POLITICS
The dubious pleasures of Mr Lawson's excessive credit
NOEL MALCOLM
Catastrophe theory, roughly speaking, tries to describe the extreme conditions under which things can suddenly turn into their opposites without going through any intermediate stages on the way there. In this context one thinks of anti-matter, the formation of black holes and the political position of Mr Nigel Lawson.
I do not mean, however, that Mr Law- son's position has suddenly turned from good to bad. Quite the reverse. What has happened is that a gradual accumulation of economic bad news has reached the point where, all of a sudden, instead of weaken- ing his position it begins to strengthen it. An atmosphere of mild discontent at a party conference may produce discord; but an atmosphere of real worry produces nothing but public harmony and support. With a rise in interest rates to 15 per cent just before the conference, and a rise in inflation to 7.6 per cent the day after he spoke, the Chancellor might have expected to be publicly reviled by his party. Instead, all the reviling was done in private, and the conference debate on the economy was conducted along the lines of that old Rus- sian joke about working for the state: he pretends to explain what is happening, and they pretend to believe him.
The stock market plunge on Grey Mon- day has certainly reinforced the impression that, when confidence is in short supply, Mr Lawson's self-confidence appreciates in value. Clearly, he is more unsackable now than he has been for a long time. But this is not just for reasons of public confidence. Mrs Thatcher may need more than ever to appear to agree with him, to be seen holding hands and sharing jokes; but she also finds it genuinely easier to support him now the conquest of inflation is back as the Government's main economic priority.
When the cracks appeared, 18 or 19 months ago, between the Chancellor's monetary policy and the Prime Minister's, Mr Lawson was in favour of reducing interest rates in order to stop the pound from soaring too high against the deutsch- mark, and Mrs Thatcher was in favour of keeping interest rates up in order to guard against inflation. For Mr Lawson, ex- change rate stability was part of an overall anti-inflationary policy, but a policy which had drifted some distance .away from old- style monetarism. For Mrs Thatcher, in- terest rates were above all a way of squeezing credit, restricting 'broad money' and thereby reducing inflation.
Now, as luck would have it, Mr Lawson wants to push the pound in the other direction. In theory, he disagrees as much with Mrs Thatcher as he ever did; but although their strategies differ, their tactics overlap this time round — hence the outbreak of harmony and agreement.
Of course the shadowing of the deutsch- mark was not the only reason for the Chancellor's downward pressure on in- terest rates in early 1988, and certainly not the one he now chooses to remember. For several months after the crash of October 1987, the international consensus of the pundits was that interest rates should come down, so that enough credit could slosh around the system to swamp any likelihood of a general recession. Indeed, no pundits were more definite on this point than the three wise men of Labour's front bench, Messrs Smith, Brown and Kinnock. When asked today what they would do about inflation, they are apt to reply like the Irish peasant that they wouldn't start from here. And that is obviously correct, since they would have been starting from somewhere even further away in the wrong direction. `This is a time for judgment', said Mr Kinnock on 29 October 1987, 'and that judgment should be a big cut in interest rates' — advice he was still repeating to Mrs Thatcher on 10 March 1988. 'When faced with that very practical advice', he asked, 'why does the Prime Minister prefer primitive monetarism?'
If only she had, if only she had: her primitivism was too half-hearted. Almost no one comes out of the inflationary history of the last two years particularly well, but honourable exceptions can be made for two prominent more-primitive- than-thou monetarists, Nicholas Budgen MP and Tim Congdon. As early as Febru- ary 1988 Mr Budgen was warning of over-heating in the economy and being pooh-poohed by Treasury ministers for his pains. And as early as June 1987, in an astonishingly prophetic Spectator article entitled 'Mr Lawson's secret inflation', Mr Congdon noted that Britain was under- going its biggest ever credit boom, and warned that inflation would rise strongly unless credit were squeezed.
The crucial factor which both of these Cassandras had understood more fully than other economic observers was the role of housing — that is, the growth of mortgage lending and the inflation of house prices. A rise in house prices is quite unlike a rise in, say, the price of washing- machines. It not only forces people to borrow more; it also makes them more willing to borrow, because it strengthens their belief that they are borrowing to finance a sure-fire investment. And, unlike the inflation of ordinary goods, the infla- tion of assets encourages all those who already hold such assets to release more money in pursuit of other goods. In the aftermath of the 1987 crash, economists worried obsessively about the adverse `wealth effect' on shareholders; meanwhile home-owners (a far larger proportion of the population) were enjoying the wealth effect of a rise in house prices in some areas of up to 30 per cent per annum. It was as if the economists were crouching expectantly in front of a mouse-hole, while an elephant walked slowly past, unnoticed, behind their backs.
So although Mrs Thatcher has tried to nudge economic policy from time to time back onto the path of old-fashioned mone- tarism, there is a more general sense in which she must take some of the blame for our present inflationary malaise. For she is the High Priestess of home ownership, the Mephistopheles of the mortgage, whisper- ing in her victims' ears that this is the way to eternal happiness and self-respect. Her long-standing disagreement with Mr Law- son over mortgage interest relief (which she would like to raise, and he to abolish) is well known. And her feelings here arise not just from a sense of political expedien- cy; there is also a genuine emancipator's zeal, as if the only alternative to home ownership were a state of council-tenant vassallage in Brent or Haringey.
So let us not be too harsh on nice Mr Gould for his off-the-cuff remarks about mortgage restrictions last week. He may be searching for an unattainable ideal, a way of squeezing mortgage lending without raising interest rates for industry; but at least he is pointing at a real problem instead of wittering on, as his Labour colleagues have done in the past, about credit cards. Perhaps he will turn out in the end to be a better monetarist than Mr Lawson. In the meantime, he will be torn to shreds by a gleeful Conservative front bench — just as they have gradually shredded their own anti-inflationary poli- cies over the last three years.
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