You would have had a very persuasive, authoritative and plausible leader in Darling had he decided to stand and had he won.

Balls is great at preaching to the choir – assuming the choir is willing to overlook all his other flaws. (He’s hardly a unifier is he?!) But he is not a figure with wide appeal.

The situation in Ireland is a boost for Labour. It helps make the case that cutting too fast and too soon not only hinders recovery but also makes the deficit worse.

Miliband E. as Leader with Balls as Shadow Chancellor would be a very good result.

I am not a Labour supporter but I rather liked Alistair Darling and I agree with cjcjc that he might have made a good leader. I suspect that Ed may indeed be better at taking the fight to the coalition than Alistair but it may also be that Alistair would make a better chancellor if he gets the chance again.

Balls is a highly skilled economist (Msc from Harvard). He’s also got the backing of Martin Wolf and Sir Samuel Brittan in the pages of the FT.

“Balls is a highly skilled economist (Msc from Harvard). He’s also got the backing of Martin Wolf and Sir Samuel Brittan in the pages of the FT.”

This warning was reported in 2002:

“CHARLES GOODHART, a former member of the Bank of England’s monetary policy committee [and economics prof at the LSE], warned yesterday that the Bank is failing to take sufficient account of the house price boom in setting interest rates.

“His warning comes amid growing fears among economists that house prices, fuelled by the lowest interest rates for 38 years, are getting out of control. Yesterday, new figures showed that homeowners are borrowing record amounts against the rising value of their homes. . . ”
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2002/04/06/cngood06.xml

Please remind us all, what exactly did Ed Balls do about the house price bubble when he was Gordon Brown’s chief economic adviser in HM Treasury 1997-2005?

The backing of Martin Wolf and Sam Brittan in the FT relates to the issue of premature fiscal tightening by the present government: The risks of premature tightening
http://www.ft.com/cms/s/0/ab7cb19e-c1c6-11df-9d90-00144feab49a.html

So skilled indeed that he believed that he had abolished boom and bust and so need not run a budget surplus just in case.

Excellent.

Ed Balls is skilled at managing his finances.

Try this on the Treasury’s economic growth forecasts:

“Peter Mandelson on Brown: ‘We were in a pit of debt. And we kept on digging’”
http://www.guardian.co.uk/politics/2010/jul/15/peter-mandelson-memoirs-brown-economy

Any update on this revelation?

” Ed Balls ‘ran’ Labour’s smear unit”
http://www.timesonline.co.uk/tol/news/politics/article6122756.ece

Recent news in the FT about the outcome of the National Curriculum tests when Balls was education minister was hardly impressive:

“The National Curriculum test results also revealed that in spite of an improvement in English and maths, more than a third of pupils still left primary school without a proper grasp of the basics in reading, writing and maths.”
http://www.ft.com/cms/s/0/ba881948-9f3f-11df-8732-00144feabdc0.html

“So skilled indeed that he believed that he had abolished boom and bust and so need not run a budget surplus just in case.”

Come on, you know full well that no politician, even one with a phd in macroeconomics, is going to admit that recessions happen regardless of what any government does. You also know full well that anytime a surplus is produced great political pressure is placed on the government to either cut taxes or invest in services.

Shorter Planeshift – “Come on, Balls may be a liar and driven by short-term considerations but so are all the others”

More like; any politician intending to take senior office isn’t going to acknowledge basic inconvenient economic facts because the political culture and strutcure will punish those who do. So if we want better economic policy, its better to change the political culture and structure than waste time calling people liars and stupid.

@11. Shorter Laban (after perusing his, um, “blog”):

Aaarrrggghh!

All the Brown people are after me!

Try in Friday’s FT, Patrick Diamond + Giles Radice: Whoever wins, Labour must retake the south
http://www.ft.com/cms/s/0/7b5aa2a4-c744-11df-aeb1-00144feab49a.html

Their analysis is persuasive IMO.

“Ireland can be our Greece – an example of what our opponents policies can lead to.”

Or it can be your, er, Ireland – an example of what happens when your policies lead to – a bonkers welfare state and a short-termist housing and credit boom caused by shovelling taxpayers’ money into a huge pit and burning it.

This isn’t recession, it’s Ireland returning to reality after a number of wholly bogus fat years based on EU money.

