If now, why not then?

If I am presented with a problem I think it's a good idea to look at what has caused the problem in order to identify the solution. A drip coming from a water pipe seems to me to be evidence of a hole, so my first investigation aims to identify where the hole is. The solution is then to close that hole. An insufficiently tasty sauce seems to me to be evidence that an essential ingredient has not been added in sufficient quantity. It is necessary to identify that ingredient and add more. Unless the solution is suited to the problem you might as well not bother because at best you will make no difference but more likely you will make things a lot worse. Putting a new washer on a bathroom tap will not cure a leaking radiator, so no further harm done but no good done either. On the other hand, adding more salt to a sauce that has enough results in a ruined dish.

Now that recession is confirmed we stand on the brink of a depression deeper and more painful than any in British history. The steps being taken by government to deal with the problem trouble me because they are such a mish-mash of contradictory measures, lacking a coherent strategy and aiming to be all things to all men. That is not the role of government. The role of government is to give a lead, to have a clear strategy so that we all know what is being attempted and why. Only if their plan is made clear can it be improved by debate and discussion. The 2.5% reduction in VAT is a fine example. Had that been proposed in a Commons debate the pros and cons would have been examined in detail and the shambolic mess it turned into could have been avoided.

As far as I can tell the current strategy seeks to address three elements of the economy, banking, housing and retail. Yet there is no overall strategy for all three, each has its own and they are in the starkest conflict.

The government tells us it wants to act to kick-start bank lending to businesses. It does not seem to be in dispute that many businesses rely on overdrafts to provide cash-flow for wages and other expenses pending receipt of money owed by customers. Starving them of credit will cause some, perhaps many, to fold. What stands in the way of the banks making those credit facilities available at the moment? Three things, it seems to me: first the banks themselves do not have as much money available to lend as they did even a year ago, secondly the risk they take in lending to any business is increased in a recession and thirdly they are required to keep their capital high.

If government wants to increase the amount of money banks have in the safe it can lend to them at sensible rates - rates that allow a profit margin when they then lend it on to customers. This cannot happen because government simply does not have money available at such rates. An alternative is to take steps to encourage greater deposits from the banks' customers, yet the Conservatives' plans to reduce tax on savings income for basic rate taxpayers has been dismissed as a gimmick, so the government is giving no encouragement there. A further option is to relax the rules on the amount of capital the banks have to hold. Capital essentially means money the banks are required to have but are not allowed to lend, they must keep it to act as security for the banks' own liabilities. For good reasons the capital requirements were made more stringent after Northern Rock and Bradford & Bingley hit the skids, but they cannot have it both ways, they cannot insist on more capital and them complain that money is held as capital rather than advanced to customers.

Now they claim to be preparing to force banks to lend to worthy customers. That is an absurd proposition. The government cannot assess the risk involved in lending to Fred Bloggs' Flooring Ltd, only the banks can do that and even they have to make educated guesses as to what the future might hold. The only positive step the government can take is to provide additional security to make it more attractive for the banks to lend to Fred Bloggs. This has been discussed for months, having been dismissed out of hand when the opposition first suggested it, but we still seem to be some way away from a workable plan being put into place. In the meantime there is simply nothing the government can do other than relax the capital requirements, and they show no sign of being willing to do that.

Housing is an area where the government really is coming into its own. The level of incompetence and waste in their various proposals is quite breathtaking. On the one hand they want the banks to lend more for house purchases, on the other hand they want the banks not to take action when a customer defaults. It does not take a genius to understand that defaults by customers undermine a bank's capital. Nor is superhuman mental agility required to see that a falling housing market requires the bank to lend a smaller percentage of the estimated value of a house for fear that it will fall below the amount of the loan if a high percentage is advanced. And one might expect even a primary school pupil to appreciate that lending money to someone at risk of losing his job is not sound business. So how can the banks lend more? To be fair there is, in part, an answer to that question. It might be that the banks are being over-cautious at the moment, that certainly seems to be the view of some commentators. Perhaps they are looking at potential loans as being more risky than they are in fact. But even if that is the case, there is nothing government can do about it because Mr Darling doesn't have the time to examine individual mortgage application forms and point out that the bank could lend £5,000 more than it is offering at the moment. These are decisions for the banks. After all, the banks don't want to be bust, they want to make profits and they know they have to do business to achieve that. It will take time for them to assess how deep the recession is likely to be and how it will affect particular types of businesses and particular areas of the country. Diktats from the Treasury cannot change the need for the banks to take time to form their own lending strategies.

The retail sector is being hit like never before. Major retailers are folding with the loss of thousands of jobs and those that stay alive have to reduce costs dramatically to cope with falling income. So far the only substantive thing the government has come up with is the 2.5% cut in VAT, which did nothing to help sales. Poor Gordon is telling us all to spend spend spend but it is a futile message because people everywhere are retrenching. Those who can get credit are choosing not to do so or are spending it propping up their businesses rather than shopping. Far more feel the need to pay back existing credit rather than take on more.

