Those who call for austerity are calling for a second Great Depression
Who do you trust on the economy: Bernanke, King and Geithner, or some right-wing blogger?
By David Blanchflower Published 29 June 2011 15:10
Despite the hysteria from some right-wing bloggers over the size of the deficit, few seem to have even an elementary grasp of basic macroeconomics or recent economic history. One blogger, for example, suggests that: 1) I have "little grasp on inflationary pressures"; 2) we "are undergoing an expansionary fiscal contraction"; and 3) "Obama's Keynesian stimulus has failed". These are similar arguments to those made by Spectator editor Fraser Nelson that I rebutted in full in an earlier blog. Fraser had no response, of course. Right-wing bloggers, it seems, want to push the UK economy into a second Great Depression.
So let's look at their claims. First, there is little evidence of domestically driven inflationary pressures in the UK, as various members of the MPC have made clear. For example, in his written testimony to the Treasury select committee yesterday, the MPC member David Miles argued that more than 100 per cent of the current measured inflation in the UK was due to the temporary factors of a VAT increase, oil and commodity price increases and the depreciation of the currency. The MPC member Paul Fisher and the Bank of England governor, Mervyn King, have made similar arguments in recent speeches. The majority of the MPC does not believe that there are significant inflationary pressures two years down the road, which is what monetary policy can impact today. It also seems unlikely that interest rates were too low in 2009.
In its latest forecast, the MPC has made it clear that it needs to look through the current high levels of CPI inflation, as at the forecast horizon inflation will return to target. The MPC member Adam Posen has stressed that there remains a risk of deflation and I agree with him; the recent decline in oil price and slowing growth pushes us in that direction. This week, Posen said that the Bank for International Settlement's argument that the Bank of England should raise rates because of non-existent inflation was "nonsense" and he is right. Inflation is likely to plummet as the temporary factors drop out. If the MPC were to raise rates, that would increase unemployment and lower growth.
Inflating the debt away looks attractive, especially where there have been large declines in house prices as there have been in the US, Ireland, Spain and the UK. At some point, interest rates need to rise to normal levels, so that when the next shock arrives, they can be cut. Assuming house prices fall another 15 per cent or so -- which seems plausible -- then that would leave three million households in negative equity, which they can't walk away from. If we assume approximately £50,000 of negative equity for each household, that would amount to £150 billion in losses that would fall on banks' balance sheets. Inflation looks like a better option than that. The problem is trying to create some inflation, given the strong deflationary pressures at work. The right-wing blogosphere's solution to the problem of negative housing equity is what, precisely?
Interest rates should not be increased right now, which is one of the few things that George Osborne, Lord Lamont, Vince Cable, King and I apparently all agree on. Just think what interest rises would do to homeowners on variable-rate mortgages. Raising rates now would hurt house prices and reduce consumer spending and lower even further the already anaemic growth the UK economy is experiencing -- more on that below. Interestingly, the financial markets don't believe the bloggers, as they are now predicting that the first interest rate rise will not happen until the middle of 2012. Indeed, now the yield curve, which is derived from what is being traded, implies that rates will be 1 per cent or lower for the next five years. The minutes of the latest MPC meeting suggests that the possibility of further quantitative easing -- meaning monetary loosening, not tightening -- is now back on the table, due to the worry of deflation rather than inflation.
Second, the whole idea of an "expansionary fiscal contraction" is a contradiction in terms. That is clear from what has been happening in Greece, Ireland and Portugal, countries that have involuntarily had to impose austerity measures because they were stuck in monetary union and unable to depreciate their exchange rate. The coalition government decided to voluntarily and unnecessarily impose austerity too deep and too fast, even though the markets were not demanding it.