It is a small country with little industry beyond tourism, Guinness, U2, a bit of big pharma and some agriculture. That’s all.

They are all idiots. Here’s a sample of Balls, master economist, on Public Sector waste

“Go up to Nottingham today, go to Trent Bridge [the venue for the test match vs Pakistan], look at the massive corporate hospitality there, there’ll not be many public sector workers there, that’s private sector waste… the point I’m making is that there’s actually huge amounts of money spent on lavish hospitality in the private sector. ”

Mr. Balls, so Labour voters tell me, is very intelligent. I beg to differ.

Now, Miliband D, on the problems of connecting with voters.

“We need to reclaim and re-enact our commitments to community. Default statism turns citizens into consumers and makes government a giant problem solver, which only increases our technical managerialism.”

No wonder eh? Authentic New Labour gibberish.

Oh … such fun!

@ 6. Bob B

Bob posts for about the three hundredth time a 2002 note from Charles Goodhart, which, um, proves Goddhart was wrong. If he had wrote the note in 2007/2008 he would have been right since current prices are around 2006 prices but he was clearly wrong in 2002.

It is a fallacy to believe that the BoE repo rate tells us anything about whether money is tight or loose. We currently have the lowest overnight rates in three hundred years, which are much lower than 2002. House prices are certainly not booming and are flat at best. Low interest rates usually means money is too tight and high interest rates mean it is too loose. As in most things economic the opposite of what most people believe.

The remit of the BoE MPC is to maintain 2% CPI. House prices and easy credit as opposed to easy monetary policy has little to do with them. Easy credit comes from the banking system. The BoE base rate can be low and credit tight and conversely it can be high and credit loose. What matters is the real interest rate and that is determined by inflation. The MPC or Balls in the Treasury could have done nothing about easy credit in the banking system. That was the job of the FSA and if the Treasury was going to micromanage them what was the point of the FSA.

You would have had a very persuasive, authoritative and plausible leader in Darling had he decided to stand and had he won.

definitive proof cjcjc is the world’s worst political pundit ever.

@10 “You also know full well that anytime a surplus is produced great political pressure is placed on the government to either cut taxes or invest in services”

But then you make the argument then when money is plentiful it makes sense to put some away. We cannot predict when or why the next downturn will happen, but we can be sure it will happen. Thus it makes sense to be prepared. It’s not a difficult argument to make really.

These cuts wouldn’t be happening at all if Labour hadn’t run deficits during the boom, as we’d have had plenty of room to borrow money to ‘stimulate’ the economy, most likely through a huge boost in capital spending or huge tax cuts or both.

@17: “Bob posts for about the three hundredth time a 2002 note from Charles Goodhart, which, um, proves Goddhart was wrong”

Demonstrable rubbish – and besides, Charles Goodhart wasn’t the only one who warned about the house-price bubble in Britain. Roger Bootle also warned about the bubble and so did the IMF in 2003.

“The International Monetary Fund said British property was overvalued by 40% and the growing credit crisis is likely to have a ‘sizeable impact’ on property prices.”
http://www.thisismoney.co.uk/mortgages-and-homes/house-prices/article.html?in_article_id=425420&in_page_id=57#ixzz10XQKmqaO

It’s ridiculous to suppose that 100% loan-to-value mortgages – and even more – weren’t going to boost house prices artificially. By autumn 2008, the consumer debt mountain had reached £1.4 trillion – the rising debt levels should have alerted the government and prompted action.

Divide the average house price by the average earnings and you get the ‘Average House Price/Earnings ratio’ – as graphed here from 1953 through 2006:
http://www.housepricecrash.co.uk/graphs-average-house-price-to-earnings-ratio.php

That ratio rose from a long term average of around 3.8 up to about an unsustainable 6 by 2006.

In case anyone here forgets, this was the headline in the FT on 28 June 2006 – a year before the financial crisis started:

“Fears over surge in high risk mortgages”
http://www.ft.com/cms/s/0/e8f9d3b2-060e-11db-9dde-0000779e2340.html

Nearly two years further on, this was the headline on 8 April 2008 when the financial crisis was already well underway:

“Lenders withdraw no-deposit mortgages”
http://www.ft.com/cms/s/0/dd76f4f2-04d6-11dd-a2f0-000077b07658.html

But the horses had already bolted.