Every week we hear statements from the government about their desire to "stimulate" the economy. I find this a quite ridiculous concept. A stimulant is something that wakes you up and gets you moving forward and can be likened to the accelerator pedal on a car. The problem is that the economy is not moving forward, it is in a fast reverse gear. Attempts to keep people in work through bringing forward future government expenditure on such things as school building and road repairs are not stimulants, they can help to slow the reverse speed by dabbing gently on the brakes but they cannot depress the clutch and engage a forward gear. And all the time more money is borrowed against future taxes, which will then slow the rate of acceleration once the bad times have been exhausted.

We know that government expenditure is not a stimulant, we know it as a cast iron fact. If it were a stimulant it could be increased without limit and there would be nothing but benefits. When the economy is moving well, government could just spend more to make it move even faster. But that does not happen. Government expenditure in good times slows rates of growth, it does not increase them. If it is not a stimulant then, it cannot be a stimulant now.

If I had enough spare, I would tear my hair out at the willful failure of the government to acknowledge the central problem facing the British economy today. For many years we have been living beyond our means. Now we have been caught out and have to retrench. Millions are retrenching all over the country. They are doing so because they know they have to in order to get back to a position where they live within their means. There is no escaping this fact, we have been living on money we did not have. The same is true of many other countries but that does not change the fact that it is the position here. The economy is shrinking because it has to shrink to get back to a sustainable size. Not once has the government acknowledged this. If they did, they would find it a lot easier to build a strategy and the greater chance they would have of providing a helpful strategy.

Trying to prop-up the housing market and encouraging people to spend in the shops how they did a year or two ago it utterly misconceived. There needs to be a humble acceptance that we are a Waitrose country not a Fortnum & Mason country (perhaps I mean a Lidl country not a Tesco country). You cannot plan for the new, realistic, state of the economy by pretending that it will be just as it was before. Living beyond our means did not work before and it will not work now. Government expenditure as a means of furthering economic growth did not work before and it will not work now. We should be preparing for a new economy of severely restricted credit and living standards that only improve with real wealth creation.

Another day, another quango

Sometimes you don't know whether to laugh or cry. Today we learn that a new quango is to be created under the chairmanship of former cabinet member Alan Milburn to try to get more people from "disadvantaged" backgrounds into the professions. This is a topic of great interest to me because I am someone from a "disadvantaged" background who made it into a profession and practised there for many years. I wasn't a star, just one of many in the middle of the bunch, earning a crust by giving advice and presenting cases in court to the best of my modest ability. Never likely to become a QC or a judge but, I like to think, a competent practitioner who provided a good service when sober and a decent service at all other times.

There is a presumption lying behind this new quango, namely, that people from "disadvantaged" backgrounds are being excluded from professions they are qualified to join. I find this a curious concept. It only takes a moment's though to realise that exclusion from a profession can only happen once someone has reached a certain age and level of academic achievement. The earliest time you can be excluded from being a doctor is when you have at least three good A-levels and have shown interest and aptitude that might make you a suitable entry to undergraduate studies at a medical college. The earliest time you can be excluded from being a barrister or solicitor is when you have a degree and have shown interest and aptitude that might make you suitable to be a practising lawyer. I don't know whether architecture, accountancy, surveying and the rest are exclusively graduate professions these days, but whether they are or not there is a stage before which no one can be said to be excluded from those professions; it might be graduation, it might be A-levels, it might be something else, but it is something.

In theory every five year-old is a potential professional practitioner. Real life tells us that is not so. Every profession requires a combination of intellectual and practical skills that few people possess. Still fewer people possess both the necessary skills and sufficient interest in the subject to make it a viable career for them. No realistic assessment of the suitability of a young person for a particular professional career can be made until they approach the end of their time at school. Can anyone say that a 16 year-old will make a good doctor or a good surveyor? I doubt it. All that can be said at that age is that they show interest in the subject and appear to have the intellectual capacity to deal with the further studies required. And what of age 18? Much more is known about their analytical skills at that age because they have had to progress from fact-based GCSEs to fact and analysis based A-levels. But even then, the most that can be said is that they appear to have the ability to cope with the necessary undergraduate studies.

Things change enormously when you get to university level education. In the same way that many who were very good at GCSE level floundered when faced with the different challenges of A-Levels, so many with sound grades in A-level exams cannot make the leap and cope with the additional demands of university education. Most degrees take three years and all of us who have been through that process remember people dropping out or switching courses, and we remember someone being a star performer in the first year but struggling to keep up by the third. When you get to the stage of post-graduate professional studies the same is witnessed again. And then you reach the stage of professional apprenticeship. Some who appeared entirely suited to a particular career during their academic studies became fish out of water when trying to put their knowledge into practice.

Opening the professions to more people from "disadvantaged" backgrounds is a meaningless exercise, a pure political fantasy. By the time they are of an age at which they might enter a profession their background is wholly irrelevant. Actually, I have to qualify that in two ways. There are some tiny backwaters in which having been to the right sort of school still carries weight. Equally, there are some tiny backwaters in which having been to the wrong sort of school carries weight. For the vast majority of professional practices the decision whether to take on someone at the junior end has absolutely no regard to their personal background. I cannot say this from empirical evidence, but I can say it from a combination of my own experience in the legal profession and from practical common sense. After all, it does nobody any good to take on a less competent person because of their privileged background and reject the more competent person from the council estate. Of course it will happen in some snobby practices but no quango can correct that sort of stupidity.

