The words of Mervyn King again speaking in the Today programme lecture last night. on the financial crisis. History provides evidence that this statement is a physical impossibility and the same will be confirmed eventually with the current depression. His comment illustrates how he completely misses the underlying causes. Relying on inflation measures missed the enormous expansion in mortgage lending by the private banks which fuelled a tripling of house prices in 12 years. Astonishingly, when questioned on this, King claimed that this house price increase was sustainable by the low interest rates and the borrowing of first time buyers (95% mortgages and 7 time earnings sustainable!)
In a credit based economy it is the natural tendency for asset prices to outstrip the productive side and this is the foundation of the boom-bust cycle. This will be shown to be the case in the UK again; the fragility of our economy, too reliant on the expansion of debt cannot support land prices that remain inflated. Until policy makers understand this, the boom-bust process will continue to fuel inequality, unemployment and misery.
