The recession and you: Vince Cable interview

The Good Housekeeping Institute gets some straight answers from Liberal Democrat Shadow Chancellor Vince Cable, who was one of the first public figures to predict the coming recession

When Judith Gubbay, Good Housekeeping's consumer director, met Liberal Democrat Shadow Chancellor Vince Cable, she was hoping for some clear answers to some of the trickiest questions of the day. And she got them. But what would it be like to interview the MP who predicted the recession nine years ago and still finds time for  tango lessons. ‘I was intrigued by the idea of meeting a professional economist and dance enthusiast,' says Judith. 'It turned out that Vince was a treat to interview. He not only knows what he's talking about in deep detail, he can also explain the essentials in a clear, down-to-earth way.'

 

Read on for the answers to those tricky, tricky questions...

 

Q: How long ago was it that you spotted the warning signs that have led to the credit crunch?

A: Back in 2002 or 2003 I warned Parliament and the press about the irresponsible mortgage lending that was feeding the bubble in the housing market and about excessive amounts of personal debt that couldn't be sustained if the economy turned down.  Myself and my party were also warning 10 years ago about the dangers of demutualising the building societies and converting them into banks - every one of which has now failed or been absorbed: Northern Rock, Birmingham Midshires, Woolwich, the Abbey. I made myself unpopular by saying it was much more sensible to leave them where they are and not get the £1,000, which people were happy to use for going on holiday in the Costa del Sol. That was not what people wanted to hear at the time.

 

Q: Our readers range from women in their late 20s to pensioners. Do you think some age groups have been hit worse than others in this recession?

A: There are certain groups who are being very badly hit. Obviously younger families, particularly ones with job losses who can't keep their mortgages going - are in a terrible state. There's a massive cut in their income because they go from salaries to Jobseekers Allowance. And also quite a lot of pensioners who are not well off and who are not into very sophisticated financial investments are very angry because they're not getting any money on their bank assets. But there are other people who are not doing badly. The bankers who caused these problems have just walked away with their money. They're not suffering particularly. In principle, under the 1995 Pensions Act, if people have been guilty of negligence or fraud then their pensions are stopped. I think that's the way they should have been dealt with.

 

Q: There's been talk of green shoots, of a financial recovery on the horizon. What do you make of that?

A: I hate this phrase ‘green shoots' because it's been so misused for political purposes.

 

Q: So do you agree with what some people say, that this recession won't be like other recessions in that we won't go back to normal afterwards?

A: Well I hope we don't go back to 'normal', because there were a lot of mistakes that were made, particularly in things like house purchase. People became obsessed with property at all costs, treating it as a source of saving and pensions, as well as a place to live in. I think a lot of people learned painfully that that's not the best way to organise things.

 

Q: So is it all our fault because we consume and borrow too much? 

A: I don't want people to feel guilty. I think that would be completely wrong. The simple point is that we do different things at different stages of our lives. When we're young and starting out on professional careers, people do borrow - as I did - and then as you get into middle age you can accumulate savings and then as you get into old age you spend the savings. There's a life cycle. I think the difficulty that people are having in getting their heads round this is that in the long run we do need a savings culture. It's important for the country's health. Some countries like China are making enormous savings and Britain and America are not saving, so the money has been transferred across the world through the banks and that's one reason the process has broken down. So that's one side of it, but at the same time it's not sensible for people to hoard cash which they would otherwise spend because they're frightened or anxious. And it's getting across that subtle difference which is quite difficult for people in government and policymakers.

 

Q: Do you think it would help if everyone were to study economics and have a better understanding of the economy?

A: Not necessarily, because economics can be very abstract, very mathematical, and there are different schools of economics that tell you different things. What this crisis has illustrated is that economic ideas are very important and it's helpful to have an understanding but in terms of everyday life.  What I think people do need, which is different - is financial literacy. And that is crucial because there are an awful lot of people who don't understand interest rates. They don't understand compound interest. You can't make sensible decisions about mortgages and credit card borrowing unless you understand what an interest rate is. So it's financial literacy, not economics [that people need to study].

 

Q: Deflation, inflation, deflation, what should we be worried about?

A: It's very confusing, because the worry is that we get into a deflationary spiral. Deflation means falling prices, falling output, falling employment, falling wages. That could happen - there is a danger it could happen and it's what has happened in deep depressions in earlier times in history. And that's what the Bank of England is obsessed about. That's why they've reduced interest rates so drastically and that's why they're creating credit, to stop that happening. But we haven't got there yet and a lot of worried people, particularly pensioners, I suspect, are completely baffled by this because they see increased prices and their cost of living going up, and they're paying more for public transport and their council tax is going up and they're saying where's this deflation? Show it me. It's very tricky, this, for the Bank of England - to avoid deflation, without lurching into inflation.

 

Q: Was separating the Bank of England a good thing?

A: Yes, and I strongly defended it at the time because the danger of not separating it is that things like interest rates would be set by political people for electoral advantage. What used to happen is that in the run-up to every election interest rates would be cut for mortgage borrowers, to bribe people to vote and that's a terrible way to run the economy. So putting that particular decision in the hands of competent independent-minded people was a good idea.

 

Q: The housing bubble - what really caused that? Was it people being silly and borrowing more than they could repay?

A: There's a big controversy and I think it's fair to say there are genuinely different views about this. One view is that there was just a shortage of houses and it's all caused by nimbyism and I don't deny that there have been problems, particularly in getting social housing built. There's quite a lot of analysis now that shows that a lot of the housing crisis was not due to that but to speculation. It was due to people bidding up prices, for speculative reasons, in the buy-to-let market, for example; and it was due to loose credit and the easy availability of mortgages. Building societies and banks were lending more than they should have and bidding up the price to unrealistic levels. Lots of people were buying second homes. There's no reason why people shouldn't have second homes. I don't criticise the individuals who did this. It was very understandable. It was part of a culture - property sections in every newspaper and in those television programmes. People were encouraged to believe that bricks and mortar is the thing to do. Up to a point, that's fine but it got out of control.

 

There's more from Judith's one-to-one with Vince in the June issue of Good Housekeeping. Vince Cable's new book is called the The Storm: The World Economic Crisis and What it Means (Atlantic Books, £14.99)

 

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