Contrary to the false claims of Cameron, Osborne and Clegg, the UK economy was never close to bankruptcy and the previous Labour government was not responsible for the global financial crisis. As I have made clear many times, the UK is not Greece, Botswana or Paraguay. This utterly false and dangerous talk caused consumer confidence to collapse even before austerity hits, and I lay the blame for that squarely at senior members of the ConDem government's door. The collapse in consumer confidence predates and predicts the collapse in consumer spending that is now devastating the high street: the value of goods sold in the high street fell by 1.4 per cent in May, which isn't surprising, given that real disposable income fell 0.8 per cent in Q1 2011, after a fall of 0.9 per cent in the previous quarter. Over the past few days, Jane Norman, Homeform, Habitat and TJ Hughes have filed for administration while HMV, Carpetright and Thorntons all declared profit warnings. Marks and Spencers started its sale two weeks early with heavy discounting. Without the consumer, the recovery is in doubt.
Talking the economy down even before the full effects of fiscal retrenchment have taken effect has caused the UK economy to slow. I have every expectation that the economic growth will fall even more as austerity hits and it looks like growth in Q2 may well be around zero. The biggest worry is what happens to output in Q3 and Q4 of 2011, which may well come in negative. Today, the ONS revised GDP growth for 2010 downwards from 1.8 per cent to 1.6 per cent, even though the OBR and the Bank of England have been predicting that it would be revised upwards.
Obama's chief economic adviser and ex-president of Harvard, Larry Summers, recently called the whole idea "oxymoronic" as it doesn't work. The concept depends on the idea that the public sector is crowding out the private sector, so cutting public spending is a bonanza for the private sector that more than fills the gap.
That is the theory but the practice is totally different. First, in the 1930s, similar arguments were used, which resulted in a fiscal tightening in 1937 in the US. This then plunged the economy back into a double-dip recession. Second, previous examples quoted, such as Canada, cut fiscally in the 1990s but also loosened monetary policy and benefitted from the boom going on in the US. There is no credible empirical evidence that fiscal contractions, without monetary loosening accompanying it, are expansionary. Sorry!
Finally, one right-wing blogger claims that "Obama's Keynesian stimulus didn't work". How do they know what might have been? This amounts to an argument about how the economy would have performed without the stimulus -- what economists call the counterfactual.
Right-wing blogs have seriously underestimated the scale of the shock that those of us involved in the crisis, including me, observed at first hand. There are a number of authorities on this issue that believe this is a once in 100 years event -- a Taleb-style black swan. Ben Bernanke, governor of the Federal Reserve and the world's most distinguished scholar of the Great Depression, argued recently on 60 Minutes on CBS that without fiscal and monetary stimulus, unemployment would have been 25 per cent and the US would have entered a depression. Mervyn King has used equally apocalyptic language about the severity of the shock the UK faced and I concur.
Last week, at Dartmouth, I attended a speech by Tim Geithner, currently secretary of the Treasury and previously governor of the New York Fed and FOMC member, who argued: "Most of what feels bad about the American economy today is the aftershock of the crisis . . . We were on the edge of a catastrophic collapse . . . We looked into the abyss . . . We were at the cliff edge."
The ex-deputy chairman of the FOMC Alan Blinder, in a recent paper, estimated that unemployment would have been around 16 per cent rather than 25 per cent but still markedly higher than the 10 per cent it reached. Further, in a recent column in the Wall Street Journal, Blinder argued that he sleeps well at night knowing that there is gridlock on Capitol Hill and consequently fiscal austerity will not be implemented any time soon. It is hard, admittedly, to separate out the effects of monetary and fiscal stimulus as they were implemented together but collectively they prevented the US economy from heading over the cliff. In my view, the same is true of the UK. The reader is faced with the easy choice between the views of Bernanke, King, Geithner and Blinder on one side and some right-wing blogger on the other. Tough choice, I don't think.
There remains a further worry about contagion from the fast-moving sovereign debt crisis in Europe. Further bailouts will not solve Greece's deep-rooted problem of lack of competitiveness across product and labour markets alongside widespread tax evasion. The interconnectedness of the international banking system makes it uncertain how much exposure the UK banking system has. Any fallout would also represent a downside risk to economic growth as the first report of the Fiscal Policy Committee made clear last week.
