The Bank of England created the present consumer credit and mortgage boom; now it must decide what to do about it. The minutes to the last meeting of the Bank's Monetary Policy Committee reveal mounting concern over ballooning consumer and mortgage debt. Official figures published yesterday, showing that householders borrowed a record £10.7bn last month - total borrowing is now 14 per cent higher than a year ago - will set alarm bells ringing as never before and make a November interest rate rise all but inevitable.
The question for members of the committee has become not so much whether to raise rates, but whether a quarter point is any longer enough to choke off a consumer credit boom which is plainly out of control. The policy dilemma is the old one; the Bank of England desperately needs to check the credit and housing bubbles before they expand any further and end in tears, but too violent an application of the brakes risks halting the still nascent business recovery in its tracks.
Business leaders have only very recently regained the confidence needed to start investing on a significant scale again. That confidence would melt away like snow in summer if the consumer stopped spending. There's been a lot of sanguine talk from the Treasury about the long term consequences of the credit and mortgage booms, but the bald statistics make for grim reading.
A rise in base rates from the present 3.5 per cent to 5 per cent would add more than £300 a month, or £3,600 a year, to the servicing costs of a £250,000, interest only, mortgage. Spread across the population as a whole, the effect would be to deal a hammer blow to disposable income and consumption. Of course, no one is suggesting that short term interest rates would need to rise to 5 per cent in one go. A series of quarter point rises over a period of time would have a less immediate effect on consumption. None the less, the long term consequences might be the same in the absence of compensating earnings inflation.
Neither the Bank of England nor the US Federal Reserve, which has been applying an even more extreme version of low interest rate medicine in attempting to keep the economy going through the business downturn, have any experience of conditions like these. Previous consumer credit booms have been easier to read, and in any case were nearly always created for political purposes. With the ballot box beckoning, interest rates would be cut sharply to create a feel-good credit boom. Prices would then rise, policy would be tightened again, and before you knew it there would be a bust. The economic cycle was as predictable as that.
The present consumer credit boom is quite different. Whether intentionally created or not, the effect has been to save the wider economy from the consequences of one of the worst business downturns in living memory. Nobody has any idea how this experiment in economic manipulation is going to play out. The worry is that the only thing achieved is pain delayed. Mervyn King, Governor of the Bank of England, has highlighted the nature of the problem on a number of occasions now. The longer the credit and housing booms are allowed to continue, the greater the danger of a nasty demand shock further down the road when they come to an end, as eventually they must.
Has the Bank of England already left it too late to act? Treasury officials point to the very low servicing costs of debt, low unemployment and the still relatively healthy shape of most household balance sheets to argue that there is not yet any cause for alarm. We'll see.
BOC Group is one of those big, boring companies that scarcely ever gets written about, let alone hits the headlines. Tony Isaac, the chief executive, struggles manfully to make his voice hear, but even he would recognise that industrial gases is not everyone's idea of a glamourous business.
Today's headlines, on the other hand, are of a type he could well do without. BOC has become the latest British company to fall foul of the American penchant for illness related litigation - in this case Parkinson's disease. So little attention is generally paid to BOC's affairs that scarcely anyone noticed the company has become the object of 80 different lawsuits collectively representing more than 6,000 plaintiffs.
All of them are former welders, and all of them believe there is a link between the welding rods supplied by BOC for use with its oxy-acetalyne gases and the Parkinson's disease that a small number of them suffer from. Up until Tuesday night, BOC had managed to see off all comers, but now one of them has succeeded. A jury in Madison County, Illinois, has awarded Larry Elam, a former welder $1m in damages after agreeing that the Parkinson's disease he suffers from was caused by inhaling manganese fumes generated from BOC welding rods.
According to the investment bank HSBC there are potentially 700,000 welding plaintiffs in the US. Plainly not all of them will sue, but even if only a tenth were successful, the costs to the industry as a whole would be a crippling $70bn, making this the most costly industrial injury case since asbestosis. BOC is confident it will defeat Mr Elam on appeal and insists that there is no medical evidence to link manganese with Parkinson's disease. None the less, there are quite enough other health related problems caused by welding fumes to make this a serious matter of concern to the company and its investors.
Paradoxically, the large number of cases already being brought are a direct result of the tort reform put in train to address the problem of America's burgeoning litigation culture. All these cases were filed ahead of a change in the law to prevent non residents bringing cases in plaintiff friendly states. Nor will the defendant any longer have to rely on the plaintiff's medical evidence, as in the past, to defend itself in court. In combination, the two reforms will make it much harder to bring cases like those of the welders.
However, they don't help with the 80 cases that beat the deadline, and if any of them survive appeal, there's no doubt that the industry has a major problem on its hands. Given the choice, Mr Isaac would have much preferred to stay dull and boring.
Gordon Brown's refusal to commit himself to a date for the pre-Budget report is getting beyond a joke. The Chancellor's need to delay the statement beyond its normal, early November slot, was understandable, given the arrival of his newly born, but by failing to commit himself to a later date the Chancellor is not only inconveniencing everyone with any interest in economic policy, he's also creating confusion in the markets and opening himself up to allegations of prevaricating in the hope that in the meantime the numbers might improve in his favour.
In nearly every other developed country in the world, the timing of such set piece policy statements is known months, sometimes years in advance. That the Chancellor is allowed to shift the date around at will is an intolerable luxury that reflects badly on the Treasury's reputation for professionalism. With the economy apparently recovering in leaps and bounds, the suspicion is that the date is being deliberately delayed so as to make the Chancellor's forecasts look more credible. Exactly the same thing happened with the Budget earlier this year, the timing of which seemed deliberately chosen to coincide with a favourable outcome to the war in Iraq.
The result is that weeks on end have to be set aside by interested parties because any of them might be the one the Chancellor eventually alights upon. This year's pre-Budget report is particularly sensitive as it will contain news of the Bank of England's new inflation target to take account of the shift to the European measure of price inflation. Is the new target to be applied before the Monetary Policy Committee's December meeting, or after? We should be told.Reuse content