So what, I wonder, is the purpose of this new body? All the major professions have looked into ways they can ensure that all those of suitable ability can gain entry. In the rest of this piece I exclude medicine because it is a nationalised profession in which entry is already at the whim of government. Each year many millions of pounds are made available by members of the professions to provide scholarships, grants and additional education to aspiring entrants. Bureaucratic webs of huge complexity have been introduced to ensure that no candidate is excluded without full reasons being given - so that those reasons can be pored over to hunt for evidence of discrimination on the grounds of pigmentation, ethnicity, gender, religion, physical disability, sexual proclivity or anything else other than merit.

At the level of entry to the professions it is hard to see that anything else can be done to get the boys and girls from the council estates involved. The problem is not at the top end, it is at the bottom. No one with the potential to enter a profession will get anywhere near it unless he or she goes through all the hoops from age five to eighteen and then enters university and exits in good shape.

To suggest that a quango can do anything substantive in this field - and anything in proportion to the amount of taxpayers' money thrown at it - is a complete joke. Let's say it loud and clear. The government, beset as it is by infantile notions of class, simply cannot understand that the professions want to attract the best people. Taking on good people at the bottom benefits all the people in the ladder. That is why the professions make so much money available and spend so much time trying to identify and recruit the best candidates. They act out of self-interest, the most powerful force in human nature, and in doing so they achieve far more than the wildest dreams of any quango.

Nurture the strong, Part II

As I tried to explain yesterday, I believe it is necessary to look after the strong if the weak are to be assisted. I suppose the principle is that you shouldn't kill the goose that lays golden eggs. Underlying my point is the biblical saying about the poor always being with us. Although I dispute use of the words "poor" and "poverty" to describe all but a very small number of people in this country, I will use them here to refer to those for whom providing themselves with housing, food, clothing, heat and water is a financial struggle. We all search for ways to reduce poverty and some idealists get so carried away with their good intentions that they claim to be able to abolish poverty completely. The error in their reasoning is that they leave human nature out of account.

Let's assume we elect a radical government that nationalises all property and distributes it in equal shares to every adult. For a fleeting moment poverty (in the modern sense of inequality) would be abolished because we would all have exactly the same, but only for a moment. Someone will find a pack of cards and start a game of poker, resulting in some ending up richer and some becoming poorer. Someone will turn his money into cans of lager and thence into an even less tasty liquid. While this is happening, someone else will sit at home learning crochet and find himself relatively richer than the losing player and the boozer and relatively poorer than the winning player and the lager seller. Through a combination of differing personal habits, differing skills and differing luck the same inequalities will arise as currently exist. Current levels of financial inequality might never be matched, but inequality is inevitable as is the loss by some people of everything the State so helpfully gave them. As they walk out of the poker room dressed in nothing but a barrel held up by sturdy braces they might curse their bad luck at running into a straight flush when they held four of a kind, but that's the way of life because people take risks and some lose.

I wrote yesterday of how Mrs Thatcher's famous words "there is no such thing as society" have been misconstrued for over twenty years. She was addressing the concept that "society" is a thing with a mind and body of its own and is capable of doing things; her point was that only people can do things. That is not to say there is no such thing as society in all contexts. A cricket club is a society, a village is a society, a country is a society, but each is a society in a different way. The one thing societies have in common is mutual dependence among their members. The best cricketer in a club is of no use unless another ten player turn out to make a full team. Village society consists of numerous acts by which people rely on others and others rely on them - Mrs A does Mr B's washing because Mr B is housebound and can't cope with that work, Mr C gives Miss D a lift to the shops, the whole village gets together for a jumble sale and a fireworks party and so it goes on. The larger the group the more nebulous the links are that make them a society and the more individual smaller societies exist within the large one. Each cricket club is a society, all the clubs which play in a particular league form a further society and all the teams playing in similar leagues around the country are a larger society again. They all have something in common and they all depend on each other to a greater or lesser degree.

Describing a country as a society is rather more difficult, particularly when, as now in the UK, the government creates or exacerbates divisions to set groups against each other. Nonetheless there is an important respect in which it is possible to see the whole of the UK as a society because some things affect the whole of the country. Decisions taken by the UK government obviously come into that category but so do decisions taken in other countries which affect our ability to look after ourselves.

A fine illustration of this is taking place in eastern Europe at the moment. Back in the days of the USSR the discovery of vast reserves of natural gas in Russia led to supplies being piped to numerous of its neighbouring states because they were all under rule from the Kremlin. The dismantling of the Soviet empire into individual sovereign states did not suddenly give those states their own gas reserves, they continued to rely on Russia for supplies. Gas has become an essential fuel in these countries just as it is in the UK. It not only boils a Ukrainian's borshch it also generates some of his electricity and fires his heavy industries. The tap remains stubbornly situated on the Russian side of the border giving the old Imperial power the ability to cripple its neighbour and demand just about any price it likes. The current huffing and puffing will die down before long, at which time Russia will receive a much higher price than before and Ukraine will have suffered massive financial losses. The simple fact is that Russia and Ukraine are not part of the same society these days, unlike when the pipelines were first built and reliance on gas became established. In those days losses in Ukraine were losses for the whole USSR of which Russia was, of course, the largest part. These days Ukrainian losses do not cross the eastern border.

