Assetz® News - Mervyn King, King Canute, Has Finally Given In As the Tide of Economic Slowdown Washes Over Him

Mervyn King, King Canute, Has Finally Given In As the Tide of Economic Slowdown Washes Over Him

8th November 2008 |

We gave Mervyn King, the Governor of the Bank of England, the title of King Canute around a year ago in return for his blatant disregard for the clear and present danger of economic slowdown as a result of his excessive interest rate rises and his failure to reverse them in it knowledge meant of the wider effects of the credit crunch on the real economy.

King Canute attempted to command the tide to turn back, such was his vanity and self belief and disregard for the laws of nature. Mervyn King and the monetary policy committee (MPC) did the very same thing in attempting to claim that inflation was the real threat and that the financial meltdown as a result of the credit crunch would be contained within the city of London and the banking sector and would not leak into the real economy. Even if they thought it would leak they clearly thought it was of a minor consequence.

What a stunning U-turn this week we now see as the tide of recession washes over Mervyn King and the MPC forcing them to admit that they have been foolishly reckless through their disregard for the effects of the credit crunch on the real economy. We've now seen a huge fall in bank interest base rates as they attempt now, far too late, to stop the economy going into recession. Huge cuts in base rates will assist the economic slowdown being shallow but it is a damning indictment of the central bank's lack of ability to anticipate the near future. Isn't that why they have this job?

Peter Dixon of Commerzbank is quoted today as saying "All other forecasters were suffering from myopia to the same degree" in reference to Mervyn King and Spencer Dale, the Bank of England's chief economist, being likely to face intense questioning over whether the Bank of England was too slow in assessing the economy's health. Sorry Peter but I would like you to correct that erroneous statement as for the last year I have been shouting from the rooftops that early signs of economic slowdown, as a result of the credit crunch, have been blatant across the whole country and has been the most compelling "clear and present danger" compared to the risk of inflation and that base rates should have been cut more aggressively a long time ago - a fact that King now accepts.

The bank is probably going to change its economic forecast for next year to be a 1% - 1.5% fall in GDP. If base rates go down another 1% next month, the government continues its pressure on banks to pass through savings to borrowers (whilst still permitting them to make substantially greater profits than in the past) and banks continue to lend to each other to greater levels then perhaps we will get away with this lightly. We won't know for sure until the spring when we will be looking for signs that quarterly GDP growth is stabilising rather than falling too much further. This will not get us away from the fourth quarter GDP growth this year being rather substantially worse than the -0.5% growth of the third quarter. When this figure gets announced in the New Year it will be enough to push base rates from the 2% we forecast before Christmas down to 1% or so we expect.

Property investors with cash are going to see great opportunities continue over the next year or so as lending rates come down and property deals abound. High yielding property in particular is likely to be highly attractive as interest from bank accounts is going to become close to zero for instant access savings accounts.

This news story has come from the property investment blog by Stuart Law, CEO Assetz plc.