PricedOut > Blog - The more things change... PricedOut in this month’s Prospect Magazine

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Posted by: PricedOut	Fri, 24 Sep 2010 12:07:53 GMT
Crazy mortgage lending, greed, hubris, global financial meltdown and an economy changed forever – it’s now all pretty familiar, right? But one of the most puzzling things about the credit crunch is how little the economic and housing commentariat has changed to reflect the devastation the crunch wrecked on pre 2007 received opinion. A large group of talking heads, media darlings and policy makers - who didn’t see the crisis coming or even contributed to the boom - are still out there talking. In the celebrity world of housing these are pretty obvious. Kirstie Allsop is, unfortunately, still on prime time and is still listened to – not just on property porn, but on mainstream political shows like Question Time and in profile pieces in the broadsheets. The threat that she may be given a place in the House of Lords has, thankfully, receded with the Coalition. But she remains testimony to the fact that changing events need not spell the end of your career if you have a good agent, a millionaire husband and an untrammelled sense of your own importance. If only celebrity world was the exception – but the old guard pervade at all levels of economic opinion makers too. Take Gavyn Davies – close friend and advisor to Gordon Brown, architect of the UK’s laissez faire Faustian pact with the city and, for a period, economist to those wonderful chaps over at Goldman Sachs (how many failed projects can one man sign up to?). Gavyn has just been given a prime new wonk slot at the Financial Times – initially called ‘Econoclast’ until even the FT sensed this was too much irony for one small blog to take. Or how about Howard Davies? Supremo of the failed Financial Services Authority between 1997 and 2003, he set up the institution in all its fabulous weakness (a body that marked a whole new low for the phrase ‘due diligence’). He then got a juicy job as non executive director at Morgan Stanley in 2004 (Morgan Stanley famously only just avoiding wipe out in 2008) and also became Director of the London School of Economics in 2003 (an institution that should have been – but wasn’t – an academic centre for thinking about flaws in the economic orthodoxy before the crisis hit). Howard, perhaps with tongue firmly in cheek, has a new book out called ‘The Financial Crisis – Who is to Blame?’ and is just about to set off on a tour of TV studios to talk about it. We’ll see if he points the finger at himself. And finally, step forward Stephen Nickell. With an academic roll call as long as your arm – you’d get an honorary degree in stodgy econometrics just by being able to read through his list of published articles – Stephen has formed a key plank in the economic and housing establishment. A strong believer in the ‘Barker consensus’ (in brief the approach put forward by Kate Barker in her keynote Barker Report that set out a political narrative that the only house price issue to look at was supply, whilst not troubling ourselves with the obvious boom in speculative housing demand, lax mortgage lending or other disconcerting issues like immigration), Nickell was also an important government advisor at the National Housing Advisory and Planning Group (recently abolished by the Coalition government). Not only this, but Nickell was also a member of the MPC when it famously ‘missed the bubble’. Rather than think that monetary policy was too lack between the period of 2000 to 2006 (when house price inflation was at times topping over 20% growth each year), Stephen actually thought that it was too tight – voting for an interest rate decrease in 23 out of the 66 meetings he attended between 2001 and 2006 and being in a minority voting for a decrease on 13 separate occasions (an impressive voting record for cheap money, even for the MPC). He also voted, alongside Kate Barker, for the infamous cut to the base rate in August 2005, when MPC members outvoted Mervyn King in the disastrous decision that pumped moral hazard all over the UK front pages and led to the 2006 and 2007 ‘crack up boom’ of RMBS fuelled mortgage lending insanity. Where is Stephen now? Languishing at an Oxford high table as he slowly winds down to retirement whilst reflecting deeply on his role in the cock up? Fat chance – this is an economist after all. Stephen not only has be showing remarkably little self doubt, but has secured a nice monthly slot with the respected and otherwise excellent Prospect Magazine (read by many a decision maker). The fate of many an aging academic, Stephen is regrettably stuck in a timewarp floating somewhere above the year 2005 (to summarise: “don’t worry about the bubble or the speculating boomers, it’s only about supply” is his familiar tune). His Prospect article from July 2010 is a classic of this genre. To quote the Nickell wisdom “the supposed housing bubble and ‘reckless’ lending had absolutely nothing to do with the financial crisis in this country” and that mortgage lending reform should be “low” on the list of political priorities of the UK government. You can read the first free paragraphs of the article here: http://www.prospectmagazine.co.uk/2010/07/number-cruncher-11/ PricedOut disagree. So we put together a letter stating why we think Nickell is mistaken, just in case anyone was still taking him seriously. The published letter is in this September’s issue and is hidden behind an internet pay-wall (although free to browse at WH Smith). The full letter is below: Stephen Nickell claims that loose mortgage lending has not been a factor in the financial crisis in the UK – he is wrong. Firstly, bad UK lending was a direct cause of the implosion of some UK lenders. Bradford and Bingley collapsed because of the horrendous state of its loan book – dominated by UK Buy-to-Let and self certified mortgages. In March 2009 it reported an extraordinary 20-fold increase in bad debts, whilst the number of its mortgages three months or more in arrears trebled to 4.6%. Its failure to find a willing buyer for this cocktail of bad lending led directly to its nationalisation. Secondly, the perception that UK lenders had lent too much, too loosely was an important factor in the loss of confidence that international investors had for many UK institutions. And when the UK housing bubble was much larger than its US counterpart, this nervousness was not without reason. And thirdly, he assumes that the avoidance of a US style short term car crash – prevented in the UK thanks to record low interest rates and the absence of ‘non recourse’ lending – has come at no long term cost. Yet Britain’s high levels of mortgage debt make us much more vulnerable to future economic shocks – both as individuals and as a nation – and is not cost free (just ask any pensioner reliant on a decent income from their savings). Any sensible government should be very concerned at preventing a recurrence of this level of risk exposure. Tougher UK mortgage regulation needs to be at the heart of the Coalition’s post crisis road map. William Griffith PricedOut.org.uk Any other nominations for pre crunch dinosaurs still alive and well in 2010? And why does the UK housing establishment have such a blind spot on mortgage financing and the bubble?

