Economic incompetence

Very good article by Fraser Nelson on the current economic situation and the way Brown has poured oil on the fire;

1) He adopted the Tory inflation target of 2.5%, which was right for its time. But this was not designed to detect or deal with an asset bubble.

2) In instructing the Bank of England to deal in CPI rather than RPI he ordered it not to take notice of the housing market (RPI contains mortgage repayment costs, CPI does not). So rather than ask it to tackle house prices, he went the other way. This meant the bank kept interest rates way too low (the 2.0% CPI target is no substitute for a 2.5% RPI target as RPI is at least a full point ahead of CPI).

3) This meant money was too cheap. As night follows day, this led to an asset bubble.

4) Brown saw this as a one-off adjustment to a new era of low inflation and permanently cheap credit. He was a disciple of Greenspan, who thought we had entered a new era of productivity and could have cheap credit. This was a fatal misdiagnosis.

5) Brown was relaxed about Britain’s soaring debt-to-income ratios, and would angrily say that the soaring (bubble) assets somehow cancelled debt out. He either didn’t realise fully, or didn’t care about, how house prices were fuelling demand as everyone was borrowing against the made-up value of their property

You can read the whole article here