Nations are the largest manageable societies in history. All the wild celebrations when London was selected to host the 2012 Olympics illustrated a bond of nationhood. It was not so much hosting the Olympics that was being celebrated, it was that a contest was won in which we, as a country, were involved. It was all the sweeter for putting one over the French, and all the more bitter for them because London was chosen rather than anywhere else. That the games will cost money we don't have and will not produce one hundredth of the long-term benefits being claimed for them is neither here nor there. We won, and it was "we" because the concept of nationhood is real and binds people in a way that being European or part of a "world community" never will. It is the same historic and cultural bond which caused artificial political constructs of countries like Czechoslovakia, East Germany and the USSR itself to revert to the units with which their people felt comfortable.

Once a society exists, the point I made yesterday applies to that unit - be it a club, a village a county or a country, each of them can only operate through individual people. But that is only part of the picture. That illustrates how things work looking from the bottom upwards. For example, when it comes to plumbing I know very little, I am weak and poor in my knowledge, I have to look up the chain of knowledge and skill to find someone to help me when a pipe bursts. It is to my benefit if his business remains healthy because he will be available when I need his services again. But what about the top-down picture? What determines whether he is in a position to help me? One factor is the forces on him from further up the chain. He needs a supply of copper pipes, joints, solder and a blow torch, he is dependent on his suppliers and they are dependent on the suppliers above them. In some fields it is inevitable that the ultimate link in the chain is an importer who is reliant on finding a supplier overseas.

As Ukraine and other eastern European countries are finding at the moment, being reliant on another country for regular supplies of an essential product is fraught with risk. In principle it is no different from the risk of plumbers running out of copper pipe because no more copper can be imported, but the stakes are very different.

Part of the task of nurturing the strong so that they can help the weak is ensuring that the nation in which they operate is as self-sufficient as possible in the essentials of modern life so that they remain strong. If you import a large proportion of your food or of the fuels you need to live as you are accustomed to living, you are at the mercy of people who feel no bond to you other than the money you pay them. That is not to say we should seek to exist without reference to the rest of the world, of course there are many things we import which we cannot grow or make here. Life will not become difficult if kiwi fruit are in short supply, it's rather different if the scarcity is of wheat, potatoes or dairy products. But we should recognise that some things are far too important to be at the whim of people over whom we, and our government, have no direct influence.

Nurturing the strong is not just about charitable and voluntary acts, nor is it just about individuals acting individually. It is about realising that we all depend on others to help us in all sorts of ways. We cannot all set up our own businesses, most are employees. Although it is to state the obvious, it is worth stating - no one can be an employee without an employer, and no business can employ someone unless it is a going concern. We cannot all do plumbing, electrics, woodwork or car mechanics, most of us rely on others to provide those services when we need them. We cannot all grow the vegetables and fruit we need or keep a cow, two sheep and a pig in a spare bedroom, we rely on others to produce these things for us and make them available in manageable quantities.

Unless we are as self-sufficient as possible in essential goods and act to keep business strong and profitable the people who will suffer most are those who are most dependent on others. And this leads to one of the great ironies of modern politics.

Talk about reducing the size and influence of government, talk about encouraging self-reliance and self-sufficiency, talk about strengthening the nation rather than international bodies and you will be labelled "right wing". Once that label is attached people will be told by the current government and those who support them that you are concerned only for yourself and have no care for those less fortunate. Yet when we look at real life we find it is the strong who help the weak, the profitable who employ the unemployed, the skillful who teach the previously unskilled and the wealthy who fund the truly effective schemes for the poor.

The left offers nothing other than "I'm from the government and I'm here to help". It is not without reason that Ronald Reagan described that phrase as the nine most terrifying words in the English language. Government help usually doesn't help because it takes too much from those who cannot afford it and delivers it too expensively and inefficiently to too few of those who need it.

The politics of the left says a lot about the government helping the poor but government has not done, and can never do, one thousandth of what is actually done. The only sustainable way to help the poor is to provide them with work and to make available goods for them to buy to improve their quality of life and to do so at a price they can afford. Only the strong can provide those things and they can only provide them if the country in which they operate is itself strong. The beliefs that lead to me being labelled "right-wing" are nothing to do with selfishness and a lack of concern for others even less fortunate than me. They are about putting into place the only effective way of reducing poverty and making it less painful for those few who remain poor.

Nurture the strong, Part I

It is not by chance or out of a desire to promote selfishness that safety instructions on aircraft tell us we should put our oxygen masks on first before helping others. The instruction is a simple matter of practicalities, if you can breathe you will find it easier to do what you can to help those in difficulties. One consequence of the instruction, in extreme circumstances, is that delay in putting on your own mask could lead to the death of someone unable to put on their own. But that is very unlikely to happen, overall more good will be done by the strong ensuring their own safety first rather than risking both themselves and the vulnerable by seeking to be unduly altruistic.

