled their cash to build houses. In the 19th century, building societies flourished as they prudently allocated money to finance residential construction. There were no fat bonuses for bosses, no dodgy financial instruments traded on bourses, no reckless sub-prime mortgages. And yet, boom/bust every 18 years.
It’s all to do with the economics of the land market. One of Osborne’s appointees on the Financial Policy Committee is Financial Times chief economics feature writer Martin Wolf. He does understand the dynamics of rent. Will he write the manual for his colleagues?
Where the buck stops
But even if Wolf did explain that, ultimately, monetary policy cannot terminate incentives in the land market, there’s nothing his committee could do about it. Because the relevant counter-cyclical tools are fiscal. Tax reform alone can thwart the land speculators and the financiers who have learnt how to extract rents from the property market. And tax policy remains the responsibility of the Chancellor of the Exchequer, George Osborne.
So we will know on whom to pin the blame when the next land-led crisis begins to destroy people’s livelihoods.