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Re: The more things change... PricedOut in this month’s Prospect Magazine

By Will on Wed, 06 Oct 2010 15:19:45 GMT

Have just read a great article from the US film producer, Charles Ferguson. It seems the US has a similar problem with its economics profession, in spades.. http://chronicle.com/article/Larry-Summersthe/124790/ The Obama administration recently announced that Larry Summers is resigning as director of the National Economic Council and will return to Harvard early next year. His imminent departure raises several questions: Who will replace him? What will he do next? But more important, it's a chance to consider the hugely damaging conflicts of interest of the senior academic economists who move among universities, government, and banking. Summers is unquestionably brilliant, as all who have dealt with him, including myself, quickly realize. And yet rarely has one individual embodied so much of what is wrong with economics, with academe, and indeed with the American economy. For the past two years, I have immersed myself in those worlds in order to make a film, Inside Job, that takes a sweeping look at the financial crisis. And I found Summers everywhere I turned. Consider: As a rising economist at Harvard and at the World Bank, Summers argued for privatization and deregulation in many domains, including finance. Later, as deputy secretary of the treasury and then treasury secretary in the Clinton administration, he implemented those policies. Summers oversaw passage of the Gramm-Leach-Bliley Act, which repealed Glass-Steagall, permitted the previously illegal merger that created Citigroup, and allowed further consolidation in the financial sector. He also successfully fought attempts by Brooksley Born, chair of the Commodity Futures Trading Commission in the Clinton administration, to regulate the financial derivatives that would cause so much damage in the housing bubble and the 2008 economic crisis. He then oversaw passage of the Commodity Futures Modernization Act, which banned all regulation of derivatives, including exempting them from state antigambling laws. After Summers left the Clinton administration, his candidacy for president of Harvard was championed by his mentor Robert Rubin, a former CEO of Goldman Sachs, who was his boss and predecessor as treasury secretary. Rubin, after leaving the Treasury Department—where he championed the law that made Citigroup's creation legal—became both vice chairman of Citigroup and a powerful member of Harvard's governing board. Over the past decade, Summers continued to advocate financial deregulation, both as president of Harvard and as a University Professor after being forced out of the presidency. During this time, Summers became wealthy through consulting and speaking engagements with financial firms. Between 2001 and his entry into the Obama administration, he made more than $20-million from the financial-services industry. (His 2009 federal financial-disclosure form listed his net worth as $17-million to $39-million.) Summers remained close to Rubin and to Alan Greenspan, a former chairman of the Federal Reserve. When other economists began warning of abuses and systemic risk in the financial system deriving from the environment that Summers, Greenspan, and Rubin had created, Summers mocked and dismissed those warnings. In 2005, at the annual Jackson Hole, Wyo., conference of the world's leading central bankers, the chief economist of the International Monetary Fund, Raghuram Rajan, presented a brilliant paper that constituted the first prominent warning of the coming crisis. Rajan pointed out that the structure of financial-sector compensation, in combination with complex financial products, gave bankers huge cash incentives to take risks with other people's money, while imposing no penalties for any subsequent losses. Rajan warned that this bonus culture rewarded bankers for actions that could destroy their own institutions, or even the entire system, and that this could generate a "full-blown financial crisis" and a "catastrophic meltdown." When Rajan finished speaking, Summers rose up from the audience and attacked him, calling him a "Luddite," dismissing his concerns, and warning that increased regulation would reduce the productivity of the financial sector. (Ben Bernanke, Tim Geithner, and Alan Greenspan were also in the audience.) Soon after that, Summers lost his job as president of Harvard after suggesting that women might be innately inferior to men at scientific work. In another part of the same speech, he had used laissez-faire economic theory to argue that discrimination was unlikely to be a major cause of women's underrepresentation in either science or business. After all, he argued, if discrimination existed, then others, seeking a competitive advantage, would have access to a superior work force, causing those who discriminate to fail in the marketplace. It appeared that Summers had denied even the possibility of decades, indeed centuries, of racial, gender, and other discrimination in America and other societies. After the resulting outcry forced him to resign, Summers remained at Harvard as a faculty member, and he accelerated his financial-sector activities, receiving $135,000 for one speech at Goldman Sachs. Then, after the 2008 financial crisis and its consequent recession, Summers was placed in charge of coordinating U.S. economic policy, deftly marginalizing others who challenged him. Under the stewardship of Summers, Geithner, and Bernanke, the Obama administration adopted policies as favorable toward the financial sector as those of the Clinton and Bush administrations—quite a feat. Never once has Summers publicly apologized or admitted any responsibility for causing the crisis. And now Harvard is welcoming him back. Summers is unique but not alone. By now we are all familiar with the role of lobbying and campaign contributions, and with the revolving door between industry and government. What few Americans realize is that the revolving door is now a three-way intersection. Summers's career is the result of an extraordinary and underappreciated scandal in American society: the convergence of academic economics, Wall Street, and political power. Starting in the 1980s, and heavily influenced by laissez-faire economics, the United States began deregulating financial services. Shortly thereafter, America began to experience financial crises for the first time since the Great Depression. The first one arose from the savings-and-loan and junk-bond scandals of the 1980s; then came the dot-com bubble of the late 1990s, the Asian financial crisis; the collapse of Long Term Capital Management, in 1998; Enron; and then the housing bubble, which led to the global financial crisis. Yet through the entire period, the U.S. financial sector grew larger, more powerful, and enormously more profitable. By 2006, financial services accounted for 40 percent of total American corporate profits. In large part, this was because the financial sector was corrupting the political system. But it was also subverting economics. Over the past 30 years, the economics profession—in economics departments, and in business, public policy, and law schools—has become so compromised by conflicts of interest that it now functions almost as a support group for financial services and other industries whose profits depend heavily on government policy. The route to the 2008 financial crisis, and the economic problems that still plague us, runs straight through the economics discipline. And it's due not just to ideology; it's also about straightforward, old-fashioned money. Prominent academic economists (and sometimes also professors of law and public policy) are paid by companies and interest groups to testify before Congress, to write papers, to give speeches, to participate in conferences, to serve on boards of directors, to write briefs in regulatory proceedings, to defend companies in antitrust cases, and, of course, to lobby. This is now, literally, a billion-dollar industry. The Law and Economics Consulting Group, started 22 years ago by professors at the University of California at Berkeley (David Teece in the business school, Thomas Jorde in the law school, and the economists Richard Gilbert and Gordon Rausser), is now a $300-million publicly held company. Others specializing in the sale (or rental) of academic expertise include Competition Policy (now Compass Lexecon), started by Richard Gilbert and Daniel Rubinfeld, both of whom served as chief economist of the Justice Department's Antitrust Division in the Clinton administration; the Analysis Group; and Charles River Associates. In my film you will see many famous economists looking very uncomfortable when confronted with their financial-sector activities; others appear only on archival video, because they declined to be interviewed. You'll hear from: Martin Feldstein, a Harvard professor, a major architect of deregulation in the Reagan administration, president for 30 years of the National Bureau of Economic Research, and for 20 years on the boards of directors of both AIG, which paid him more than $6-million, and AIG Financial Products, whose derivatives deals destroyed the company. Feldstein has written several hundred papers, on many subjects; none of them address the dangers of unregulated financial derivatives or financial-industry compensation. Glenn Hubbard, chairman of the Council of Economic Advisers in the first George W. Bush administration, dean of Columbia Business School, adviser to many financial firms, on the board of Metropolitan Life ($250,000 per year), and formerly on the board of Capmark, a major commercial mortgage lender, from which he resigned shortly before its bankruptcy, in 2009. In 2004, Hubbard wrote a paper with William C. Dudley, then chief economist of Goldman Sachs, praising securitization and derivatives as improving the stability of both financial markets and the wider economy. Frederic Mishkin, a professor at the Columbia Business School, and a member of the Federal Reserve Board from 2006 to 2008. He was paid $124,000 by the Icelandic Chamber of Commerce to write a paper praising its regulatory and banking systems, two years before the Icelandic banks' Ponzi scheme collapsed, causing $100-billion in losses. His 2006 federal financial-disclosure form listed his net worth as $6-million to $17-million. Laura Tyson, a professor at Berkeley, director of the National Economic Council in the Clinton administration, and also on the Board of Directors of Morgan Stanley, which pays her $350,000 per year. Richard Portes, a professor at London Business School and founding director of the British Centre for Economic Policy Research, paid by the Icelandic Chamber of Commerce to write a report praising Iceland's financial system in 2007, only one year before it collapsed. And John Campbell, chairman of Harvard's economics department, who finds it very difficult to explain why conflicts of interest in economics should not concern us. But could he be right? Are these professors simply being paid to say what they would otherwise say anyway? Unlikely. Mishkin and Portes showed no interest whatever in Iceland until they were paid to do so, and they got it totally wrong. Nor do all these professors seem to make policy statements contrary to the financial interests of their clients. Even more telling, they uniformly oppose disclosure of their financial relationships. The universities avert their eyes and deliberately don't require faculty members either to disclose their conflicts of interest or to report their outside income. As you can imagine, when Larry Summers was president of Harvard, he didn't work too hard to change this. Now, however, as the national recovery is faltering, Summers is being eased out while Harvard is welcoming him back. How will the academic world receive him? The simple answer: Better than he deserves. While making my film, we wrote to the presidents and provosts of Harvard, Columbia, and other universities with detailed questions about their conflict-of-interest policies, requesting interviews about the subject. None of them replied, except to refer us to their Web sites. Academe, heal thyself. Charles Ferguson is director of the new documentary Inside Job and the 2007 documentary No End in Sight: The American Occupation of Iraq.