As in aircraft, so in life. In order to help those unable to help themselves it is necessary for the able to be keep themselves fit. Sometimes that means physically fit, perhaps more often in the modern world it means financially fit. There is no money to pay benefits unless profits are made from which tax can be raised. Damage healthy businesses and you not only take money out of the pockets of those owning and employed by those businesses you also reduce the tax they pay and, therefore, the resources available for supposedly beneficial government work. This very simple point is beyond the understanding of the political left. Although they never acknowledge it, at the heart of their philosophy is the concept that it is better for everyone to have nothing than for some to have nothing and others to have something. That is what lies behind their pathetic assertions that Thatcherism encouraged selfishness and greed. They smile smugly while quoting those famous words "there is no such thing as society". Anyone who bothers to read the interview Mrs Thatcher gave to Woman's Own magazine in 1987 will see that she made a point with which no rational person could disagree. There is no creature called "Mr Society" with his own bank balance and limitless resources. It takes people to take action to help others in need. "Society" can't dive into a river and save someone from drowning, only a person can do that. "Society" can't pay for medicines, education and operations, only the money earned by people can do so. That is the point she was making - look to what you can do, don't rely on others in the belief some great green blob of goo in the corner with the label "I am society" round its neck will magically spring into action. Do what you can do, look after yourself and that way you have the capacity to look after others either directly through your own works or indirectly by paying tax to pay for services they need.

I never once heard Mrs Thatcher say we should be greedy and selfish. Many times I heard her say we (individually and as a country) should achieve as much as we can for ourselves in order that we are not a burden on others and that we have the resources to help those in difficulties. For those who believe no one succeeds without squashing someone else underfoot, that message is meaningless. They believe I can only become £100 wealthier by taking £100 from someone else, the concept of the creation of new wealth is beyond their imaginations. In the real world we know otherwise.

Of course, the strong will not help the weak if they feel no need to do so. All sorts of factors contribute to that feeling of obligation. Often it is referred to as a moral duty, something that should be done because the common standards of decency we have developed over many generations recognise it as the right thing to do. There is no need for the law to step in and force people to do it if they feel they should do it anyway. Yet we do not feel the need to sacrifice ourselves endlessly for every cause, we have to choose. The more remote or trivial the problem the less strongly that moral duty operates. At the same time we also weigh in the balance what it would cost us in time or money to help and reach a value judgment about whether we care enough about the problem to go to the amount of trouble required to help. If Aids charities working in Africa asked for donations of at least £100 they would almost certainly receive less in total than if they ask for £2 because we won't really miss £2 whereas £100 is a jolly good evening at Madame Fifi's Sauna and Hanky Panky Parlour. Some of us would never give a penny to a charity caring for animals while others would rank such a cause above the relief of human misery. We all have to form our own view and act according to it. Human character being as diverse as it is, the range of views different people hold means there are plenty enough to look after addled donkeys without the need to close soup kitchens.

The one essential prerequisite to being able to help others is possession of the resources to do so. The choice whether to do so simply does not arise if giving assistance is beyond your physical, mental or financial capacity.

How much are houses really worth?

If you want to know the value of something there is, in theory, a simple way to find out. Put it up for sale, advertise it as widely as you can and see what offers you get. If you do this with a television set or an ordinary piece of furniture you can be sure the offers will give a pretty fair reflection of the item's true value because there are no distorting factors to encourage anyone to offer more. Of course it is somewhat artificial to talk of any piece of property having a single true value because you can never expose it to sale to everyone who might want to bid or who might find some flaw in it that others have missed. Nonetheless, giving it fair exposure to a reasonable range of potential buyers will give you a very good idea of what it is worth in the real world.

An interesting twist of the recent credit boom is that it did not fuel price inflation in any field other than housing. In part this was due to increased consumer credit in the UK coinciding with increased availability of the very types of goods people wanted to buy on credit - flat screen tellies, computers, clever music machines and other electronic gadgetry. No scarcity of supply meant there was always another seller who would undercut anyone charging over the odds. Another popular purchase made with borrowed money was foreign holidays. The holiday companies knew an increase of demand was most profitably met by making more available rather than keeping supply static and trying to charge extra. In each of these fields low prices and readily available credit were only part of the story, keeping up with the Joneses also had an effect. Wayne had a flat screen telly, so Darren wanted one, Darren's mate Ryan couldn't be left behind, and so it went on. When it was only a few pounds extra a month on a credit card it seemed easily affordable.

In relation to housing, supply and demand operate rather differently. Obviously you can't turn on a tap in China and create loads of new houses and flats, equally obviously the decision to buy a house or flat involves many factors not relevant when deciding whether to upgrade your fridge. Once prices start spiralling upwards the whole thing becomes a self-fulfilling prophesy. You feel you must buy now because this time next year you won't be able to afford to, equally you see a potential profit over that same period and if you don't make that profit someone else will. Spending £5,000 of your £25,000 salary on interest seems less painful if you think you'll make a capital gain of a greater sum than you spend. We all know now that lending people four or five times their gross salary does nobody any favours in the medium to long term. Some of us have known it for many years because we saw the effect when it was done in the mid to late 1980s. Exactly the same happened then as now - lenders faced huge losses when borrowers defaulted and thousands lost their homes because they could not afford to keep paying such a huge proportion of their income in interest.