The UK is undergoing a contractionary fiscal contraction. These right-wing bloggers appear to understand economics about as well as my 120lb Bernese mountain dog, Monty.
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55 comments
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This government is not even trying to deal with unemployment and inflation at the same time, it is on the back burner with their eyes diverted towards the world of finance, which dominates everything it does, the problems of the community facing austerity cuts and falling living standards doesn't even get a look-in.
http://www.diyhomerenovations.org
I see, I am setting myself up now, another smokescreen.
Considering you have made it a point never to retract any of your numerous incorrect statements, your definitely the last person to point a finger Bozo555.
According to Bozo555, house prices rose in May 2011, which in effect, he pre-empted house prices for 2011.
If he get's five minutes, he should swing by the Land Registry website. They have listed house prices as declining in May 2011, by 0.4% and at an annual rate of 2.2%.
An excellent article but...a little behind the times. The real unemployment figure in the US is 22%, the UK 18%. No one should take any notice if the 'official' monthly unemployment figures as they are based on an a politicla definition of unemployment, not an acturial one.
@Matt
"Strange how Bozo555 keeping the Thatcher housing boom, the £400 Billion National debt circa 1997, and the £300 Billions of North Sea Oil Revenues that where wasted 1979-1997."
I've lost count how many times I've answered that point, everyone can see that I have. Why you continue with it is very strange.
"If I didn't correct my mistake, he would only goad me over it."
When people give out so much criticism they set themselves up for some when they make mistakes.
@David
Thanks for your answer, I don't think the way we're going is painless either, not for many people. This is the point I'm making.
Propping house prices up hurts lots of people, personally I think a society with more affordable housing is always better in the long run.
"Contrary to the false claims of Cameron, Osborne and Clegg, the UK economy was never close to bankruptcy and the previous Labour government was not responsible for the global financial crisis. As I have made clear many times, the UK is not Greece, Botswana or Paraguay. This utterly false and dangerous talk caused consumer confidence to collapse even before austerity hits, and I lay the blame for that squarely at senior members of the ConDem government's door."
Pretty much in line with what people on the Hight Street tell me.
Indu Pendant keeps talking about before 2008. was letting the banks fail an option?
On the contrary Blanchy...
Anyone calling for another Liebore government be but looking to depress us !
no one
Haha Guido. Maybe you should just stick to being a bully and attacking childhood vaccination programs.
Osborne and Cameron have been singing the praises of manufacturing growth recently yet data out today shows manufacturing growth at a 21 month low for the UK whilst China is at a 28 month low and the Eurozone is at an 18 month low.
It will be interesting to see the growth figures for this quarter later this month and I would like to know how the construction industry is doing at the moment considering it's falls for the past two quarters.
@Matt
"He is now changing his tune over house prices in May 2011, now trying to defend himself, by stating his comment was a question."
I haven't changed my tune at all. It's a fact that I posted a question rather than a statement, I knew Halifax and NW were both up but wasn't going to check each of the indices for your sake, hence the question. It doesn't undermine my overall argument.
"Because Bozo555 is thick, he tried to create the myth that the merger of the two CGT rates increased house prices."
No I didn't, post up where I said that. I have already dealt with your criticisms on this on at least two occasions. If I had said such a thing I could argue that tax cuts generally boost markets, whether that means boosting prices or lessening the extent of price falls, unless you can tell us otherwise?
"Bozo555 initial argument, was that low interest rates where " Propping Up " house prices. "
Yes, that is still the case, I've said they've helped prop prices up, without the huge bailout and 0.5% rates house prices would almost certainly have corrected by much more. If you think my argument has been undercut why don't you tell us what would happen to house prices if we return to a normal neutral base rate of say 5%? I've already asked you on this topic but you haven't responded yet:
http://www.newstatesman.com/economy/2011/06/work-jobs-labour-unemployed
"...more than 100 per cent of the current measured inflation in the UK..."
