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Osborne Finally Points To The Main Cause Of The Crisis

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In his Mansion House speech, Chancellor George Osborne finally points to the main cause of the economic crisis:

__________________________________________________________________________________________

" At the heart of the crisis was a rapid and unsustainable increase in debt that our macroeconomic and regulatory system utterly failed to identify let alone prevent.

Inflation targeting succeeded in anchoring inflation expectations, but the very design of the policy framework meant that responding to an explosion in balance sheets, asset prices and macro imbalances was impossible.

The Bank of England was mandated to focus on consumer price inflation to the exclusion of other things.

The Treasury saw its financial policy division drift into a backwater.

The FSA became a narrow regulator, almost entirely focussed on rules based regulation.

No-one was controlling levels of debt, and when the crunch came no one knew who was in charge. "

__________________________________________________________________________________________

But why did it take so long for the Conservatives to point to this root cause?! And why even now Osborne's reference to Brown's removal of housing costs from the inflation index is so indirect?!

I guess the Conservatives didn't oppose the change at the time, and could not point to it during the election campaign, and even now they can't be too direct about it.

At least we now know that the Conservatives understand the root cause of the problem. That is big news, and very good news.

LINK to full speech: http://www.hm-treasury.gov.uk/press_12_10.htm

Edited by Tired of Waiting

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In his Mansion House speech, Chancellor George Osborne finally points to the main cause of the economic crisis:

yes. too many politicians and the followers of politicians speculating on property.

oh. and thats your bill btw.....

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In his Mansion House speech, Chancellor George Osborne points to reveals the main cause of the economic crisis to be agreed policy over the last decade:

Corrected for you.

Edited by AvidFan

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yes. too many politicians and the followers of politicians speculating on property.

oh. and thats your bill btw.....

Yep. I agree. Most MPs were property owners (and many at our cost!), and that must have "clouded" their judgement.

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In his Mansion House speech, Chancellor George Osborne finally points to the main cause of the economic crisis:

__________________________________________________________________________________________

" At the heart of the crisis was a rapid and unsustainable increase in debt that our macroeconomic and regulatory system utterly failed to identify let alone prevent.

Inflation targeting succeeded in anchoring inflation expectations, but the very design of the policy framework meant that responding to an explosion in balance sheets, asset prices and macro imbalances was impossible.

The Bank of England was mandated to focus on consumer price inflation to the exclusion of other things.

The Treasury saw its financial policy division drift into a backwater.

The FSA became a narrow regulator, almost entirely focussed on rules based regulation.

No-one was controlling levels of debt, and when the crunch came no one knew who was in charge. "

__________________________________________________________________________________________

But why did it take so long?! And why even now his reference to Brown's removal of housing costs from the inflation index is so indirect? I guess the Conservatives didn't oppose the change at the time, and could not point to it during the election campaign, and even now can't be too direct about it.

At least we now know that he understands the root cause of the problem. That is big news, and very good news.

LINK to full speech: http://www.hm-treasury.gov.uk/press_12_10.htm

Anyone else read this as "tories to include houses in CPI/RPI"?

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Corrected for you.

If you mean, the Conservatives didn't oppose it, I agree completely with you. I think only Vince Cable kept putting warnings on record about the credit/debt bubble.

Mervyn King also spoke in the right direction - against the removal of housing costs from the inflation index in 2003 by Brown - but Mervyn could, should, have been much firmer about it, and even threatening to resign, and do it if needed be. But noooo.

Bunch of incompetent b@stards.

.

Edited by Tired of Waiting

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There is a good paper below, which discusses the poor use of CPI too:

http://www.cobdencentre.org/2010/06/austrian-ideas-at-the-top-table/

Monetary policy is not independent of political pressures

The UK government grants operational independence to the Bank of England, but sets

the targets that are required to be hit. This has the potential to mask inflation by moving

the goalposts, as Gordon Brown did in 1997 when he switched the target from the Retail

Price Index (RPIX) to the narrower Consumer Price Index (CPI). Although the relatively

harmonious macroeconomic conditions of the first decade of UK independence has

created little room for conflict, the rarity of disagreement between the Bank of England

and Treasury also hints at some operational alignment. On the other side of the Atlantic

the distinction between de facto and de journo independence is even more evident, as

Allan Meltzer says, “The Fed has done too much to prevent a possible recession and too

little to prevent another round of inflation. Its mistake comes from responding to pressure

from Congress and the financial markets. The Fed has sacrificed its independence by

yielding to that pressure.”vi

...

Inflation targeting is too simplistic

The key problem with the UK is that a monetary system of inflation targeting supposes

that interest rates should rise to combat inflation, regardless of the source. Treating

inflation as the primary target downplays conflicting signals from elsewhere in the

economy. In an increasingly complex global economy it seems simplistic at best to

assume such a degree of control. We’ve seen productivity gains and cheaper imports that

should result in falling prices, but a commitment to 2% inflation forces expansionary

monetary policy. As Joseph Stiglitz has said, “today inflation targeting is being put to the

test – and it will almost certainly fail”viii. He believes that rising commodity prices are

importing inflation, and therefore domestic policy changes will be counterproductive. We

would also point out the possibility of reverse causation, and instead of viewing rising oil

prices as the cause of economic troubles; it might be a sign of capital flight from financial

assets into hard commodities (Frankel 2006). Underlying this point is a fundamental

fallacy that treats aggregate demand as being the main cause of inflationary pressure.