Every house and flat must have a true value, be it a precise figure or a bracket of a few thousand pounds. If that were not so there would be no talk of a house price bubble, but how can we know what the true value is and how much is artificial? It seems to me that the true value must reflect affordability. There are always ups and downs. Someone gets hit with a bit of bad luck and can't afford the mortgage any more. Banks take the occasional hit through a customer being unable to repay a debt. These are unfortunate incidents but are not signs of a troubled economy or of the country paying too much for houses. When the level of defaults increases to such a level that banks lose money hand-over-fist you know too much has been borrowed against too little security - the prices paid for houses and flats were not affordable and, therefore, those prices did not reflect true value.

One can analyse affordability in various ways, it seems to me there are essentially two elements to it. First, one has to ask what proportion of income can be spent on a mortgage loan without stretching the household budget so far that default is a widespread risk. Historically the banks restricted mortgage loans to two-and-a-half times the gross income of the main earner plus the gross income of any second borrower involved in the transaction and they required a minimum fifteen percent cash deposit. There is nothing very scientific about these figures, they just proved to be a good guide to what people could afford without stretching themselves too far. This just gives you a figure for how much people can afford to borrow, in other words it tells you what they can afford to spend. It does not tell you what they can buy with that money. The second stage is to look at what one might reasonably expect different people to be able to buy. There are starter homes - small flats and one-bedroomed houses in which one might normally expect to find young single people or young couples. From there you can look to modest two or three-bedroomed houses to which you might expect those young couples to move some years later when they earn more and need more space for children. Then there are larger properties with good sized gardens usually bought by those earning substantial incomes. However many categories of houses and flats you compile, the true value of each is what can be afforded by those buying that level of property for the first time.

For example, take a young couple earning £25,000 and £20,000 respectively. The amount they can afford to borrow is about £82,500 and they must put down at least fifteen percent of the price of their first property. That means they can afford a property costing about £97,000, call it £100,000. As a very general rule of thumb, in areas where those salaries are decent rates of pay for people of their age, £100,000 should be the true value of a modest starter flat. We don't have to go back further than about twelve years to find just that figure being the average price of reasonably sized nice one-bedroomed flats in the area of Islington in which I live. The same flats averaged over £250,000 in the Spring of 2007.

Then take a single doctor aged 30 who has just been made a partner in a GP practice and earns £50,000. He can borrow up to £125,000 which, with the required fifteen percent deposit, puts his purchase price at about £150,000. That is the benchmark for the type of property one would expect someone in his position to buy, perhaps a two-bedroomed flat in a decent road. I haven't designed these examples to relate to the environs of FatBigot Towers, it just so happens that £150,000 would have bought a very nice two-bedroomed flat in a quiet road this area as recently as about ten years ago. A good £350,000 would have been demanded in Spring 2007.

All sorts of other factors affect house prices. I am, however, sure that the strongest factor is the amount of money potential buyers have available to them. Something is only worth what someone is prepared to pay for it, and what anyone is prepared to pay is limited by the amount of money they have at their disposal. If, as I hope will be the case, banks and other mortgage lenders impose tried and trusted limits on the amount they are prepared to lend we should return to much lower house prices and, indeed, prices which reflect true value. They will be a long way below what they are today.

Savings and tax, a good start

Only Twelfth Night and already the battle lines are being drawn for a general election. And, for the first time, there is a sign that the Conservative opposition might understand the need for a fundamental change in the economy. Today David Cameron announced his plan for abolishing tax on the profits from savings for basic rate tax payers. It cannot be a stand-alone policy and we can expect a (coherent?) package to be outlined in the next few weeks and months. What I find encouraging about it is that it marks a shift from dependency on the State to dependency on one's own resources, just a little first step in a shift, but a shift nonetheless.

My view, for what it's worth, is that the vast majority of people are far more resourceful than they are given credit for and far keener to be self-sufficient than the welfare state acknowledges. Of course there are some idlers but not as many as we might like to think. One major problem we have is that the tax and benefits systems discourage individuals from providing for themselves, and one aspect of this is that it is hardly worth saving modest sums of money when inflation and tax reduce the value of what you have saved. If you receive 5% interest when your cost of living increases at 5% through inflation, your savings maintain their value; but the interest you receive is taxed at 20% so you actually receive 4% interest at a time of 5% inflation - you lose money. At the moment the rates of return on any normal savings account are well below inflation so the cost of saving is even greater.

The structure of economic policy should not be dictated by temporary circumstances. Just because interest paid to savers is currently low and inflation (not the bogus rates used by government but the real increase in the cost of living for real people) is high, removing tax on interest earned by standard rate tax payers seems fair. Were rates of return high and the rate of inflation low, there would be less immediate political pressure to remove the burden of tax on interest received. The real question is what is the right atmosphere for government to create. Should its policies encourage people to look after themselves or should it encourage them to rely on the State? The answer, of course, depends on where you stand in the political spectrum. I have no doubt that people are at their best and do more good for others when they are able to stand on their own two feet. Part of standing on your own two feet is being able to make the best provision you can for the future and there is no escaping the fact that saving money is the only means we have to provide for the future.