Lol. Only an economist could write nonsense as truly nonsensical as this. This Blanchflower seems to be a master at it, better even than fellow print-and-spendaholics, Hutton, Balls and, of course, our old friend Mr "O% rise" Brown.
@Matt
"If he could use a calendar, Bozo555 would have known CGT rates where merged in aug 2008. House prices declined in the whole of 2008, and didn't rise until the Spring of 2009. "
Which index are you talking about now? You need to make it clear.
Also changes to the housing market don't always have an instantaneous effect on prices due to the process of buying and selling a home.
Where the heck is "Capital Hill"?
Guido has put so much weight on recently, he now has the same gravitial pull as Venus and Saturn.
'Right-wing bloggers, it seems, want to push the UK economy into a second Great Depression.'
It is truly terrifying to think somebody this ignorant of history is a lecturer in economics, and even more concerning that he feels competent to comment on economic history. Nobody is advocating that we enter the Second Great Depression. That would be actually impossible - on account of the fact that we have already had it.
It began with the Wall Street Crash in 1929 and came to a hesitant and uncertain end in about 1938 as everyone went on an arms buying spree.
I know that most people forget about the First Great Depression of 1880 to 1903. But Blanchflower claims to be intelligent, knowledgeable about economics, and free to pontificate to us hoi polloi about them. So he really should try to get his facts right.
He could then start a proper, informed and potentially useful discussion of how successful his proposals were in 1930s America, next to a comparison of Chamberlain's - although the results might rather surprise him.
@Matt
Is my use of the word "all" really the best you can come up with? You're ignoring the big picture and trying to trip me up on the most feeble of points, it's pathetic to witness.
Halifax and Nationwide were up in May, you can't quote Halifax one minute to support your argument then criticize someone else for using them. You may one day trip me up on one months figures, it doesn't even matter if you do, house prices are still too high, stop running from the main points I make.
Where are these "numerous incorrect statements"? I hope you will do the decent thing and apologize if you don't come up with numerous examples?
The bloggers are not alone in this -they are merely reading off the same sheet as the ECB, IMF, BIS, OECD and most European governments.
How you get growth from austerity, socialising debt and very high levels of unemployment is a mystery - but not to them. You'll will get growth eventually - but it will be from a much lower base, smaller in scope and with high and sustained levels of unemployment (which, of course, will impede it). It's idiocy.
It's just a neo-con agenda to diminish the role of the state. They believe in magic growth fairies in defiance of the evidence.
Paul Krugman (New York Times) had a very good chart on the respective levels of income growth under Carter, Reagan, Bush 1, Clinton and Bush 2 - it made a nonsense of claims that lower taxes (on the wealthy and corporations) equal higher growth as both the Clinton and Carter administrations (which taxed more) out-performed the others by some margin (in the Clinton case - by over double).
It's all ideology and hang the rest. It's just crass.
DB, I'm reluctant to believe in any economic forecasts that pass your lips (so to speak). I've kept track of a number of predictions made by you in the past, none of which have materialised e.g. 4m unemployment unless a £92 bln stimulus was enacted. I think of you more of a political activist than an economist.
In any case , don't the Land Reg figures lag behind the other indices due the the nature of the way they're collated? Or shall we not mention that Matt?
"Indeed, now the yield curve, which is derived from what is being traded, implies that rates will be 1 per cent or lower for the next five years"
You'd have thought a professor of economics would know what the yield curve implies.....the ALL TIME LOW in 5y GBP interest rates is 1.97%, and currently they are at 2.20% through Swaps....which implies that the market thinks interest rates will end much higher than that in 5y time (given they are lower now). Even 1y Swaps have barely traded below 1%.
Moron.
@Matt
I presume this is my quote you're basing your comment on?:
"Plus, weren't the last months house price stats all pointing up?"
