The business column - Patrick Hosking puzzles over Brown's B-word

It is puzzling why Brown has added the B-word to his economic lexicon. I can only assume he regards

I nearly dropped my loofah the other morning when Gordon Brown told John Humphrys that Britain had been in a "house-price bubble" for the past two years. Surely, this was a slip of the tongue? The Chancellor was being grilled by the Today programme presenter, and it would have been easy to overstate the government view of the property market in the heat of the moment.

But no: speaking to Treasury officials shortly afterwards, I was told that Brown had used the very same phrase at the IMF in Washington. A few hours later he wheeled it out again for his speech at the Labour conference. "In any other decade, a house-price bubble such as we saw in the last two years would have caused a recession," he said.

A bubble - defined in my dictionary as an unsustainable boom in asset prices that is followed by a crash - is suddenly the official Treasury reading of this most important of industries over the past few years. Many have described the housing market in these terms for some time, but for ministers to do so is quite another thing.

Brown's point, I am told, was not that house prices are about to crash, but that this bubble was deflating gently. Annualised house-price growth has slowed in an orderly manner, from roughly 23 per cent three years ago through 10 per cent a year ago, up to a complete halt today. Moreover the UK economy, after eight years of Brown treatment, was resilient enough to withstand such a slowdown. But the use of the word "bubble" is bizarre. The whole point about bubbles is that they burst. Euphoria in the attractions of an asset class - be it technology shares, oil futures or tulip bulbs - gives way to panic selling and a price collapse. Bubbles occur when prices far outstrip fundamental valuations.

If indeed the Chancellor has presided over the puffing up of a bubble, it is nothing to be proud of, especially for a leader-in-waiting trumpeting the virtues of a home-owning democracy. Soaring prices since Labour came to power have put home ownership out of reach for most twentysomethings in most parts of the country. That is partly the fault of the government, which has allowed easy credit to proliferate, which boosted prices, and has done little to unpick the tangles of planning regulation, which make it so difficult to build new houses.

You could even argue that Brown's crowning achievement - giving independence to the Bank of England and setting it a narrowly defined inflation target - has added fuel to the flames of the property market. In setting interest rates, the Bank uses an inflation target which ignores mortgage borrowing costs.

Why the Chancellor has deliberately added the highly charged B-word to his economic lexicon is puzzling. I can only assume he regards it as some sort of fig leaf, should economic growth, which is already slowing, come to a complete halt. There is only so much you can blame on the soaring oil price and the lacklustre European economy.

The Liberal Democrats have got into a pickle over a record £2.4m donation from Fifth Avenue Partners, the private company of a Majorca-based, Scottish-born entrepreneur, Michael Brown. The Electoral Commission is investigating whether the gift breaches rules on foreign donations. Not much is known about Fifth Avenue Partners except that it makes a lot of money trading financial derivatives from its base in Switzerland.

Money originating from more esoteric corners of the money markets is not just a Lib Dem trend. The Labour Party is also deeply reliant on money from City tycoons. Ignore the largesse of the supermarket owner and science minister Lord Sainsbury, and the party's five biggest personal donors this year have made their piles in the financial markets - and in the least transparent and most swashbuckling corners of those markets at that.

Some traditionally Labour-friendly industries still do their bit. Chris Wright, the music industry entrepreneur, gave £25,000. From the advertising industry, John Bogle chipped in £25,000, while Sir Frank Lowe gave £100,000. But these donations are dwarfed by largesse from the likes of William Bollinger, co-founder of Egerton Capital, a hedge-fund group, who has given £250,000 so far this year. Jon Aisbitt, formerly a partner at Goldman Sachs, who now sits on the board of Man Group, Britain's biggest hedge-fund manager, gave another £250,000. Sir Ronald Cohen, who recently retired as head of Apax Partners, did the same. Nigel Doughty, of another private equity group, Doughty Hanson, also gave £250,000.

Hedge funds - unregulated investment vehicles based in tax havens - are not obvious bedfellows with Labour. Nor are private equity firms, usually secretive investment groups whose pursuit of capital gain at all costs is legendary. As I write, another private equity firm, Merlin Biosciences, has admitted it is being investigated by the Serious Fraud Office. Merlin is led by the Labour supporter and donor Sir Christopher Evans.

Patrick Hosking is investment editor of the Times

This article first appeared in the 03 October 2005 issue of the New Statesman, Iraq: our fatal blunder