[b[This emphasis on price inflation rather than monetary inflation neglects the overall size of

the monetary footprint[/b], which is “the stock of saved goods that allow entrepreneurs to

invest in more roundabout production” (Baxendale and Evans 2008). It is actually the

money supply that has generated inflationary pressures.

Price inflation targeting seems to be at the core of the problems. Surely, the BoE should have pointed this out and made big noises about it being a bad idea? Even Mystic Merv produced a paper which said broad money was the more important measure over longer periods of time (1 year plus, IIRC).

EDIT: In addition, targeting 2% will ultimately mean hitting the printing presses, as credit expansion can't continue indefinitely. The writing has been on the wall since this 2% target was set - to continue to hit it, the printing presses would have to be used sooner or later. As directly printing money is against the Maastricht Treaty, shouldn't alarm bells have been ringing loud and clear as soon as the target was announced?! They were essentially guaranteeing that there would be a credit contraction and a resulting recession. :blink:

(apologies for all the edits!)

Edited by Traktion

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I'm sorry, but I fail to believe that anyone didn't spot the huge increase in debt.

They did, but because the increase in credit / debt masked the static or falling real wages, they chose to ignore it.

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Anyone else read this as "tories to include houses in CPI/RPI"?

Osborne has always said that he wants to include housing prices back in the inflation index - RPI like.

The problem is that if he does that now, still near the peak, as house prices fall, this will make RPI lower than CPI.

In this case, if the BoE targets RPI, then interest rates will be lower than if they target CPI. This will reduce the price crash size and/or speed. Very bad for us, potential house buyers - "Tired of Waiting" for the fecking crash!

If they didn't count HP in its way up, they should not count it on its way down. One would balance the other, roughly.

But if they ignore those prices on their way up, and count them only on their way down, they will distort forever the accumulated UK inflation. Excellent for them, of course, as they are debtors, and some bonds are inflation linked! The b@stards.

.

Edited by Tired of Waiting

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I'm sorry, but I fail to believe that anyone didn't spot the huge increase in debt.

Yeah, I tend to agree. It was too obvious. Specially for the parties' leaderships, and their economic teams.

But I think you went a little too far when you said "anyone ". Many MPs are surprisingly thick though. Don't overestimate them. :D

They did, but because the increase in credit / debt masked the static or falling real wages, they chose to ignore it.

Yes, the government had that interest. But why the opposition? I think the Conservatives did not foresee the size of the incoming crisis. Very few people did. It required some knowledge of economic theory. Or some basic common sense, granted.

No, not granted. I go back to my point: I think that to foresee the size of it, the scale of it, you would need some econometrics. And I think the Conservative party leadership did not see it coming.

.

Edited by Tired of Waiting

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There is a good paper below, which discusses the poor use of CPI too:

http://www.cobdencentre.org/2010/06/austrian-ideas-at-the-top-table/

Price inflation targeting seems to be at the core of the problems. Surely, the BoE should have pointed this out and made big noises about it being a bad idea? Even Mystic Merv produced a paper which said broad money was the more important measure over longer periods of time (1 year plus, IIRC).

EDIT: In addition, targeting 2% will ultimately mean hitting the printing presses, as credit expansion can't continue indefinitely. The writing has been on the wall since this 2% target was set - to continue to hit it, the printing presses would have to be used sooner or later. As directly printing money is against the Maastricht Treaty, shouldn't alarm bells have been ringing loud and clear as soon as the target was announced?! They were essentially guaranteeing that there would be a credit contraction and a resulting recession. :blink:

(apologies for all the edits!)

RPI inflation targeting was going to force the BoE to increase interest rates in 2004. It was going to work fine, and curb some of the housing market enthusiasm. But Chancellor Brown intervened, and removed Housing Costs from the inflation index (CPI, refereed to by Osborne in the OP). forcing the BoE to keep interest rates low - too low - and the credit/debt/house prices bubble kept going up, of course. THAT was the main problem. Brown tampered with the index - target.

Edit: And Mervyn did complain about that, at the time.

.

Edited by Tired of Waiting

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Yes, the government had that interest. But why the opposition? I think the Conservatives did not foresee the size of the incoming crisis. Very few people did. It required some knowledge of economic theory. Or some basic common sense, granted.

No, not granted. I go back to my point: I think that to foresee the size of it, the scale of it, you would need some econometrics. And I think the Conservative party leadership did not see it coming.

The Conservatives had the same self-interest - nobody wanted to be the one who stood up and said "you are all going to get poorer and at best your overall standard of living will plateau". People often shoot the messenger, especially with an election to win.

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Yep. I agree. Most MPs were property owners (and many at our cost!), and that must have "clouded" their judgement.

id guess that 80% of politicians are multiple property owners.

even camerons dads a property millionaire.

all of them. up to their hairy tits topping up already a very good wage off the backs of the young £5 ph jobs.

they are all *****ers. total *****ers.