I think you'll find that was a question rather than a statement. It's a shame for other readers we have to go through this sort of pathetic drivel so often, but while you continue to ridicule my posts, so be it.
building more houses won't necessarily work as intended - landlords will buy them.
limiting the welfare state and stopping people from profiting for having lots of kids might help....
Nice to see the uneducated Tory Trolls are in force in the comments section of a DAvid Blanchflower blog again.
Do CPHQ send out a text when David posts a new blog?
Uneducated, Spiteful and plain Wrong Tory Trolls.
@Matt
"Considering you have made it a point never to retract any of your numerous incorrect statements, your definitely the last person to point a finger Bozo555."
I haven't posted any incorrect statements, post some up, if they're proven to be incorrect I will retract them.
"According to Bozo555, house prices rose in May 2011, which in effect, he pre-empted house prices for 2011. "
What are you talking about? Nationwide said prices were up 0.3% in May, Halifax said they were up 0.1%. You've quoted the Halifax figures in the past when talking about house prices. How is this incorrect?
Go on then Greg, do a detailed debunking and back up your claims.
It depends on your position in the food chain, as to which economic expert one listens to.
I'm not sure anything can work without a major overall of our economic system, and nobody doing well wants to make those modifications.
That's the truth of it. A 'I'm alright Jack' attitude.
This resistance to change and lack of interest in fundamental issues make it increasingly difficult to come to grips with its problems.
This government is not even trying to deal with unemployment and inflation at the same time, it is on the back burner with their eyes diverted towards the world of finance, which dominates everything it does, the problems of the community facing austerity cuts and falling living standards doesn't even get a look-in.
This savage policy is leading towards disintegration and decline and dimished prosperity.
Your stance against such inhuman callousness does you credit, and long may you continue to do so.
The main reason we have this global credit crunch is because people like Blanchflower kept rates too low while everything was booming. Now he wants to keep rates low again to bail out the people that borrowed too much. Does he ever learn?
15% house price falls are nothing, they're still triple the price they were before the boom.
The BoE's 2% inflation target is a laughing stock. I bet the MPC has a great laugh every month.
For rebalancing the economy the emerging world would need dollar support to expand consumption. IMF led balance of payments should be handed out to developing economies to acheive a faster rebalancing.
This would require restructuring of the investment model that brings about no capital expenditure in the developed world and moving that capital to emerging markets.
Radical structural changes will evolve an export base in developed markets.
As for the US economy the fastest way to absorb their real estate nightmare is to allow qualifying immigration which attracts capital to the property sector.
Good post, but your defence of the U.S. stimulus is lacking.
A far more substantive defence of ti would be the following:
a) It was too small and ineffectively targeted.
b) State budgets had to shrink and the same time, offsetting it almost completely.
http://streetlightblog.blogspot.com/2011/05/feel-stimulus.html
http://www.voxeu.org/index.php?q=node/4707
c) Most importantly: the financial sector - particularly in the U.S. - is parasitic. It will suck many of the growth gains out (or at least the job gains). Until they sort that out, stimulus won't work very well.
I see house prices are up in June according to Halifax figures out today, along with a comment about how low rates should help support broad stability in the market. Looks like it's not just me who thinks so.
@Matt
So that's no incorrect statements so far. I wonder if you will do the decent thing and apologize?
I wonder which Right-Wing Blogger predicted that the Service sector would contract by 1.2% in April and Bank Lending to Businesses falling in May 11.
With the news Habitat and Jane Norman have gone belly up, and TJ Hughes now in administration, it looks like Gideon's is now weaving his magic on the Retail/Leisure sector.
Cameron talks about the importance of Greece, yet Osborne is seen at Wimbledon, watching Federer.
How many public sector workers can afford to watch the Federer at Wimbledon?.
What a thoroughly cogent point you make, Robert. 'Liebore'. Brilliant, droll, and original. Are you Kelvin McKenzie in disguise?