These were BBC reports of IMF warnings in 2003 and 2004 about the house-price bubble in Britain:

“The International Monetary Fund has warned the UK it could be facing a dangerous house price bubble.

“The IMF said the UK’s economic prospects were generally good. But it singled out spiralling property prices – and the possibility of a deflationary crash – as an ‘appreciable’ risk..” [March 2003]
http://news.bbc.co.uk/1/hi/business/2814809.stm

The International Monetary Fund has warned that rising interest rates in some of the world’s biggest economies may slow global house price growth. . . Since 1997, house prices are up by at least 50% in nations such as the UK, Spain, Ireland and Australia. [September 2004]
http://news.bbc.co.uk/1/hi/business/3682144.stm

At the time, Ed Balls was Gordon Brown’s chief economic adviser in HM Treasury.

@ 20. Bob B

Bob you love appealing to authority as if it somehow proves something. Let me explain how Goodhart, Bootle, IMF et al were wrong. Everything depends on the timing of when the forecast is made. Were the aforementioned in 2002/03 predicting something that one will occur in the future? That prices will rise very rapidly? Or are they talking about something that has already happened, that prices are too high relative to market fundamentals? Clearly it is the latter. Demonstrably they were wrong in 2002/03 if 7/8 years later prices at worst only fell back to 2006/07 prices.

I don’t know whether to laugh or cry with you citing IMF forecasts. This is what happens when you randomly cite anyone to support your argument. Here is a clue the IMF are useless forecasters. Now if you were citing a Goldman Sachs forecast it would be more credible. Everyone hates them but they are the best in the business.

You often quote John Kay of the FT, why not use him when he says that there was no UK housing bubble?
http://www.johnkay.com/2010/03/31/bankers-can%E2%80%99t-blame-the-uk-housing-market/

Absolutely no one disputes that UK house prices have risen since 1997. However, price rises on their own do not prove a general national ‘ bubble ‘. There were many factors involved and undoubtedly easy credit was one of them. However, it was not the only factor. The fact that prices have not fallen rapidly in the UK in contrast to other nations is prima facie evidence that fundamentals as opposed to a bubble explains price rises. The same current low base rates apply in the nations which have seen rapid falls so that can’t be the explanation.

The BoE base rate is a blunt instrument. Why should British industry suffer just because the housing market is getting too frothy? Until the financial crisis sterling spent a decade massively overvalued damaging exporters and sucking in imports. That is an indication that the BoE base rate was too high not too low vis-a-vis the ROW. If the BoE had followed Goodhart and Bootle in 2003 they would have made things worse. If there was too much cheap credit that was up to the FSA to control by imposing higher liquidity and capital requirements on the banking sector.

The Average House Price/Earnings ratio is a useless metric. People do not face a choice of whether to live in a bus shelter and buy another car and go on holiday or buy a house. The choice they face is whether to rent or buy. Therefore, the national rental yield is a better measure of house prices. If house consumers have to spend more of their earnings on housing they cut back on their discretionary spending and spend more on housing. They do not decamp to the bus shelter so the price earnings ratio is not a reliable measure.

Personally I don’t care if nominal house prices rise or fall most of it is just money illusion anyway. Ben Bernanke was right to say in January, ‘ It is extraordinarily difficult… to know in real time if an asset price is appropriate or not. ‘ You can’t reason from a price change so the only way you will know something was a bubble is when it bursts. Since there has been no UK burst below 2002 prices there is precious little reason to believe that there was a bubble. If or when prices fall below the levels when your authority figures made their predictions I will accept they were right. Until then they were self-evidently wrong.

Thanks for that, Richard, and btw I was well aware of John Kay on the house-price bubble but then he got it wrong that time IMO.

The house-price/earnings ratio is a useful metric, not least because mortgage lenders normally require information on the incomes of those they lend to, similar to the way in which banks want to look at the trading accounts of businesses they lend to. The objective is similar in both cases: lenders are looking for an indication of the capacity of borrowers to service the debt they intend to contract.

It really is completely ridiculous to suppose that 100% and greater loan-to-value mortgages wouldn’t bump up house prices artificially – or that this time was going to be completely different from pevious house-price bubbles in the early 1970s and then again at the end of the 1980s.