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The Conservatives had the same self-interest - nobody wanted to be the one who stood up and said "you are all going to get poorer and at best your overall standard of living will plateau". People often shoot the messenger, especially with an election to win.

Yes, I agree, in the last year or so, near the election, OK.

But why they didn't criticise the debt bubble in 2004, 2005, 2006? Vince Cable did it, and it helped his credibility. I really think that you are overestimating them. They didn't "get it" back then. Incompetence.

.

Edited by Tired of Waiting

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id guess that 80% of politicians are multiple property owners.

even camerons dads a property millionaire.

all of them. up to their hairy tits topping up already a very good wage off the backs of the young £5 ph jobs.

they are all *****ers. total *****ers.

+ 1

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Yes, I agree, in the last year or so, near the election, OK.

But why they didn't criticised the debt bubble in 2004, 2005, 2006? Vince Cable did it, and it helped his credibility. I really think that you are overestimating them. They didn't "get it" back then. Incompetence.

Perhaps I am overestimating them, although it wasn't quite as obvious in 2005 at the last election as it became in the years 2005-2008.

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RPI inflation targeting was going to force the BoE to increase interest rates in 2004. It was going to work fine, and curb some of the housing market enthusiasm. But Chancellor Brown intervened, and removed Housing Costs from the inflation index (CPI, refereed to by Osborne in the OP). forcing the BoE to keep interest rates low - too low - and the credit/debt/house prices bubble kept going up, of course. THAT was the main problem. Brown tampered with the index - target.

Edit: And Mervyn did complain about that, at the time.

.

Sure, RPI targeting would have been better, but both are flawed. Even if you had RPI targeted at 2%, how can you meet that indefinitely without printing money? To quote, the above article again:

But although inflation is always and everywhere a monetary phenomenon, “there is nothing in Friedman's work that states that monetary expansion is always and everywhere a consumer price phenomenon.”

Or a retail price phenomenon either, I might add.

If inflation is always and everywhere a monetary phenomenon, targeting anything other than 0% inflation will lead to problems, if you only have the velocity of credit as a lever. If you target 2%, you are essentially saying that borrowing needs to increase, YoY, forever. It can't be done - simple maths illustrates this. Putting the wisdom of having a 2% target to one side, why wasn't it monetised if it was unsustainable? Surely, you either have:

1. A 0% target.

2. A 2% target, monetising as required to reach the target as we go along.

Doing neither 1 or 2 put us on a collision course with a credit crisis OR a breach of the Maastricht Treaty.

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Perhaps I am overestimating them, although it wasn't quite as obvious in 2005 at the last election as it became in the years 2005-2008.

That is exactly my point. The bubble was not yet obvious to everybody "on the street". It was not yet "common sense", or "common knowledge".

But look at this article, from Sep 2004, from the magazine The Economist (link below). The Conservatives should have known better.

I think the fact that their personal properties were increasing in value clouded their judgement. Very human, ok. But not very wise. We deserve much better from the main parties' leaderships. They were very incompetent - even against their own long term interest.

http://www.economist.com/node/3176456?story_id=3176456

CFN545.gif

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Basic ignorance really.

i wish it had been, but it wasnt. it was wholly contrived.

they dont care.

where are they now the blairs and the browns and the fred goodwins ?

loaded to the fµcking gunnels in property wealth thats where.

you've been had by an act of innocence and incompetence.

which of those now millionaires are incompetent ?

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But why did it take so long for the Conservatives to point to this root cause?! And why even now Osborne's reference to Brown's removal of housing costs from the inflation index is so indirect?!

I guess the Conservatives didn't oppose the change at the time, and could not point to it during the election campaign, and even now can't be too direct about it.

At least we now know that he understands the root cause of the problem. That is big news, and very good news.

I don't think the Conservatives wanted to frighten the horses -- either through talking about debt, the deficit, or by discussing in public subjects that a significant proportion of the electorate prior to the election may have struggled to comprehend, and where such a knowledge lack could have been used by Labour and the left to spin into something damaging to the Conservative cause.

I reckon they had to wait for the zeitgeist to evolve enough. This is where Greece has done us a massive favour -- simply by providing an instance of "worst case scenario" that the ConDems can use to illustrate their arguments simply.

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i wish it had been, but it wasnt. it was wholly contrived.

they dont care.

where are they now the blairs and the browns and the fred goodwins ?

loaded to the fµcking gunnels in property wealth thats where.

you've been had by an act of innocence and incompetence.

which of those now millionaires are incompetent ?

Kind of funny that our main argument is if they are b@stards or morons. :lol:

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Kind of funny that our main argument is if they are b@stards or morons. :lol:

how can anyone who made themselves a millionaire by acting dumb be a moron ?

these people are intel. eton. media. we are farm animals fed by the bbc nosebag.

they have had us over. the banks and the politicians.

question time is a prime culprit of the illusion.

Edited by right_freds_dead

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  • 153 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
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      • Even
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      • up 5%



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