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Stop making with the negative vibes: Why the credit crunch is a good thing. By Jonathan Russell

4th Sep 2008
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Putting the HR software pieces togetherJonathan Russell argues that if market confidence helped cause the credit crunch, accountants should start stressing the positive.

Rather than being part of any strategic plan, it seems most recent government policy has been mere reaction to speculation and rumour. Running a nation is little different to running a business – in fact the world's largest companies are bigger in fiscal terms than many countries – and we all know the impact that rumour can have on a company's share price. Look at the plunge HBOS took this March on the back of completely unsubstantiated rumours, for example. In fact, one wonders how badly the current economic malaise has been exacerbated simply by the media's need to fill column inches. All negativity has a market impact.

The politics of rumour

It is a failing in the human nature that we have a tendency to believe what we want, or what we are told, and then find the justification afterwards. For instance, it's commonly held that our present economic trouble come on the back of an economic boom. But do they? My experience of small and medium sized businesses is that on balance they have done OK over the past 10 years, and no better. True, they have been able to operate in a period of stability, but generally speaking most of these businesses have grown only on back of hard work, careful management and efficiency. They have not seen huge leaps in profitability.

The boom has been one of consumer spending, mainly on the back of borrowing related to the strength of escalating property values. Yes, some of this spending has come the way of ordinary businesses, but mostly it has gone on increased leisure spending, much of it abroad, and the purchasing of consumables. But the spending spree made people feel good, and now the credit crunch has killed it, sentiments are reversed.

Whether he was referring to the UK specifically or the world in general, the Chancellor's extraordinary comment this weekend that we are facing the worst economic crisis in sixty years is a case in point. There is plenty of evidence to suggest this was a crass exaggeration, but the markets took no notice, and the value of sterling plummeted. We are all feeling that things are getting worse so we will latch on to anything which confirms this view and say 'I told you so'.

The essential underlying problem, common in business and politics, is that once the rumour machine gets going it churns out self-fulfilling prophecies. If enough people believe something is going to happen, it invariably will, and no amount of denial can prevent it. The classic case recently has been how the government might encourage some activity in the housing market.

We have historically had periodic adjustments in house prices, but on this occasion it is somewhat different in that the cause is not so much house prices as the availability of finance. After all, it makes no difference what value is put on houses if there is no money to buy them. One option, and only one, was a holiday in stamp duty. Initially the government made clear it would not pursue this policy as Lamont had tried it and its effects had been negligible. Yet rumours of a holiday persisted, and the market slowed further still as buyers held on to see what would happen. Eventually the government had no option but to announce something, in this case an increase for twelve months in the nil rate band to £175,000, because otherwise this damaging speculation would have continued. And now, of course, we can all smile smugly and say 'I told you so'.

But what exactly will an increase in the stamp duty threshold mean? In many areas £175,000 is very much at the entry level for housing if not below it, so there will be saving for first time buyers but huge pressure on properties in the £175,000 to £190,000 bracket to drop their price to £175,000 and further deflate the market at this price bracket.

Anyway, if rumours can move the market and influence government what should we be doing? We should be creating the rumours that will stimulate the markets and recreate that feeling of wellbeing. To start it all off I make some suggestions.

Positive speculation: reasons we might have to be cheerful

  1. The value of sterling has fallen against the dollar and the Euro, but look how the US economy expanded when the value of the dollar dropped because it was then more competitive overseas and exports grew.
  2. a. Sterling is weaker therefore our goods and services will be cheaper for people to buy outside of the UK and our exports will rise

    b. Sterling is weaker and therefore more tourists will want to come here because they have better spending power

    c. Sterling is weaker therefore we will go abroad less and spend our money here rather than overseas

    d. The Euro is stronger and therefore those who second properties in the Euro Zone will have offset some of the property loss with a currency gain.