There are, in my view, two aspects to saving - the short term and the long term. The short term provides for the things we want and/or need over the next year or two or five, the long term is all about pensions. In all the fuss and feathers surrounding the recession the pensions crisis has rather fallen into the background. That is understandable while people are losing their jobs and homes, but the problem is not going away. In fact is has become even more serious with the stock market losing almost a third of its value in 2008. I will return to pensions in a moment because saving is about far more than pensions. It is about realising that the old sayings are correct - a penny saved is a penny earned, many a mickle makes a muckle, look after the pennies and the pounds look after themselves, never a borrower or a lender be. Living within your means and saving what you can to make things easier in the future are, I have no doubt, things that improve the quality of life. It is for each individual to decide whether they get greater satisfaction from having something they cannot afford now and paying for it twice-over by putting it on a piece of plastic, or waiting a while to have a fridge with two doors and buying one only when they have enough in the bank. Encouraging saving by removing tax on the interest earned might help more people realise that their lives will not end if the big flat screen telly arrives next year rather than this. It won't have a dramatic effect, but it sets the scene for greater self-sufficiency without the dead weight of credit interest.

The long term is perhaps even more important. My opinion of private pensions was cemented a long time ago. I know of people who worked in a small factory in the 1960s and 1970s who were encouraged by their employer to start individual pensions funds. The employer agreed to match the contributions the employees made. A number of people started saving for the first time in their lives. Most retired many years ago and received a small but welcome boost to their state pension, for some it was just £15 or £25 a month but that made a big difference when their only source of income was a state pension of £250 a month. I spoke to some of them about it and what I heard time and again was regret that they had not been encouraged to save years before. It was not so much about the extra money, it was about the extra money having come from their own efforts. The state pension was taken for granted, the little extra was something they looked on with real pride. You see, they did it themselves. They had help from their employer but that was part of their remuneration it was not a gift, they actually saved the money and were able to provide something extra for themselves.

We hear a lot from the current government about how well pensioners are provided for. They have the basic state pension, a minimum income guarantee, a free television licence, a winter fuel allowance, free bus travel and discounts on this and that. Talk to the pensioners themselves and they will tell you they paid National Insurance all their working lives in order to get a decent pension and instead they are at the whim of government. What will the winter fuel allowance be next year? Will I have to pay the television licence myself now that the government has run out of money? Will my state pension be increased in line with the increase in my food and gas prices? Will I get anything more when the Council Tax goes up next year? And so it goes on. Much of a generation is now at the beck-and-call of the Treasury because they were given no reason to save and provide for themselves. Of course they were told they were saving and providing for themselves through their National Insurance Contributions. No one told them those contributions did not go into a big pension fund but were spent by government just like all other tax revenue.

The need for people to save for their old age is more pressing now than it has ever been. Tax relief on pension contributions has existed for many years and most of those in so-called middle class occupations are involved in a private pensions scheme of some sort. As always, it is those at the bottom of the economic pile who are at greatest risk. The time is approaching, if it has not already arrived, when the state pension simply will not provide enough. Even those on modest earnings will have to have their own private pension in order for old age to be bearable. One might think that a tax break on savings will not affect the position because there are already tax breaks on pension contributions. The problem is that too few people are making private pension provision because there is no culture of saving and they hear the constant message "the government will provide".

To my mind an awful lot of what we do as a country depends on the general atmosphere created by government. When they create an atmosphere of increased wealth people act as though they are wealthy. When they create an atmosphere of terrorists and paedophiles lurking in every doorway people submit to extraordinarily oppressive laws to combat the perceived threat. When they create an atmosphere of more government being the answer to every problem people abdicate personal responsibility and rely on the perceived safety net. The brutal consequences of poor Gordon's doomed boom give an opportunity to change the atmosphere. David Cameron's proposal to relieve standard rate tax payers of the burden of losing 20% of the interest they earn on savings is a step in the right direction. It tilts the balance a little towards self-sufficiency. It gives a little encouragement to provide for yourself without your efforts involving an overall loss after inflation. A small step in the right direction.

To create or not to create, that is the question

So, poor Gordon is going to create 100,000 new jobs, or so says the BBC. What caught my eye was the way the headline to the BBC's article is written, it says poor Gordon is `to create 100,000 new jobs', so I then looked through the article to find where that quote came from. Gordon is actually quoted as saying "I want to show how we are able ... to create probably 100,000 additional jobs over the next period of time ..." So, he did not say he will create any new jobs, he did not commit himself to the figure of 100,000 and everything he did say is hedged by the meaningless evasion "over the next period of time". Well done BBC, an utterly hopeless piece of hack journalism.

Leaving aside the incompetence of the editor who allowed the article to appear in that form, I want to look at what poor Gordon actually said. If I understand it correctly, his plan is to pump money into public works projects to provide continued employment for builders who might otherwise lose their jobs. In other words, he is not creating vast numbers of new jobs he is merely preserving jobs which currently exist. No doubt some additional people will be taken on but the clear thrust of the plan is to retain jobs not create new ones. In his usual confused and misleading way poor Gordon uses the term "additional jobs" without saying what they are additional to, the only explanation that makes any sense is that they are additional in that those employed to refurbish schools and hospitals would otherwise be on the dole yet that is hardly the meaning he hoped to convey.

