In praise of Gordon Brown

Yes, he did do one good thing:

There is at least one thing we have to thank Gordon Brown for; he resisted pressure from Tony Blair to take Britain into the euro. In one of the lorryload of documents the Treasury produced to assess Brown\’s \”five tests\”, there\’s a brilliant analysis of what European interest rates would have done to the economy. The scenarios are a near perfect description of what happened to Ireland – a housing and development boom of unprecedented velocity followed by a bust of equally devastating magnitude. It might be argued that the UK has conformed to both, but just as slightly tighter policy in the run-up to the crisis perhaps saved us from the outer extremes of the boom, ability to counter the bust with loose money and devaluation has eased the pain of the comedown.

If we\’d gone into the euro we would have gone the way of Ireland.

The single currency has its advantages: the single interest rate not so much. And especially the single interest rate in an economy that has a) much higher levels of house ownership and thus mortgages and b) has mortgages which tend to be on floating rates rather than fixed as in many places on the continent.

The combination of those two means that any specific interest rate change has much greater effects in the UK/Ireland than it does in places like, say, Germany, which has a much larger rental sector and fixed rate mortgages on those privately owned.

Yes, I know, I don\’t want to join the euro at all: think its very existence is a terrible idea (and can see the effects of being locked into it here in Portugal) but for the enthusiasts for joining. Please do try to understand that until these features of the UK housing market are changed, whatever the other benefits you perceive, euro membership is simply insane.

6 thoughts on “In praise of Gordon Brown”

  1. I’m a bit puzzled. I’m pretty sure you’ve said before that markets set long-term interest rates, not governments. So why would the price of housing be affected by changes in the short-term government interest rate?

    Tim adds: Precisely because of the make up of our mortgage market. Floating rate mortgages are best thought of as a 30 years times 12 months series of one month loans (in terms of the interest rate they carry) rather than one 30 year loan. Thus precisely because we have floating rate mortgages short term interest rates influence the price of housing, in a way that they don’t in places which have 30 year fixed rate ones…..where it is long term rates that matter.

    Much more important than the influence on the price of housing though is the effect of a change in those short term rates on disposable income and consumer spending. In a floating rate system a change in short term (or even long term) rates changes the disposable income of all who have a mortgage: a significant percentage of the population. In long term fixed rate systems, changes in the mortgage rate only affect at the margin: those on the verge of buying and or selling. Thus the effects of an interest rate change are far larger in floating rate systems than fixed rate: both booms and busts are exaggerated. Which is rather why you don’t want to have an economy with a floating rate system locked into a single interest rate system with a fixed rate one.

    Hey, even G. Brown got this point, as his attempts to encourage long term fixed rate mortgages showed.

  2. Not only does our obsession with unearned capital gains from the houses we live in preclude
    Euro membership , it is also prevents the use of Keynesian demand management as cheap interest rates pump up inflated house prices (really land values) before they inter-act with the production/consumption loop.
    The real question about Brown is: why did he as someone who as a young MP shared a Land Tax platform with Dave Wetzel ,President for life and possibly beyond ,of the Georgist Labour Land Campaign and who prefaced his first budget with ” I will not allow house prices to get out of control and put at risk the sustainability of the recovery” (1997) get deflected from his first instincts? Blair?

  3. But I still don’t understand why it would change the price of a house? The price of a house is presumably the flow of income (imputed) you get from living in it over its lifetime, not one year? So a 0% interest rate for 1 year, when you can see long-term rates are 5% (say) would make next to no difference, wouldn’t it?

    Tim adds: But the 0% interest changes the NPV of that future value.

  4. I would think it more likely we didn’t go into the Euro because Labour risked losing the election that followed. They didn’t want a referendum because they would lose it and were never going to force us into it. Plus I expect Brown would not willingly give up the authority he retained as Chancellor of our own currency.

    As experienced a politician as Brown is he wasn’t likely to be listening to advice but merely picking the advice that suited his political needs.

  5. I wonder to what extent it would have been possible to put credit controls in place to head-off the inevitable property boom when the step-change in interest rates arrived?

    (Not that politicians are any better than banks at regulating credit, but when there’s a step-change in interest rates there needs to be some kind of mitigation)

  6. personally I think Gareth has a point. The Euro would dilute Browns power and authority.
    Far better to enter the Euro when he was PM (remember he thought he would be PM sooner rather than later) and dilute the power of his own chancellor.

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