Besides the escalation in house prices and the press reports about the “surge in high-risk mortgages” in the FT in June 2006 (see link above @20), there was also the growth in consumer debt to £1.4 trillion by the autumn of 2008 and the low personal saving ratio to alert the government that something was seriously amiss.

The fact is that house prices are falling back:

“The UK saw house prices rise rapidly in the middle years of the past decade, but prices and activity both fell back sharply between 2007 and early 2009. Record low interest rates and a limited supply of properties for sale put a floor under prices in the spring of 2009 and was accompanied by a modest increase in home purchases.”
http://www.guardian.co.uk/business/2010/sep/23/house-prices-mortgage-approvals-recession

While house sellers avoid selling – unless they really have to – on a falling market on the chance they can do better by waiting, buyers put off buying to avoid getting trapped into negative equity. There is an observable cycle in the ratio of average house prices to average earnings over the last half centruy and the ratio of about 6 reached in 2006 isn’t sustainable:

“Houses are less affordable than 50 years ago although the quality of homes has improved, according to the Halifax. The lender, now owned by Lloyds Banking Group, said that over the last five decades UK house prices have risen by 2.7% a year, allowing for inflation.

“This was above the 2% annual increase in real earnings over the same period. Prices increased the most in the last decade, and separately lenders warned that lending to first-time buyers would be constrained for ‘some time to come’.”
http://news.bbc.co.uk/1/hi/business/8468605.stm

No wonder first-time house buyers were and are saying they have been pushed out of the market.

And just what did the New Labour government do about it?

The great housing achievement of New Labour:

“The average price paid by first-time buyers in the UK rose by 204 per cent between 1995 and 2005. Their average incomes increased by 92 per cent.”
http://www.statistics.gov.uk/downloads/theme_social/Social_Trends37/ST37_Ch10.pdf

“Housebuilding fell to its lowest level for more than 60 years in 2009 – with just 118,000 new homes completed, according to government figures. The number is the lowest since 1946, when official records began and represents a 17 per cent drop on the number completed in 2008.”
http://business.timesonline.co.uk/tol/business/industry_sectors/construction_and_property/article7032641.ece

@ 23. Bob B

Bob I have no strong opinion whether home prices will rise or fall in the future. However, I find it amusing that when the market does not do what you think it should do you automatically assume the market is wrong. Does it not occur to you that you might be wrong? Do you not think it a bit arrogant that you consider you know better than people themselves how much they should pay for a house? I have spent years listening to people telling me with certainty what was going to happen in the future. The more certain they were correlated with how wrong they were. The only certain thing I know about the future is it is uncertain.

‘ There is an observable cycle in the ratio of average house prices to average earnings over the last half century…’

You do know this ratio has been on an upward curve for forty years?

“Houses are less affordable than 50 years ago although the quality of homes has improved..’

You do know how this would affect the elasticity of demand and as a consequence the ratio?

If first time buyers can’t buy a house most of them have to rent. Therefore, the rental yield acts as a floor for prices. Always remember the choice for most people is not buy a house or be homeless. The choice is to buy or rent.

Look I am not saying that house prices are fairly priced nor that they will not fall in price. However, you are citing people as if they were right when clearly they were wrong. They might in the fullness of time be proven right but they have been wrong so far.

24. Bob B
The great housing achievement of New Labour:

“The average price paid by first-time buyers in the UK rose by 204 per cent between 1995 and 2005. Their average incomes increased by 92 per cent.”

“Housebuilding fell to its lowest level for more than 60 years in 2009 – with just 118,000 new homes completed, according to government figures. The number is the lowest since 1946, when official records began and represents a 17 per cent drop on the number completed in 2008.”

Utterly bizarre that you can’t see a connection between the two. If you build less houses prices will rise for fundamental reasons. It is not a bubble it is fundamentals. Never forget that 1968 was the peak of housebuilding in the UK.

@25: “However, I find it amusing that when the market does not do what you think it should do you automatically assume the market is wrong.”

But I’m not assuming the market for housing “was wrong”. I don’t need to and can’t imagine why you think I do.