  3. Energy prices are much higher than they were last year, in particular oil price. This has made transport much more expensive. As a result goods manufactured in far flung parts of the world are much more expensive to ship to the UK.

    a. If the price of imported goods goes up because of transport costs local produced goods will be cheaper and therefore more competitive

    b. If locally produced goods become more competitive we will see an increase in manufacturing and this will create more local jobs which will mean the economy will grow

    c. With energy prices going up we will reduce consumption of energy and all do our bit for global warming and the roads will be less congested

  4. The government will realise that the best way to increase their tax revenue is to set it at a level that people are unconcerned about paying the tax. Therefore:-

    a. They will make the extension to the personal allowance for 2008/9 permanent

    b. They will realise that people are not fooled by national insurance contributions not being a tax and scrap employee's national insurance and just increase the basic rate of tax. This way they will also increase the tax receipts on dividends and stop themselves worrying that small businesses might abuse the tax system by paying themselves dividends rather than salary

    c. They will realise that employers national insurance is a tax on jobs and discourages people to employ. Employer's national insurance will be scrapped and replaced by an employment levy which will be levied on all labour input costs.

  5. The government will realise that people do not like the credit system and that it costs more to administer than the benefits it creates. They will scrap all the means tested benefits and credits and pay them out to everyone but they will be treated as taxable income.
  6. At last the government will realise that the final salary pensions paid to civil servant employees is unaffordable, particularly now that civil servant pay is being linked closer and closer to private sector employees. The pension system will be scrapped and replaced with a money purchase scheme as in the private sector. This will dramatically reduce government spending over the long term which in turn will enable them to put more money into actual services.
  7. And finally the government will realise that they really have less control than they think and they are mere custodians of the nation. They do not need anything like the number of MPs they have and will go back to having just 100 MPs as was the case a hundred years ago. This too will dramatically reduce the burden on the public purse.

So let's create the rumours that we want to hear: as a result of present conditions the economy is going to get better, taxes are going to be fairer, government control will decrease and spending waste will too. Who knows. In politics, if enough people believe it, it invariably becomes reality. The good times might be back by Christmas as long as we tell everyone they will be.

Jonathan Russell is a partner in ReesRussell LLP based in Witney Oxfordshire. He is also a past president of the UK200Group.


Replies (4)

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By suesimkiss
10th Sep 2008 16:01

We have talked ourselves into this "recession"!
You are so right - we have talked ourselves into this "recession". But the media and some ridiculously irresponsible comments from the Chancellor have hyped it up even more! We need to start regaining confidence, gritting our teeth and getting on with it, instead of bemoaning how much house prices have fallen, as they were absurd. The "bubble" was caused in my opinion by the big house builders getting incredibly greedy. I was told by someone who works for one of the main builders that one of their top of the range houses costing from about £370k (Midlands prices!) only cost about £80k to build (inc labour). They only need to realistically price their houses, and the whole merry-go -round can start again, if the banks were to be persuaded to join in the game!!!

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By the gates of delirium
05th Sep 2008 16:51

Stop making negative vibes
Well said Jonathan, whilst i am not sure about a couple of your points i love 5 and 6 and agree with your sentiment!

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By dgowens
05th Sep 2008 14:33

Good policies for the Tories
I can’t see the present government adopting any of your proposals to reform the tax system. These policies would certainly be popular with the public and the opposition parties might take some of them up.
As to reducing the number of MPs and reform of civil servants pensions, I can’t imagine such proposals being popular with any of the politic parties. I think we’ll need a mass media campaign and demonstrations in the streets to get any movement here.

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By aburt01
05th Sep 2008 13:58

You are right... in so many ways
All this talk of technical recession just gives me a head-ache.

There are so many positives out there.

Your remarks on UK manufacturing are justified, UK manufacturers are doing well according to their association this week.

Investment in such laudable things as renewable energy has never been greater (if a bit mis-guided at times)

I just wish we could find a Government to invest in simpler tax systems. (And save the productive sectors of the economy a billion or two in overheads)

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