Gordon Brown doesn’t boast anymore about his friendship with Alan Greenspan – and little wonder. The former Fed Chairman’s name is fast becoming mud in America, as they turn on the man they lionised for more than a decade. America is about nine months ahead of the UK in the credit crunch, and what fascinates me is not just their take on the current situation but how they are revising their view of the last decade. What Greenspan called “prosperity” they now see as a debt binge and he is being blamed for fuelling the housing bubble now bursting with such calamitous consequences.The CPI of course is the Consumer Price Index. RPI is the Retail Price Index. The CPI is weighted to what consumers are actually buying and the RPI measures the price of a fixed basket of goods. It turns out that the RPI is a better measure of inflation as it is not influenced by substitutions when good become dear.
This should terrify Brown because the same charge will probably be applied to him. He was something of a Greenspan disciple – and was also lionised for what was then seen as prosperity and is now (as in America) seen as a bubble created by cheap debt and booming assets. But as repossessions soar in Britain, people will soon look back on the Brown years differently. In my News of the World column today (not online) I say his time at No11 may be known as a “reign of error”. One can (now) see five key mistakes.
1) He adopted the Tory inflation target of 2.5%, which was right for its time. But this was not designed to detect or deal with an asset bubble.
2) In instructing the Bank of England to deal in CPI rather than RPI he ordered it not to take notice of the housing market (RPI contains mortgage repayment costs, CPI does not). So rather than ask it to tackle house prices, he went the other way. This meant the bank kept interest rates way too low (the 2.0% CPI target is no substitute for a 2.5% RPI target as RPI is at least a full point ahead of CPI).
3) This meant money was too cheap. As night follows day, this led to an asset bubble.
So what does all this mean? Hard to say. One thing for sure is that since this started in the US earlier we are likely to come out of it sooner. There is some evidence of this in the recent US stock market rise which was based on an unexpectedly good profits report from business.