In the boom, house prices were responding (rationally) to demand fuelled by easy borrowed money, often at 100% loan-to-value mortgages or better and often motived by a speculative element based on a belief that house prices the following year would be even higher.

As that FT headline said on 28 June 2006 – a year before the financial crisis broke: “Fears over surge in high risk mortgages”
http://www.ft.com/cms/s/0/e8f9d3b2-060e-11db-9dde-0000779e2340.html

Greenspan pointed to the irrational element in the market in his testimony on 24 October 2008 to the US House of Representatives Oversight Committee:

“Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief.”
http://online.wsj.com/article/SB122476545437862295.html

Gordon Brown contributed to the house price boom by announcing a change, as from February 2004, in the inflation target of the Bank of England previously set in terms of RPIX – where the price index included an element of housing costs – to the CPI, which didn’t. The two indices diverged. Had the old RPIX target been maintained, the BoE would have been obliged by its remit to set higher base interest rates which would have raised the costs of borrowing.

The facts about the boom in house prices are well documented in the links I’ve posted above:

“Houses are less affordable than 50 years ago although the quality of homes has improved, according to the Halifax. The lender, now owned by Lloyds Banking Group, said that over the last five decades UK house prices have risen by 2.7% a year, allowing for inflation.

“This was above the 2% annual increase in real earnings over the same period. Prices increased the most in the last decade, and separately lenders warned that lending to first-time buyers would be constrained for ‘some time to come’.”
http://news.bbc.co.uk/1/hi/business/8468605.stm

That escalation in house prices was simply not sustainable indefinitely. Sooner or later it would have had to come to an end. Once the speculators appreciated that house prices weren’t going to keep on rising, the speculative element in the demand for houses evaporated. There was a further tightening of demand when most banks adopted more prudent guidelines and restricted mortgages to a maximum loan-to-value of 90%. Predictably, the house-price bubble burst.

What amazes me is why you should automatically assume that Charles Goodhart, Roger Bootle and the IMF were all in the wrong to warn about a house-price bubble when they did.

The facts speak for themselves. The collapse in house building was an entirely rational response by builders to the bursting of the market bubble.

Btw there is scope for argument about the quality of newly built houses. Try Social Trends 37 (2007), figures 10.3 and 10.4: house building densities by 2005 were much higher than they had been 10 years earlier, especially in London, and many more houses were built with only 2 bedrooms instead of 3 or 4:
http://www.statistics.gov.uk/downloads/theme_social/Social_Trends37/ST37_Ch10.pdf

26. Bob B

‘ But I’m not assuming the market for housing “was wrong”. I don’t need to and can’t imagine why you think I do. ‘

You really are saying the market is wrong. If you say or imply prices are too high you are saying the people paying those prices are wrong. Hey you might be right. However, with what is thought to be a new Bernanke put, and the implicit King/Osborne pact I would not bet on it.

‘ In the boom, house prices were responding (rationally) to demand fuelled by easy borrowed money, often at 100% loan-to-value mortgages or better and often motived by a speculative element based on a belief that house prices the following year would be even higher. ‘

Partial facts, Bob. Most people buy a house to live in it and the speculative sector tended to be the buy-to-let brigade. As I keep telling you easy credit comes from the banking sector and that was up to the FSA to control. The BoE MPC can’t be expected to only concern themselves with house prices. In your world they would be the House Price Control Committee.

‘ Gordon Brown contributed to the house price boom by announcing a change, as from February 2004, ‘

Hmmm far be it from me to be a Brown defender but I distinctly remember you saying there was a ‘ bubble ‘ in, er, 2002. It was actually changed in December 2003.

‘ in the inflation target of the Bank of England previously set in terms of RPIX – where the price index included an element of housing costs – to the CPI, which didn’t. ‘

RPIX excludes mortgage interest payments.

‘ The two indices diverged. Had the old RPIX target been maintained, the BoE would have been obliged by its remit to set higher base interest rates which would have raised the costs of borrowing. ‘

Another hmmm. The RPIX target was 2.5% and the new CPI target was 2%. Currently CPI is 50% above target and the base rate is 50 basis points, any sign of the BoE raising rates?

I have no idea why they changed to CPI. I would hazard a guess that the EU leaned on them to change. The HICP used throughout the EU is exactly the same thing as CPI. We just call it CPI to be different from Johnny Foreigner.