The other aspect to the plan is to "invest" in various eco-wibble projects, such as research into electric cars and wind and wave power. It's hard to see any significant number of jobs being created in these fields because research is not very labour intensive. How, I wonder, will this "investment" take place?

Car manufacturers are already putting a lot of time and money into researching electric cars and they do so as people who know a bit about making cars. What can the government do to expand or speed that research? Very little, I would think. They do not have the wherewithal to set up their own research facilities so their involvement can only be by way of funding research which is currently paid for by the existing manufacturers. If I were in charge of Jaguar's current account I would be delighted to hear that government wants to pay my company to do what it is currently doing at its own expense. I would be faced with an overwhelming temptation to announce that research has to be pared-back due to the recession in the expectation that the UK taxpayer will then hand over vast slabs of cash to allow it to continue. How many jobs will be created by this sort of exercise? Probably very few, if any at all.

If it really is to be an investment rather than yet another example of pouring money down the drain, the government will look for a return, perhaps by way of interest or by having a defined right to share in the proceeds of future exploitation of the new technology. The task for the motor manufacturers will be to assess the cost of getting the government involved. If government wants to big a return, the companies only have to make clear they are not willing to play and the whole scheme collapses - unless the government then capitulates and gets such a feeble return that the money is, in effect, a gift. Poor Gordon's problem is that he has absolutely no bargaining strength. Couple that with his solid track record for throwing good money after bad and we get a pretty good idea of what will come of this "investment".

Then he wants to play with windmills and waves. Again, a great deal of research is already taking place into wind and wave power, most of it paid for by the taxpayer. What exactly does he have in mind? More people employed to do the same work as now? That's the thing about research, it can only move as fast as it can move. Ideas must be tested on paper, then on models then in real life and at every stage the results must be analysed and adjustments made to try to improve the outcome. You can't just say "here's an extra £1million, now you can produce an efficient windmill" because it is not a lack of money that causes current wind and wave power technology to be expensive and only modestly efficient. What is needed is time and an awful lot of trial-and-error. Of course extra money can allow additional experiments which might speed the path to a final product, but the difference it can make is only marginal.

Perhaps the most interesting thing about the plan is the money involved. It is said to be a bringing-forward of £10billion of expenditure. In other words, it's in the government's budget for future years but will be spent now rather than in 2010, 2011 or whenever. It seems to follow that the budget will be reduced in those future years. If this is so, spending it to preserve jobs in 2009 will simply result in jobs being shed later. That's a curious definition of "additional jobs".

£10billion looks like an awful lot of cash, probably because it is an awful lot of cash. But how much does it really buy? Say a school is to be refurbished to current Building Regulation standards. Perhaps it will need new windows and doors, new insulation, rewiring, new plumbing and all the rest of it, including upgrades to old language and science labs. Just the materials will cost a lot of money. New windows and doors for a single large classroom might easily cost £5,000, the materials for an average sized secondary school could top £1million in the blink of an eye. New roads cost millions per mile just in materials and plant hire, resurfacing is cheaper but still very expensive. Are the preserved jobs of the suppliers of materials to be included in the count? If so, how is anyone ever going to be able to tell whether those jobs would have remained safe even without this new business. No doubt the government will claim credit for keeping all sorts of people employed when their jobs were never under threat.

If £10billion is to sustain 100,000 jobs that is just £100,000 per job, yet that figure includes not just wages but materials too. It really is hard to see how 100,000 jobs can be either created or preserved for any significant period when the budget only allows £100,000 for the combination of each job and the materials that job requires. In any event, once a renovation is finished or a road resurfaced the jobs involved in that project necessarily cease. So what is "the next period of time"? Of course it is anything you want it to be. Logically it should relate to the bringing-forward of the money. So, if 2011's budget is spent in 2009-10, the relevant period is two years; if 2011's budget is to be spent in 2009, it is one year. But it won't be looked at in that way because then he would have to admit that he is planning lay-offs in 2011. And what if Joe the plumber is retained through the whole of 2009 and 2010, does that count as two jobs, one for each year? Will he have to be formally laid-off between projects so that he can be counted twice? In the world of statistical jiggery-pokery all sorts of tricks can be played to make it look as though the impact on employment is greater than it really is.

It's such a lovely catchy headline. Good old Gordon, not only saving the world but now creating enough jobs to keep the adult population of Reading employed for a year. His own explanation shows that he is planning nothing of the sort. He is hoping to cushion the effect of recession by keeping people employed now in the hope that by the time these works have been completed the economy will have picked up and their jobs will be safe again. I have no huge objection to that (although cushioning recession inevitably involves a cost for future years), but I do wish both the government and the BBC would tell the truth. This is nothing to do with creating jobs and it is nothing to do with additional jobs (in any syntactically accurate sense of that term). For poor Gordon I suspect it is really about trying to hide the true damage his decade in the Treasury has done.