Outlook: Bank ducks challenge of taming house prices

Goldman Sachs; Corus withdrawal
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The Independent Online

How much further will house prices have to rise before the Bank of England's Monetary Policy Committee summons up the courage to to act? Minutes published yesterday of the last MPC meeting two weeks ago display an almost complacently relaxed view of the latest acceleration in house prices. Only one member of the committee, Andrew Large, seems to take the view that monetary policy should be used to take the steam out of the housing market. Conscious of their remit to meet the inflation target and that's all, the rest seem minded to adopt a wait and see approach. I'm more and more of the view that this is a mistake.

How much further will house prices have to rise before the Bank of England's Monetary Policy Committee summons up the courage to to act? Minutes published yesterday of the last MPC meeting two weeks ago display an almost complacently relaxed view of the latest acceleration in house prices. Only one member of the committee, Andrew Large, seems to take the view that monetary policy should be used to take the steam out of the housing market. Conscious of their remit to meet the inflation target and that's all, the rest seem minded to adopt a wait and see approach. I'm more and more of the view that this is a mistake.

To be fair, the MPC cannot be accused of being entirely blind to the dangers of the housing boom. To judge from the minutes, there was plenty of discussion at the last meeting of the impact of the housing market on consumption and aggregate demand. Nearly all members of the MPC have at one stage or another sounded a degree of alarm over strongly rising house prices.

Yet there is a tendency to think this a phenomenon that in itself the MPC doesn't have to worry about. It has become a mantra of central bankers that monetary policy should not be used to control asset bubbles, only to deal with their consequences. The problem I've got with this argument is that the housing boom is largely the result of the exceptionally loose monetary conditions the Bank has itself created these past four years to keep recession at bay. It therefore ill becomes the MPC to wash its hands of the consequences, which are as socially divisive as they are economically dangerous.

The majority of the MPC took the view that next month's Inflation Report would provide a better opportunity than the minutes to evaluate the mixed economic news, the reasons for the renewed pick up in house prices, and their relationship with household spending and borrowing. So what's the Bank of England going to tell us? That actually the housing boom doesn't make much difference to consumption and demand and therefore doesn't need to figure in policy?

The more house prices rise, the more people have to borrow to buy, which in turn makes their spending highly vulnerable to any increase in interest rates. As things stand, inflation looks tame, but it will not ever be so. If the Bank doesn't act against the present boom, the later bust might be a lot worse. On one thing the MPC is right. Another quarter point on interest rates will make no difference to the housing market at all. The last two quarter point increases failed to have any impact, so there is no reason to believe another will do the trick.

Instead, the Bank needs to engage in shock therapy, even if this means lower growth than otherwise and a persistently below target inflation rate. The hoped for soft landing in the housing market looks less likely by the day. The problem needs to be gripped now. Even Gordon Brown, the Chancellor, seems to recognise it, to judge by yesterday's comments, yet he's set the MPC up in a way that makes it difficult to do so without breaching its remit to meet the inflation target.

Goldman Sachs

The story of Joyti De-Laurey's £4.5m theft from her overpaid and absent minded employers at Goldman Sachs has prompted much tut-tutting in the press over the supposedly unique culture of greed and hypocrasy that is said to exist in one of the world's most secretive and successful investment banks.

The reality is that Goldman Sachs has become pretty much like everywhere else in the City since its stock market flotation three years ago. Although more profitable today than it's ever been, Goldman Sachs has lost the culture of excellence, pursued with all the passion of the zealot, that made it so special in its heyday as a workaholic partnership.

In its place is the same money driven cynicism that exists throughout the City. Time spent at Goldman Sachs continues to look good on the CV, but otherwise there's little to distinguish the place from Morgan Stanley, UBS, Deutsche or any of the other big Wall Street and City investment banks. Goldman Sachs today is on the same merry go round of interchangeable traders and corporate financiers as everyone else. The only determinant is the size of the bonus.

More than half the former partners, enriched beyond measure by the stock market flotation of three years ago, have since left, and staff turnover throughout the bank is higher than its ever been. There's nothing left remarkable about Goldman Sachs. The De-Laurey heist, if that's not too complementary a description of her fraud, is less a commentary on Goldman Sachs than on the City as a whole.

In terms of pay and lifestyle, those who work near the top in the City have become almost wholly divorced from reality. Most of them are decent, clever, and hardworking enough, but they are not celebrities and few can claim the uniqueness of talent, creativity and innovation that distinguishes a top rock star, sportsman or entrepreneur from the pack.

Indeed, the problem the big investment banks have got is that they are now quite widely perceived not as wealth creators, but as skimmers, hawkers and worse. Perceptions have yet to recover from the disaster of the dot.com bubble, which was largely created by investment banks, or the scandals of corporate America, again widely blamed on Wall Street's culture of greed.

While the rest of society suffers in the grip of a savings crisis of monumental proportions, the likes of Goldman Sachs bizarrely seem to grow their profits and bonuses through thick and thin. The money making trading strategies of the investment banks and hedge funds undoubtedly made the trough of the bear market a good deal worse than it needed to be. Never mind the theft perpetrated by De-Laurey on Scott Mead, the main victim of her crimes; what about the destruction of wealth visited on our pension funds in pursuit of Mr Mead's reputed £100m fortune and that of other City high flyers?

Much as the investment bankers would have us believe otherwise, wealth is not magicked out of nowhere. It is funnelled from one set of pockets into another. As gatekeepers to the world's financial markets, the investment banks are uniquely placed to ensure a one way flow. De-Laurey's dishonesty has performed one public service at least - to lift the lid on a world where money is in such abundance that it seems to have lost all meaning.

Britain is much better off with the City than without it. The wholesale financial services industry is today such an important part of the UK economy that we'd be left bankrupt if it were suddenly removed. Yet there is a considerable, socially divisive downside. Hard though it is for a business whose whole raison d'être is the pursuit of money, the investment bankers must tame their avarice or beware the backlash.

Corus withdrawal

The Russian bear has made a tactical withdrawal ahead of today's annual meeting at Corus. Realising he couldn't win, Alisher Usmanov, the Russian industrialist who has been stalking the Anglo-Dutch steel maker, last night withdrew his nomination for boardroom representation. But although the battle is lost, the war is far from over. Mr Usmanov, one of Russia's biggest steel tycoons, promises to continue lobbying shareholders for more root and branch change at Corus than the present board is proposing. He still hopes eventually to get his man on board.

I don't rate his chances. Whatever Mr Usmanov says, the suspicion remains that if he gained management influence it would be used for his own commercial advantage rather than for the pursuit of general shareholder value. If Mr Usmanov reckons he can run Corus so much better than the present management, he should make a bid and reap the rewards. As things stand, he's an unwelcome distraction.

jeremy.warner@independent.co.uk

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