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Last week Mark Carney did his best to re-assure us. “The markets are too optimistic,” he said, or words to that effect. Not only central bankers, but economists, and even the analysts whose reports often determine market movements, can seem out of touch; unaware of what is going on in the real world. There are reasons to think that they are not getting it again; that the Bank of England is grossly underestimating the speed with which it may have to raise rates.


We often hear about economists who correctly predicted the crisis of 2008. Now they are feted, held in reverence, seen as objects for worship. But in one particular respect the media and economic institutions overlook something rather vital, so wrapped up are they in their small world. What they overlook is that in 2007/8 lots of people – ordinary folks down the pub, or watching their kids playing football on Saturday mornings, chatting to friends – often did pinpoint  what was wrong with the economy, and why it was so dangerously exposed. I attended a network meeting in the summer of 2008. This was a meeting of media people. I was the only economics writer present. At that time it was obvious things were going wrong with the economy, but one person laughed it off , another – a PR women who had no real deep rooted knowledge of economics – said she thought that once house prices started to fall the entire precipice upon which the economy was based would collapse. She said that she thought it would be like 1929, all over again.

But she was not alone, lots of people thought likewise. It was the professional economists and analysts who remained optimistic. I can remember attending a press event at the National Institute of Economic and Social Research earlier in 2008 and feeling gobsmacked as this esteemed group told us that it thought recession was unlikely. I was not the only person surprised. I can remember chatting to a journalist from the ‘Guardian’ afterwards, and she was just as puzzled by it as me.

When the Queen asked: “Why didn’t anyone seeing it coming”, she should have perhaps asked why was it that so few economists saw the crisis coming when so many non-economists and many in the media did?

Of course, very few got the details right. Nouriel Roubini is the only economist I am aware of who got close to detailing the way in which US sub-prime and mortgage securitisation would backfire, and the extent of the crisis that might follow as a result. But, in broad terms – that is to say a perception that things were very wrong and serious problems would result – I think a higher proportion of ordinary people got it than those who were supposedly more qualified.

I think the issue here is that economists were out of touch. They didn’t understand the extent to which individuals had become reliant on their house always going up in value – the extent to which households were only able to manage their finances via leverage.

In 2008 I read that there was no crisis in the making, no consumer bubble, because growth in consumer spending had been modest since the beginning of the 20th century. What these rosy forecasts overlooked is that a bubble in consumer spending had occurred in the late 1990s, but there had been no correction. Instead, leverage had propped things up, which is why things became so very nasty when credit was squeezed and house prices fell.

It is happening again and once again I see complacency about the dangers of a new housing bubble. The same economic writers who laughed off talk of a bubble in 2008, are doing so again. Mark Carney assures us he won’t let a bubble develop, but I think he fails to grasp the British psychology and how inclined Brits are to jump on property bandwagons.

Mr Carney says rates won’t rise soon; that the City is too optimistic. I am not so sure. I think that right now millions of Brits, who are not on the so-called housing ladder are panicking; they are desperate to climb on its first rung. Those who are already ascending are desperate to climb ever higher. Record low interest rates, governments initiatives such as Help to Buy, and a faith that the central bank will never opt for what people are calling a suicide rate hike has created a very dangerous cocktail. I can smell this cocktail down the pub, and at parties. Mr Carney has not yet caught a whiff.

I think we will see a rise in construction, which will lead to falling unemployment, and rising wages. At the same time inflation will fall over the year. House prices will rise and they will rise quite a bit. The lesson of the early noughties is that when house prices look like a bubble, central banks need to up rates.

If, as a result of rising house prices, more construction, falling inflation and maybe rising wages we see a growing economy, leading to more investment, and more technological focused economy, then the negative aspects of a housing boom may not matter so much. I fear that instead we will see re-run of the noughties.

These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees


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