Wood? Can't see any wood. Not with all these trees 'round here...

As you know, and as I've said numerous times before, we're all doomed.  The collective concious of humanity has got so little grip on reality it's amazing.  I'm sure this has always been a problem, but it must never have been this bad in the past?  I put it down to a lack of recent wars, there's nothing like imminent destruction to focus the mind.

Yes, I am talking about our elected leaders, and their mainstream media puppets; and the bizarre decisions they make.  The list is endless - one day the World Health Organisation plead to avoid the overuse of Tamiflu, lest Swine Flu become resistant; what does our government do?  Send it out by the bucket load to everyone that wants it.  Why?  Because the Daily Mail would crucify them if they didn't.  Reckless isn't the word...

And it doesn't end there, of course.  This is the cause of much of the disjoint thinking that can be seen in economic reporting.

No, don't panic, this isn't going to turn into another "no one measures house prices correctly" rants.  But, before I get to my main point, it is worth mentioning some recent developments:

All of the mortgage lending statistics are still showing 45,000 per month as being current lending rates.  They've been around that level for quite a while.  But still they spin "up 26% in July"; just look at the graph on that page, to see that 26% from a low base isn't much at all (it puts us back at the level of December 2008), and will require another couple of years to grow back to normal - and that's was never really normal, if you think Northern Rock/Bradford and Bingley lending (125% mortgages with no proof of income) was "normal" and want to see it return.

Some of the old-school cheerleaders who were temporarily stunned into silence during 2008 have started making noises again.  David Smith (economics correspondent for The Sunday Times), who said in May 2007 "the world economy is strong and house prices rises will be slow but positive" (that was paraphrased for space, full analysis here), yesterday took time to point out the "trend" in the Nationwide House Price Index.  (Incidentally, late 2007 was when Smith stopped allowing comments on his blog, I wonder why that was.)

The trend was that, annualised, the Nationwide House Price Index is showing a 15% growth rate.  Hurrah, normality has returned, everyone knows house prices always rise at more than 10%, some bloke on Newsnight said it, and now it's true.  (See, I could write articles for The Times, I'm already more insightful than Anatole Kaletsky.)

The truth is that a rise of such magnitude has taken mainstream commentators by surprise.  They didn't predict the crash, they even tried to pretend it wasn't happening, but when it became undeniable they just reverted to form and ended up quoting each others predictions of a flat or slightly falling market.  None of them predicted a mid-year boom.  Some people (i.e. me), on the other hand, did predict a mid-year boom, describing such things as a "forthcoming dead-cat bounce".  Those of us who did both: a) see the crash coming, and b) saw the bounce coming, generally take quite a different interpretation to these recent headlines than the mainstream pundits who are all falling back into their pre-crash set patterns.

For you see.  This is a 15% rise (not that annualising part of a year is particularly helpful, it always produces wildly eccentric numbers, but I'll stick with it for the time being) on a very low number of sales.  It is, therefore, difficult to make any extrapolations from this.  This could be caused entirely by waiting cash-rich buyers being tempted to trade-up due to record low mortgage rates; if so, this will end quite soon.  On the other hand, this could be the start of mortgages becoming more widely available again, but: a) we're still not realistically ever going to get back to early 2007 levels of lending, that only happened because of the willingness of now-departed banks (Lehman Brothers) to buy anything with the word "mortgage" on it; b) if such low volumes are causing a 15% hike, then larger volumes will cause an unsustainable spike; c) interest rates will need to be raised to avoid the inflation problem getting worse.

Meanwhile, back in the land of political expediency, the Bank of England is printing just enough money to buy all the government debt that the private sector doesn't want (half of it); and since this is unable to stop anytime soon, low interest rates will continue.  It is this political shenanigans which is going to guarantee that everything ends badly, and is the main thing that has caused this dead-cat bounce in the first place.  By monetising the debt, they are rekindling the same kind of asset-price bubble that caused all these problems in the first place.  But those idiots who regarded 2006-2007 as "normal" and the "good times" will welcome such a return with open arms; little do they know that it practically guarantees another crisis that'll make 2007-2008 look like a minor spout of petulance.  Can you imagine, if the "boom" lasts another six months, there will be a very large percentage of home owners on essentially zero rates (mainly variable because fixed mortgages have already gone up); when rates need to rise... kaboom.

All the weapons in the armoury have been used for this first crisis, even though only half of them were needed to stop the contagion; the rest of them have been used just for morale boosting purposes.  When we need them again, they will not work.  If the next crisis happens at 1.5% interest rates, cutting them will have no stimulative effects whatsoever.  And if inflation is up at 10% by then, printing money will be a waste of time, it'll devalue faster than it can't be spent.

This is not going to end well.  Not well at all.

We're still living in a world where the belief that continually rising asset prices based on ever expanding lending is both sustainable and desirable.  The whole notion of having economic growth, wealth creation, etc. never gets a look in; or when it does get mentioned it is only in the context of needing to sacrifice parts of it "to increase lending" - yeah, let's destroy investment, then people will have to borrow.  Makes sense...

The final evidence of this, and the whole point of the post (must stop getting side-tracked), is the way the "problem" of bankers bonuses is being handled.  The current best ideas that are being bandied about is either a: high pay commission, which would have the power to essentially confiscate large earnings; or a bonus tax, punishing companies that pay bonuses.

Both are, quite clearly, madness.  Complete, total, utter lunacy.

Are banking bonuses too high - almost certainly yes.  Are banking bonuses deserved - almost certainly no.  But, at the same time, banking is highly profitable (because the government pays billions to them every time they don't naturally make a profit - which is the real outrage), and considering the amount of money sloshing about why shouldn't the workers get the money.

You hear similar arguments about Premier League football, they're overpaid, etc... well, yes, but there's billions flooding around the game, this is caused by the competition for media rights more than anything else.  And, given that fact, surely it's better that the people who create the entertainment get the money rather than the owner of the Dallas Cowboys or other such hangers-on?

The bonuses are a symptom, they are not the disease.  The disease is that banking is such a privileged closed world.  In any other industry such large profit margins would lead to new entrants, and provide incentive for game-changing alternatives to find investment.  Not in banking, they keep sitting there, creaming the rest of the economy...  This is the problem!

It's a problem that is made worse by the willingness of the government to keep it afloat at all costs.  Providing unlimited insurance against losses, etc.  No other industry gets such treatment.  Of course, banking is special, if it all collapsed we really would have a Mad Max scenario; this is why the original bailout was valid, it's everything that's happened since that's the problem.  Several times this year, for example, the government has increased its stake in various banks "to provide more capital for lending".  Freaking reckless lunacy.

They know what they're doing.  And what they've done has worked, there's no longer any risk of High Street banking failures; but they've gone too far.  The economy is, at the best case, sluggish for years because of the inefficiencies that have been added by overcompensating the bailout.

You can see now that bonuses aren't the problem.  When the whole bank has a guarantee, there's no incentive for them not to take risks, it doesn't matter how much or how little the bankers themselves are getting paid; there will still be pressure for results.

To summarise:  Expect a sequel to the financial crisis, bigger and better than ever before, late 2010 or sometime during 2011.  Mark my words.  The only real question is what form it'll take; currently I'm expecting a hyperinflationary flame out.