"BRITAIN'S BIGGEST ECONOMIC DISADVANTAGE - OUR PROPERTY MARKET"

The following views are expressed by John Stepek in today's Money Morning, the daily online newsletter of Money Week magazine.

The Governor "and other members of the Bank of England have warned that the Bank isn’t going to rush into printing more money in November. And it’s not just because of the GDP bounce. It’s because he’s not sure it can solve Britain’s problems. 

King reckons – and I wouldn’t disagree – that the basic problem is the banks are still sitting on too much bad debt. The debt needs to be recognised and its value written down (or written off). The banks then need to be patched up. All that needs to happen before banks are willing to lend again.

“In the 1930s, faced with problems of sovereign and other debt similar to those of today, the pretence that debts could be repaid was maintained for far too long. We must not repeat that mistake.”

However, we are repeating it. The trouble is, the “significant writing down of asset values” that King refers to, would involve allowing house prices to fall. In Britain, house prices are the single most important economic indicator, politically speaking. When house prices are falling, governments lose elections.

It’s why public policy, the tax system, and central bank activities, are all horribly skewed towards propping up the property market. Yet with the banks aware that they are over-exposed to an over-valued sector of the economy, they aren’t going to be keen to lend more until the risk is no longer so high.

This unravelling could take a very long time to play out. We can’t expect rampant global growth to help us out. So the Bank of England will continue to have to walk the line between allowing ‘too much’ inflation to get into the system, and keeping rates low enough to cushion those with large debts. That leaves Britain vulnerable to nasty external shocks."