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When the credit crunch first bit just over a year ago, economists queued up to forecast that house prices would fall. Unemployment would soar, foreclosures would mount and no banks would have any money to provide mortgages for new buyers. The result, they all agreed, was that prices were likely to drop by as much as 30 per cent.
Not for the first time, the economists were wrong. House prices quickly fell perhaps by as much as 15 per cent from their peak but for most of this year they have been clawing their way up again: on some measures, they are now back where they were 12 months ago.
So stable is the situation that when the Financial Services Authority yesterday announced proposals which would put more discipline and restraint into mortgage lending, it was perhaps inevitable that the more excitable among us immediately saw this as the regulator trying to put a brake on the housing market. The truth is perhaps more prosaic. The regulator's move is something which has been working through the system for some months and is part of a much wider plan to make the economy more stable in future by cutting back on individual levels of debt. The plan is never again to be fooled into thinking we are doing all right when in fact the "growth" was largely driven not by our ability to earn more but by our willingness to increase the level of debt on our credit cards.
The bigger point though is that house prices are not the only good sign: for most people and most businesses the recession has not been as dire as predicted. Some sectors have been devastated - house building, commercial property, much of the media and the motor trade have rarely seen it so bad - but in many ways they have taken the flak for everything else.
As a result, unemployment has grown neither as far nor as fast as expected. Similarly, company profits have fallen, but nothing like as dramatically as they did in the recessions of 1992 and 1982. Spending in shops has held up well. We read every day about the appalling state of the public finances but taxes have not gone up. The stock market has recovered, inflation has stayed low and, because of lower mortgage rates, people who are still in work actually have a bit more money to spend. The next set of economic statistics from the Government, due any day now, is expected to confirm that the economy began to grow again in the last quarter. If this is recession, one almost hears people say, bring it on.
The trouble is that when something seems almost too good to be true - as all this does - then it probably is. There is no doubt that things look much better than they did 12 months ago but that is a characteristic of several severe depressions which have gone before. They lure you into thinking that the worst is over then, when you drop your guard, they floor you with a sucker punch.
Everyone has heard of the Wall Street Crash of 1929. What they don't realise is that in 1930 shares recovered 80 per cent of the ground they had lost on Black Wednesday and sucked many people back in. But they then collapsed completely and plumbed to their real low in 1932, by which time everyone was wiped out.
Closer to home, the financial crisis of the Seventies, which has many parallels with today's events, also gives no cause for comfort. After years of debt-fuelled and frothy boom, the three-day week and the oil price shock in 1973 and 1974 pushed the economy over the precipice. But in 1975 the stock market doubled between January and Easter: people thought the worst must be over. The reality, however, was that in 1976, inflation soared to 20 per cent and the government had to go to the International Monetary Fund for a bail-out. Scores of companies went bust. The cuts in government spending were the most brutal since the Twenties. Real recovery did not come along till the Eighties.
Now people so want to believe the worst is over that no one wants to hear how it could all go pear-shaped again. Just as two years ago no one was prepared to listen to those who said the boom was out of control, so today no one wants to be told that this recovery might turn out to be a false dawn. Arguably we are beginning to make those same mistakes again - with bankers' bonuses just the beginning.
What worries the Cassandras like me is that the fundamental economic problems have been parked, not solved. The Japanese have a proverb which says that if you put rotting meat in a freezer, you don't cure the rot, you simply kill the pong. So it is with our banking system. In spite of all the new capital that has been raised and the bail-outs from government, the International Monetary Fund reckons the Western banking system is not even halfway towards covering its potential losses. It reckons the world's banks, with RBS and Lloyds among the worst offenders, may need as much again - another similar-sized bail-out - before they can be considered sound.
We don't notice this bad smell because the Government's insurance of toxic assets in effect puts them all into deep freeze. The banks refuse to pull the plug on non-performing loans because they don't want to turn that loan into a loss they can't ignore. The Government goes along with this because the last thing it wants is another financial meltdown this side of the election. Both might get away with it - in which case the Cassandras will have been proved wrong.
That indeed is what one must hope for. Whether it is the way to bet is another matter.
Reader views (4)
This recession so far is not as bad as any of the previous Ive endured for the majority population, that is, however I cant help feeling that much is either being ignored or otherwise hidden on the basis of being 'positive' ie the unemployed are pretty much swept aside these days as being irrelevent to either the general public who see them as parasites and the government who pretends there is no problem. Dito inflation, the less you earn, then the higher your personal inflation rate is where all your money is concentrated on necessities, however the inflation rate stats tends to cover the spending patterns of the well off, ie new cars/computers/TV/Flights etc are cheaper. NO, the big problems are still to arise and have just been disguised.
- Steve, London UK
We're living in a fake economy at present, backed by pretend money (printing) and huge borrowing. These are unsustainable. There is no business plan on the table to aid recovery. When the fiscal stimuli stop, the economy goes to hell in a handcart. Government spending will stop because we will have run out of money, full stop.
We are living in a fools paradise at present. A lot of this has to do with house prices. They need to unwind by 50%. Please stop buying houses that are way overpriced.
- Np, Cornwall, UK
You say that taxes have not gone up - it depends upon your definition of a tax. Certainly anything provided by government is going up in price, or anything that is a monopoly backed by government 'regulators' is. Just look at the massive recently announced increases in fares and Congestion Charge in London. And one of the reasons used is 'the recession'. There is no inflation in most goods sold by private businesses in the high street. So government is taking it away instead. And unemployment is a lagging part of recession. London's economy is certainly not breathing easy.
- Damian Hockney, London, UK
It is reassuring to read an article where the writer recognises the ferocity of the 73-75 so-called oil price recession. Few remember that domestically it started with the Barber-boom, credit availabilty freed-up, mortgage lenders 'deregulated' and house prices went ballistic....in percentage terms much greater rises than have been seen inthe boom periods of the last 40 years. The Ft index fell to 165 (I think) and so on ad infinitum. Without the help of the Wizard Brown, life went on even if the lights went out. Slowly things got back to 'manageable,' interest rates went sky-high, wage bills rose at the rate of 20% pa. The government sought to manage prices, incomes and introduced eveything but rationing. The field was marked out for Maggie Thatcher's ploughing in the early 80's It strikes me that two 'drivers' are strangely absent from the current situation: With the exception of the Postal workers, who appear to be caught in a time warp, the blue collar labour force has at last realised that any job with reasonable wages is better than no job with no wages; and the white collar workers who are lined up for culling are far too reasonable to make a fuss. Secondly and perhaps more importantly, the response on the 'authorities' to economic advisity has been to slash interest rates..whilst this has hurt the 'oldsters' , it has been a godsend to the mortgage payers..and other borrowers. I can't help feeling that interest rate policy been mismanaged for the last 40 years?
- Sam Dickins, London