Re: The more things change... PricedOut in this month’s Prospect Magazine

By Andrew Kneeshaw on Sun, 07 Nov 2010 16:56:42 GMT

There is one (and only one) reason for high house prices and that is the lack of supply of housing. And that, in turn is caused by a lack of supply of building land. Remember, in most cases, it is the cost of building land which is the biggest component of the price of a house, and the only reason this is so high is that planning authorities constantly stand in the way of new development. Release land for building and prices would tumble. Solution. Make it mandatory that 55% of people who sit on planning committees live in rented accomodation. What is the proportion now - less than 2%, I bet. Stop press from Countrywide, a network of 1300 letting agents. In the last quarter 61,000 new tenants registered for rental accommodation - 19% up on the previous quarter. (July saw 20,000 register - the highest number since records began). In the same period the number of available rental properties went down by 6.9%. There is an average of 5.8 tenants vying for each available property. (up from 5.5 in the previous period). So why are prices so high? Not enough houses. Supply and demand. SO BUILD SOME!

Re: The more things change... PricedOut in this month’s Prospect Magazine

By Graham Pressler on Thu, 11 Nov 2010 15:30:15 GMT

Interesting reading above. The old supply and demand argument is one which will always loom. Simple economics. However, my firm view is not quite so simple. Rentals are up. Less can afford housing in the first instance based upon salary and being short of a deposit. More and more are losing their homes based upon buying at unsustainable levels when banks were simply throwing money into the market. Rising house prices saw further borrowing to property investment as another income for many. Purchase prices therefore rose once more. More rentals also came to the market. The housing is out there to buy. It is simply not affordable to the average hard working individual / family. In the area which I live, many a development remains empty / unfinished undoubtedly through inability to afford by the consumer / lack of funds for completion. Poor fiscal policy is to blame. The rich have gotten richer, the poor poorer. Inflation has seen house prices, as well as many consumables, rise and rise. This has not been clearly shown by the official figures as those published by those in power are no longer a true reflection of inflation. Only a proportion of true living costs are included. Wages have not risen to a comparative extent during this period. Thus, in real terms, those on the average wage have become very much poorer. The rise in the cost of living has been phenomenal of late, whilst wages have remained relatively low. Those who find themselves with the benefit of a degree are more and more of a less exclusive group. Supply and demand once more, they can no longer expect to receive a good wage as a degree has become less of a commodity. The push towards university academia and the 'access for all' approach to the same has not quite been a success. All should be able to access in my view. However, the emphasis placed upon university education has been far too great. Education can and should be attained by other means also. Many degrees in certain fields also lead to employment whereas they once lead to self-employment. The cream and more is syphoned away very quickly by the employer in those instances. There is a part of me that wills a house price crash, to make home buying more affordable. However, the more sensible part of me remembers the devastation that will cause to many who have invested in the market with a view to short term gain. There again, whilst many may find themselves in a negative equity situation, as long as they can hang onto their homes, including the second ones, the balance towards positive equity may be returned within, say 10 years. Another alternative may well be to see wages rise generally. Over-supply suggests this unlikely in normal economic terms. Thus, the implementation of an increase in the minimum wage? The downside being the potential of outpricing the labour market at home to foreign competition. The answers are not simple. The cause, however, I do not believe to be a lack of building land as suggested above. The cause is a lack of fiscal prudence by the former administration. Simple overlending could and should have been managed with adequate fiscal policy but was not. 