More to the actual point is that the coalition government is behaving like a steroid & cocaine addled version of the Blair years, acting with no inhibition and only u-turning on issues prior designated to make them appear to be listening to the people (e.g., forestry sell off, allotments, parts of the NHS bill)just as the Blair years were Thatcherism wrapped in cotton wool. For every positive Labour achieved (minimum wage, sure start) came one or more equal or worse negatives. PFI and Iraq being two of the most immensely ineffective and costly, and yet the push in these directions continues.
There is no positive direction with this government and lying is even more of a symptom of the present regime than the last, yet we're just over a year into it. The general public are not fully aware (perhaps only partially at that) of how severe the cuts are going to be in their effects in two/two and a half years. Combine that with growing inflation problems world wide (China's being closer to 20% than the reported 5% and a massive debt problem that will make Greece look like Sunderland in comparison) and our lack of inner investment and cuts in the wrong areas, well, the future looks bleak.
@Martin
"building more houses won't necessarily work as intended - landlords will buy them."
Simple changes in taxes would rectify this, rises in stamp duty or CGT on second homes for example. CGT was unfortunately slashed under New Labour.
Meanwhile, I wonder if Matt will post up examples of my numerous incorrect statements? I bet he can't.
"How do they know what might have been? This amounts to an argument about how the economy would have performed without the stimulus -- what economists call the counterfactual."
Alright when you do it though, isn't it?
"This utterly false and dangerous talk caused consumer confidence to collapse even before austerity hits, and I lay the blame for that squarely at senior members of the ConDem government's door."
Again, alright when you do it though isn't it?
FAIL
High house prices are at the root of our debt/economic problems. Propping house prices up also causes much misery. This should not be forgotten.
Mike555
I know you really worry a lot about house prices being too high and thus pricing young people especially from buying a home
We clearly need to build more houses but
1. Falling house prices tend to be correlated with falling consumption
2. Falling house prices would put lots more people into negative equity which would be toxic for the banks at a time when real incomes are falling
3. Letting house prices fall fast would further undermine confidence
Not sure there is a way out that allows the air to come out of the bubble very gently
Danny blanchflower
Danny blanchflower
"The more than 100%" is easy to explain. It means that without the temporary factors listed in the article inflation would have been negative, .i.e prices would have fallen.
DB's maths is perfectly correct.
I am glad Bozo555 keeps throwing up more smokescreens and questions, because he runs away from the facts and his own comments.
He is now changing his tune over house prices in May 2011, now trying to defend himself, by stating his comment was a question.
It does stink of desperation, but people with desperate arguments always clutch at straws.
Bozo555 is bringing up an old chestnut of CGT.
Because Bozo555 is thick, he tried to create the myth that the merger of the two CGT rates increased house prices.
If he could use a calendar, Bozo555 would have known CGT rates where merged in aug 2008. House prices declined in the whole of 2008, and didn't rise until the Spring of 2009.
I mention on a regular basis that Bozo555 is a wally brain, and he no problem repeating it for the record.
Trying to use the " Lagging " argument, is pretty bankrupt, because the Land Registry figures reflect the current state of the market.
As I have mentioned, the Land Registry reported a monthly decrease of 0.4% and an annual decrease of 2.2% when compared to May 2010.
Bozo555 initial argument, was that low interest rates where " Propping Up " house prices.
0.5% interests rates have been active when house prices have declined, undercutting his argument.
Yes it's apparently true the man said "The increase in VAT, higher energy prices, and higher import prices
account for more than 100% of the inflation overshoot."
How stupid is that? One wonders if its because he's an external member that he can tell us his opinions about what may or may not be happening beyond the full shilling, so to speak. How can anything be described in terms of more than 100%? It's not logical in the common sense. One wonders; is this the language of leverage that got everyone in so much hot water concerning the so-called credit crunch?
