The second-most expensive four words in the English language

The late great Sir John Templeton warned that the four most expensive words in the English language are “it’s different this time.”

He was absolutely right. You usually hear those words at the frenzy stage of an investment bubble, when there’s no conceivable sensible reason for prices to go any higher, and vested interests have to clutch at straws to promote their arguments. Just ask anyone who bought property stocks a year ago, or tech stocks in 2000.

But in the wake of a bubble popping, you often hear another phrase, which may well qualify as the second-most expensive four words in the English language. And we’re hearing it more and more from the property pundits, politicians and City hotshots who stand to lose most from the looming recession.

It’s that whiney little mantra, “something must be done!”

Property pundits are calling for government intervention

We have to do something to save the property market. Or so everyone who makes money from the property market is saying.

David Ritchie, chief executive of house builder Bovis, was among the latest to call for government intervention this week. “People need to be able to access finance to buy property and anything we can do to assist people getting on the housing ladder must be good.”

The Government agrees it seems, even if it can’t quite work out a plan yet. After all, nothing screams “get rid of this bunch of incompetents!” to a British voter louder than collapsing house prices. There’s the vague rumours about stamp duty, which no one has stamped on yet, so they must be getting ready to announce something. And The Times reports this morning that the Government is also considering helping councils to buy “repossessed and unsold properties.”

It seems that “something is being done.”

But let’s rewind a moment. Let’s just examine that statement from the Bovis boss, particularly the second half. “Anything we can do to assist people getting on the housing ladder must be good.”

Here’s an idea. Why don’t you give away your homes for free, Mr Ritchie? They’re not selling anyway. That would get people onto the housing ladder. And that must be good, right?

Oh, wait, I forgot – that would cost you money. In fact, it would bankrupt you. Why should you be expected to subsidise housing for the rest of the nation at your own expense?

Taxpayers shouldn't have to prop up the housing market

It’s a ridiculous notion, of course. And yet, when it’s taxpayers’ money that’s meant to fund other people’s property purchases, it’s apparently just fine.

Well, I’m a taxpayer, and I don't think it’s fine at all.

Let me explain why. The Government takes money from your pocket and mine in the form of tax. The justification for this is that it spends that money on public goods, things that can’t be provided more efficiently by the private sector. You can argue the point on what these things are, but we generally accept (in this country at least) that this includes the army, the police, universal health care, and some form of welfare safety net.

I don’t see anything on that list about propping up the housing market. A cut in stamp duty is simply taking money from people who don’t intend to buy a house, and giving it to those who do. That’s completely unfair. If the Government can afford to cut taxes at all, then it should be giving us all some of our money back.

How to make the recession less painful – cut taxes

And this takes us to the bigger point. If we want to get out of this recession in one piece, what really needs to be done?

Interest rate cuts won’t work. They haven’t worked in the US, they didn’t work in Japan. That’s because as a nation, we’re up to our eyeballs in debt. Banks can’t afford to lend money; we can’t afford to borrow it. All of us need to pay off our debts and build up our savings. So it doesn’t matter how cheap money gets, we’ve snapped out of spending mode and strapped on our tin hats.

So the quickest route out of recession is to help people pay down debt and build up their savings. Inflation is one way to reduce the value of debt, but it generally comes with a hefty price tag – currency collapse and economic meltdown. Higher interest rates might help build up savings, but they’d also make debt more expensive to service.

How can we help people save more without fuelling inflation or making our debt burden even worse? Simple. Cut taxes.

If you cut taxes, you almost automatically increase productivity, because you take money from a wasteful, inefficient organisation – the government – and reallocate it to someone who actually gives a damn about how effectively it’s spent – the individual. And rather than squander the money on property (as the Government is proposing), individuals would use it sensibly, saving it, or using it to pay down debt.

This isn’t a magic bullet. It won’t stop the recession – nothing can. The looming bust is nature’s way of telling us that we spent too much money on unproductive garbage during the good times.

Look at it this way. If we’d taken all the money we spent as a nation on property in the past ten years, and had pumped it into – let’s say – our energy infrastructure, then maybe we’d have lower gas bills, and a nice, productive industry providing highly paid, specialist jobs that would be tough to outsource. Instead, all we’ve got is big debts, an unwanted pile of jerry-built buy-to-let flats which are already turning into slums, thousands of unemployed estate agents, and a national energy crisis.

It’s depressing, yes. But what we can do now is put an end to the rot and the waste. The quicker those savings build up, the faster balance sheets are repaired and the quicker we can get out of this downturn.

Will this happen? I doubt it. The Government still believes the great lie, that you can spend yourself rich. It still believes that “something must be done.”

Better get ready for a long, drawn-out, painful recession.

Turning to the wider markets…

UK shares had another good day as takeover speculation helped the prices of several rumoured targets. The FTSE 100 index advanced 73 points, 1.3%, to 5,601. J Sainsbury flipped up 8% on hopes that former suitor the Qatar Investment Authority might be prepared to re-open bid negotiations, while insurer RSA climbed 5.5% on talk that several rivals could be considering acquiring it. Legal & General put on 4%. Banks also did well, with Barclays up 6%, and HBOS and Royal Bank of Scotland both 4% higher. Wolseley recovered 6% on better US economic numbers.

Shares in Europe were also stronger yesterday, with the German Xetra Dax gaining 1.6% to 6,421 and the French CAC 40 advancing 2% to 4,461.

US stocks were again firmer, with the Dow Jones Industrial Average adding 213 points, or 1.85%, to end at 11,715 and the wider S&P 500 gaining 1.5% to 1,301. The tech-heavy Nasdaq Composite added 1.2% to 2,412.

Overnight the Japanese market joined in, adding 305 points, 2.4%, to 13,073 and in Hong Kong the Hang Seng improved 321 points, 1.5% to 21,293.

This morning Brent spot was trading at $113, spot gold was at $837, silver at $13.85 and platinum at $1,473.

In the forex markets this morning, sterling was again weak, trading against the dollar at 1.8291 and against the euro at 1.2400. The dollar was trading at 0.6780 against the euro and 108.58 against the Japanese yen.

This morning also brought news that London luxury house prices have posted their first annual drop (-1.6%) since 2003, according to Knight Frank, after a 1.3% monthly fall, while UK consumer confidence remains around its record lows, said GfK.

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