'Mr Prudence' was not quite so. Yes, the banks made a mess of things generally. Intervention could and should have occurred, however. The answer now is not to open up land left, right and centre for building with a view to driving prices down. Schemes need to be implemented to make housing more affordable. This alongside measures to improve wages without outpricing from the competition. I firmly believe that these measures can be implemented. However, it is going to take some amount of time to implement. We are all in for a few rough years. Except, of course, for those privileged enough to have liquid assets / large incomes.

Re: The more things change... PricedOut in this month’s Prospect Magazine	By laurajames on Tue, 16 Nov 2010 10:52:17 GMT
o This is a wonderful opinion. The things mentioned are unanimous and needs to be appreciated by everyone

Re: The more things change... PricedOut in this month’s Prospect Magazine	By bernard kelly on Wed, 02 Feb 2011 10:51:27 GMT
I am a landlord and own flats which were built for the BTL market. Without' buy to let' less house and flats would have been built, the housing shortage would be much bigger and rents and house prices miuch higher. The main problem in Britain is a shortage of houses being built, and the rules about planning permision

Re: The more things change...

By Richard Smith on Sun, 24 Apr 2011 14:35:55 GMT

There some fairly serious issues with the UK Economy, but thats not the whole story. Houses are in demand, lack of supply will drive house prices up, with the population growing (mass immigration is not helping) the future for House Prices looks likely to be upward. The lack of land- we are an island after all, and planning regulation all conspire against those looking to get on the property ladder. There is some good news in that many will be collecting the value of their parents property throught inheritance. The other key issues are this, Mortgage Lenders do not really want play ball, this is due to the constraints placed on them. If you are self employed Mortgage Borrowing is made even harder buy recent changes in the FSA's stance toward affordability. The other issues are these, for the first time in history we have those in further education that will leave substantially in debt, with repayments needing to be paid on these as soon as they hit about 80% of average wage. There is also the issue of Pensions, in that if you are in statutory scheme (local Government) you will have to increase contributions, if you are not that lucky you will be forced to increase to increase contrubutions to your Personal Pensions all of whicah reduces available income. Then there is Fuel Prices, never have we had to pay so much, and these look likely to increase not decrease, lets not talk about record levels of Council Tax and General Taxation, the situation is not good now and is not looking good for the future. Those under 30 and my children (13 and 16) are facing a changing world that seems to care little about them, and those that have gone before seem to have had it all a bit too easy. There are some solutions out there, long term quality rental developments need to be increased and there is some evidence for this, perhaps the developers just can't sell them, hence they are letting them out. Some kind of group funding would work, there is no reason Pension Funds could not be released in order to fund long term 'shared ownership' or DIY shared ownership, remember there is no shortage of money, it's just in the wrong place at the moment with little political will to focus on what matters. Richard Smith http://www.thefinancezone.co.uk

Re: The more things change... PricedOut in this month’s Prospect Magazine	By Terry Truth, saviour of common sense, not weird id on Tue, 31 May 2011 19:35:47 GMT
"improve tenants rights", Katie says on channel 4 news tonight... What a numpty, they've got far too many rights already! Katie came across as someone who had her own agenda, didn't know macro economics or social responsibility if it bit her on her a##. which I fear is what she was talking out of.

Re: The more things change... PricedOut in this month’s Prospect Magazine	By FirstTimeBuyerGuru on Mon, 18 Jul 2011 19:51:25 GMT
This is a very interesting thread<br>

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