A special lie from poor Gordon

The Labour Party has started a new website using taxpayers' money, it claims to be a site giving unbiased information and so is dressed as a government site and paid for by the little people. In fact it is just Labour Party propaganda. This is such an abuse of office that I do not intend to compound the insult by linking to it or mentioning its name. But I do want to look at something poor Gordon has written on it.

There is a section about the current recession/depression in which the man pretending to be Prime Minister explains what caused it and how it should be solved. He says this:
"In America people were encouraged to buy homes with cheap credit and low starter interest rates, but salespeople made no proper assessment of what level of lending they could afford to repay.
As US house prices fell and the US economy slowed the number of people defaulting on their mortgage started to rise, and once other lenders realised that was happening, the system started to panic, as everyone was trying to work out how many other risky assets the other banks held."

This is so blatantly simplistic and inaccurate that some might be surprised to find it being put forward by anyone who claims to know what they are talking about. How can he possibly think it a fair and accurate summary of the position? How can he seek to explain the situation in the UK by exclusive reference to what happened in America? The man is clearly now so deluded that all hope of hearing sense from him has passed.

The case he seeks to put forward is that there is no problem anywhere other than America and all losses being suffered by banks are the result of defaults by US housebuyers. The man is absolutely barking. It is certainly true that American banks lent money left-right-and-centre to people who couldn't afford the loans, they had to because of a bizarre legal requirement imposed first by Jimmy Carter and then strengthened by Bill Clinton required them to do so as a condition of being granted a banking licence. But what about here in the UK? The same thing was done by many of our banks voluntarily, in pursuit of a quick profit, with the agreement and encouragement of the government. Our houses did not become grossly overpriced because of anything going on in America, our economy is not saddled with countless billions of unaffordable credit card debt because of anything going on in America, our businesses are not burdened by expensive red tape because of anything going on in America; only someone with prawn cocktail for brains could think otherwise.

I've said it before and, being a boring sort of chap, I'll say it again, levels of perceived wealth over the last few years comprised both real wealth and pretend money, money which did not really exist. That pretend money is now being squeezed out of the system. That's what recessions do, they bring us back to reality when we have been living beyond our means on pretend money. Sadly, lancing the boil of fictitious wealth can destroy real wealth in the process, collateral damage cannot be avoided.

I know poor Gordon is an avid reader of my musings, and I now know he has prawn cocktail for brains, so I will illustrate things in terms even he might understand. Take Mr Ordinary on a post-tax income of £12,000. That means, Gordon, that he has £1,000 to spend each month. Rent costs him £500 a month, gas, electricity, food, travel and clothing cost him £450 a month. He has £50 a month spare. Mr Ordinary wants a car, it will cost £6,000 but he doesn't have the cash so he takes out a loan. It costs £75 a month. Woops, he has a problem. He is now a man with a car, ostensibly a wealthier man than he was last month because then he was a man without a car. He maintains his spending as before and soon finds himself overdrawn at the bank. How can this be? He is now wealthier than he was before, how can he also be poorer? The answer, of course, is that his apparent additional wealth is an illusion. Eventually the time will come when he has to cut back on his spending to balance the books. But, and here is the vital point, it will not be enough just to reduce spending by £25 a month because that will only restore him to a break-even position for the future. He also has to repay the overdraft. In order to negate the loss caused by taking out an unaffordable loan he will have to reduce his normal expenditure to below £1,000 a month until the overdraft is cleared. During that period of hardship his real wealth falls, he started out with £1,000 to spend on himself but for a time he has to spend less than that and suffer a real reduction in the quality of life.

That's what recession is all about, not just reducing your current expenditure to match your income but reducing it to below your established comfort level in order to remove the accumulated cost of having lived beyond your means. It applies to a country just as it applies to Mr Ordinary in this example because a national economy is made up of the individual economies of the people and businesses operating within it.

In one respect the problem of American banks being obliged to lend to the indigent has made things worse in that those British banks that invested in securitised US homeloans face losses that also need to to be addressed. The problem, however, is not that the US banks made bad loans and offered British banks the opportunity to buy an interest in those loans, it is that the British banks accepted the offer. Canadian banks did not, because their regulator did not allow it; accordingly Canadian banks are now sitting pretty. Pointing the finger at America is no answer. When someone offers me a pie and my decision to eat the pie follows encouragement from a dietician, the resultant clogging of my arteries cannot sensibly be laid at the door of the person offering me lard and dripping wrapped in a crisp suet crust. It was my choice to eat it and that choice was subject to the ultimate quality control of the dietician. In real life such a dietician would require good insurance. In the fantasy world of Labour politics they make him Prime Minister.