‘ What amazes me is why you should automatically assume that Charles Goodhart, Roger Bootle and the IMF were all in the wrong to warn about a house-price bubble when they did. ‘

Err because they were wrong prices never fell to where they were when they made their predictions. If I say today that BP shares are overvalued and they rise every year until 2018 and then fall back to 2016 prices. Would I be right? No. I would only be right if they fell below 2010 prices..

‘ The facts speak for themselves. ‘

The only relevant facts are the prices people are prepared to pay in the market. Everything else is hot air.

“You really are saying the market is wrong”

No I’m not that. I’m saying the housing market responded rationally to a demand fuelled by easy, high risk mortgages offered by bankers seeking bonuses for contracting deals who had little regard for the interests of their shareholders – which is what Alan Greenspan was saying.

According to your lights, he has to be wrong too.

But the fact is that an awful lot of banks on both sides of the Atlantic clocked up horrendous losses because of subprime mortgages contracted with borrowers who couldn’t afford to service their debts once the initial discounts had run out.

The subprimes were then packaged up in (untransparent) derivatives and sold on to other financial institutions, which is why financial institutions stopped lending to other institutions on the basis of this collateral when they realised what was going on. Anyone who claims this was an orderly functioning market is nuts.

“Partial facts, Bob. Most people buy a house to live in it and the speculative sector tended to be the buy-to-let brigade.”

But I’ve met folk who were intentionally engaging in housing escalators expecting to trade up in a year or so after buying a house on the expectation that house prices would be higher by then.

Regretably or not, the hard facts of life are that house prices could not have gone on rising faster than earnings indefinitely. One unofficial iron-law of economics – due to Herb Stein – is that things which can’t go on forever, don’t. Once appreciation of that reality set in, part of the demand for housing dropped away. No wonder house builders dramatically cut back on construction.

“Err because they were wrong prices never fell to where they were when they made their predictions”

But house prices are in the process of falling now !!

What may temper the fall is worries on the part of investors looking for retirement nesteggs about what could happen to equity prices in the event of a stagnant economy or a double-dip recession. For them, housing seemed an especially good bet as a nestegg so long as house prices looked as though they would go on rising faster than earnings. In the event of a double-dip, a house purchase may seem a better haven than a lot of equity.

“Another hmmm. The RPIX target was 2.5% and the new CPI target was 2%. Currently CPI is 50% above target and the base rate is 50 basis points, any sign of the BoE raising rates?”

No – the official position is that the inflation rate will fall and conform with the 2% target in due course. There are undeclared concerns about the possibilities of a stagnant economy, a double-dip recession or even deflation, which restrain any current incination to raise interest rates.

A worry is that money created through quantitative easing will get added to reserves or hoarded until the future looks more assured, when it will be loaned out or spent. This thought is motivating a few policy makers to press for a modest rise in interest rates about now to remind everyone of the possibility of a surge in inflation downstream when GDP growth prospects are better.

“I have no idea why they changed to CPI. I would hazard a guess that the EU leaned on them to change. The HICP used throughout the EU is exactly the same thing as CPI. We just call it CPI to be different from Johnny Foreigner.”

The change in the BoE’s target was announced in December 2003 after the decision to stay out of the Eurozone had been announced in June 2003. One of the motives may have been to cultivate a mythology that with a CPI target we will be better placed to join the Euro one sunny day. However, as I understand it, Mervyn King supported the change even though the BoE would need to recalibrate its forecasting models with the new price index.

Bob, you are beginning to waffle. When I suggest that you are saying the market is wrong I am speaking about present tense nothing to do with what happened in the past. If prices are going to fall below 2002 prices when Goodhart made his prediction then buyers today are wrong to buy. You in your infinite wisdom know better than the market.

You do know about the new Bernanke put? He has implicitly drawn a line in the sand at 1% inflation. No matter how much it costs asset prices will not be allowed to fall. Another trillion dollars in the British style of QE will be pumped into the market. The King/Osborne pact means that the Bank will do any amount of QE to stop the money supply from falling and that will boost asset prices. Feel free to keep shorting them but they have infinite money.

There is no worry that ‘ money created through QE will get added to reserves.’ It automatically becomes part of reserves the day it is created.