We're really going to have to sort out some common language and sensible story about what's happening in the world today, please. I can personally understand and I am a great believer in the practicalities of ignorance as bliss..but sometimes it would be quite interesting to be able to clarify more exactly; where one can find and what is this so-called social contract our Bank of England deputy governor says needs redrawing.
"Obama's Keynesian stimulus has failed"
Before 2008, Labour borrowed £350BN to inflate the economy. Did that fail?
@Danny Blanchflower
The issue is that the UK does not generate enough wealth and has funded its lifestyle through borrowing.
I have a strong grasp of macro economics and understand the agruments. Lets hope China is willing to increase its public spending so that simplistic fiscal expansion can work. I do not believe it is China's strategy inflate the world economy through their spending.
On a micro level, UK people need to be realistic about the prospects for the country and to adjust their lifestyle to an affordable level. Its not going to happend without unrest or bloodshed which we can see starting to brew.
An alternative to government cuts are allowing house prices to fall even if it results in negative equity and is painful for people. It would force the necessary long term realignment of expectations needed including making the workforce more flexible and competitive from the point of view of businesses.
The best approach would have been not to have borrowed money in the first place and artificially inflated economy. The £350Bn borrowed and spent before 2008 by the last government had an negative NPV and has been detrimental the national interest. I contend that political corruption under pinned this borrowing.
Just think what a difference it would have made if more of the £350Bn had not been waisted and instead had been invested in UK industry. Unfortunately our productive indutries are too "grubby" for Labour to support.
Anyone else wonder if mike555 and matthew fox are in fact one and the same person?
Smoke and Mirrors Bozo555 is not contridicting himself yet again, he is that dismal he contradicts his own postings, first he runs away from the facts, now he runs away from his dross filled posts.
He isn't bright enough to understand what the Land Registry is, so let me educate him again.
The Land Registry logs all housing sales in the UK. According the May 2011 figures, house prices declined by 0.4% in May 2011 and an annual rate of 2.2%
Our resident clown, had the bare-face cheek to comment that ALL indicators pointed to a rise in house prices in May 2011. Is this true, absolute not.
Will he retract, no, because he has no backbone.
@Barny
I can assure you not. 95% of my posts are in response to Matts ridicule. I don't know why posting about house prices being too high attracts such attention, but it doesn't bother me one bit as it's so easy to counter.
You can't keep spending what you no longer have and neither can you keep borrowing your way out of debt.
@David
In response to your 3 points on house prices:
1/ "tend to be", I never believed that people base their spending habits on the value of their home from month to month. I think the high level of house prices we have means people spend too much money on housing rather than boosting the economy.
2/ I don't think a drop in the nominal value of housing will bring the banks down after everything that's happened, I don't think the government will allow it. Propping house prices up with QE and low rates means more people in more debt and more people walking a financial tightrope. It's hard to over emphasize the negative effect high housing costs have on peoples lives, especially the young. Unless you've lived it, as many have over the last 10 years or so, it's hard to get it across.
3/ Again, I don't think many people base their spending on house prices. The hopelessly overborrowed have had unparalleled levels of help. People would have much more money if they didn't spend so much on mortgages/rent. Imagine if peoples mortgages were half as much, which they should be if it weren't for the housing boom, what effect would that have on their personal finances and their ability to spend?
Whilst it is possible to ignore the innumerate stridency of the right wing bloggers the questionn remains - can we trust Bernanke, King and Geithner?
The fact is that they all had a bad financial crisis, Geithner was a supporter of the growth of subprime mortgage backed securities.
One must ask the question - is this an economic crisis? I would contend that the development of toxic financial instruments, the failure of the rating agencies and the ignorance of the directors of financial institutions and their auditors was a social failing, one that has not yet been addressed.
King's statement to the effect that we cannot establish our exposure to Greece because the assets and liabilities of banks are inextricably interwoven and infinitely regressive effectively means that no-one has control of the balance sheets of our financial entities.