Don't reason with this mule, Governor just hit it over the head
d IST1 FILDES Ihave a question for the Bank of England's monetary policy committee: how do you attract a Missouri mule's attention? When the economists have quite worked out their answers, I can tell them: you hit it over the head with a length of four-by-two planking. This is the proven technique, but it goes against their principles. They would much rather subject the mule to sweet reason, and they hate the idea of giving it nasty surprises. These are the methods they are trying on the rest of us, but we seem to be — well. mulish. We just keep on borrowing. The Governor, Mervyn King, wishes we wouldn't — 'Think before you borrow', he urges us — but he aches to be predictable. His colleague, Paul Tucker, would rule out shock treatment: no four-by-two planking for him. Next week, when their committee meets, they will have to propose something else. Should they put interest rates up by a predictable 1/4 per cent? Or wait a predictable month for even more statistics? Or. . . er. . . In what I regard as the old days, Bank rate used to go up in leaps and come down by easy stages, as the Bank hauled back on the reins and then let them out gently. The shock would be part of the treatment. Now, though, it might be thought to reflect on the Chancellor and, specifically, on his Budget judgment. The old days, he would grumble, were the days of boom and bust, but I claim to have abolished them, Did I give the Bank its independence so that it could second-guess me? Who will rid me of these turbulent committee-men? All the same, if the Governor wants to attract his attention — and ours, too — he knows what to do.
Getting and spending
The Bank has seen binges before. 'I'm the guy,' said William Martin of the Federal Resen,e, 'who takes away the punch-bowl when the party's getting good.' The wilder the binge, the worse the hangover, so how much better we would feel if we could kick the habit gently. How much healthier, too, this would be for the British economy. For years its growth has been led by the British consumer, borrowing and spending, and now supplemented by the British government, which borrows and spends even faster. One of these days, growth will need to be led by investment and exports, and the eye of faith can see signs of hope on the horizon, but the
longer the binge goes on, the more severe the adjustment is likely to be. Hangovers are, in themselves, a form of shock treatment, and sore heads are often a symptom.
House on fire
The party that still roars on is the great British house party. A boisterous few months have persuaded the Nationwide that house prices, this year, are on their way up by another 15 per cent. The faster they rise, the more we can and do borrow against them, spending the proceeds on riotous living or investing them in property, by putting down a 10 per cent deposit to make a quick turn on a newly-built flat. I last saw this game played 15 years ago in Docklands. That was a red-hot market, and when it cooled down the depositors vanished. Today's market looks hot enough to be handled with oven gloves, and among the professionals I begin to notice signs of caution. The Bank expects house prices to level out by the end of next year. It has been expecting this, on and oft, for some years now; I have been expecting it for even longer, and shall only add now that, every so often, a stopped clock turns out to be right. The Chancellor has left the costs of housing out of his new index, shamelessly preferring not to count them as inflation, and expecting the monetary policy committee to take this at its face value. When something looks like a mule, reacts like a mule and is as stubborn as a mule, it is probably a mule, and needs to be hit on the head,
War in the tunnel
My railway correspondent, I.K. Gricer, wants to know what to do about his shares in Eurotunnel. He bought them when they came to market, attracted by the prospect of free travel, but failing to spot that in order to qualify he had to turn up in a car. Since then the shares have lost most of their value, and at the annual meeting next week a band of rebels will propose to oust the board. Hostile circulars and counter-circulars ('this great project has become a nightmare', 'vulgar and personal, . . who are these men?') have whizzed between the battle-lines. The rebels seem to hope that governments will bail the project out — 'managing the political issues', they call this — and hint at a stand-off with Eurotunners banks, The catch is that if Eurotunnel defaults, the banks are entitled to take over, running the business for themselves until they get their money back. The board has an ambitious plan called Project Galaxie, which would involve merging Eurotunnel with its rail links. This is at least directed to the project's basic troubles: a high superstructure of debt on a rickety capital base, and traffic that still falls far short of capacity. I have advised LK, Gricer to vote with the board. This will not make him rich (and the banks, too, must suffer) but is better than the only credible alternative, a shareholding in the world's longest submarine mushroom farm,
Numbers engaged
If you can't get through to Barclays, which blames a fire in Manchester, that is really because the reviewers in Whitehall are hogging the line. When they are at a loose end, they ring up and ask questions. Last year (says Sir Peter Middleton, Barclays' chairman) they asked about capital adequacy, payments systems, credit cards, insurance, business crime, pensions, investment products, corporate governance, company law and mortgage regulation, and they are now moving on to payment systems, long-term savings, and reviews of the Consumer Credit Act and the Financial Services and Markets Act. Breathing down their necks are the Eurocrats, who will provide 14 more sources of financial legislation — none of them, says Sir Peter, weighed in the balance for their costs and benefits. He spent his own formative years in Whitehall, becoming head of the Treasury, and drawing a valedictory moral: 'Even if you have a badly functioning economy — which in many ways we still do — it is always possible to make it worse by government initiatives.' How he must wish his successors would learn it. Fat chance.
Previous page
