The Bank of England’s Chief Economist, Charles Bean, gave an interesting talk yesterday – interesting for the future direction of house prices in the UK. In addition to being the BOE’s top economist, Charles Bean is also part of the team that decides whether interest rates will rise, fall, or stick each month.
Bean is one of the less hawkish members of the Monetary Policy Committee. (In the June meeting, he was one of the five who voted down the four – including the BOE Governor, Mervyn King – who were pushing for higher interest rates.)
What did Bean Say?
In his Friday 13 talk, Bean says:
“. . . once excessive credit/asset-price growth has been diagnosed, the lags in the monetary transmission mechanism seriously complicate the calibration of an appropriate policy. Raising official interest rates will be counterproductive if the boom turns to bust, so that the economy is subject to twin deflationary impulses both from the asset price collapse and any associated credit crunch, and from the effect of the policy tightening. Indeed, in the unlikely event that the policymaker knew that an asset price collapse was imminent, monetary relaxation, rather than tightening, would be called for.”
What does Bean Mean?
Put more simply, rather than allow house prices to crash, Bean would press for lower interest rates.
What would the consequences of lower Interest Rates be?
If interest rates were lowered there would be an explosion of money – just like the bad old days when printing presses worked overtime printing ever more money, with ever less value.
Sterling would fall in value – the US dollar is weak right now precisely because excess dollars were “created” by Alan Greenspan after the Y2K stock market crash. This glut of dollars has led to a weaker dollar and an American consumer more weighed down by debt than ever before in history.
The excess dollars also found a home in the notorious sub-prime mortgage market. Lenders, clutching vast quantities of newly created Greenspan cash, had to find someone to borrow it. The “someone” turned out to be millions of Americans who had previously been denied mortgages because the lenders (rightly) doubted their ability to ever repay the debt. The fact that this sub-prime market is now unravelling and is possibly going to drag down the US economy with it (the jury is still out) doesn’t seem to disturb Dr. Bean. He talks happily about lowering UK interest rates in the event of a sharp fall in house prices.
Charlie Bean’s Vision of the UK’s Future seems to be:
a. If house prices keep rising or fall slightly, he would say interest rates are about right and leave them alone.
OR
b. If house prices fall sharply, he would lower interest rates.
Either way, Charlie Bean seems to be offering a guarantee on UK house prices. He will try to ensure that, if there are price falls, they will be modest; he will allow price rises to continue without limit provided the headline inflation rate remains low.
Whichever way you look at it, you’d be better to put your money in property or some other asset because Charlie Bean says he will create more money (devaluing the pound in the process) to maintain property prices. The fact that, in order to prop up house values, he will need to push ever more people into ever more debt doesn’t seem to concern him.
It’s not wise – in my opinion – for Charlie to publicise these views because, if people believe him, it’s going to help keep the property bubble inflated a bit longer – and that’s not good news for the long-term prosperity of the UK. On the other hand, Charlie Bean is but one member of the Monetary Policy Committee. I sincerely hope that at least five other members hold more robust views on the dangers of creating new money than those expressed yesterday by Charlie “the printing press” Bean.