David Smith: things might be bad, but they're going to get better

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Merryn: Hi, I'm Merryn Somerset Webb, editor-in-chief of MoneyWeek, and I am here today with David Smith, economics editor of The Sunday Times, and we're going to talk about, amongst other things, his new book, Something Will Turn Up. And, I'm looking at this cover, David, and I can't quite figure out whether Something Will Turn Up is a pessimistic or an optimistic cover. Is it saying that things are pretty rubbish, but maybe if we're lucky something will turn up? Or is it saying the great thing about capitalism is that something always turns up?

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David: The choice of the title, obviously it comes from Dickens, and Mr Micawber, so however bad things are, things do get better, and I think I chose the title more because you get a lot of excessive pessimism around, either about the UK or about the global economy, and there are times, and you know them well, when people say, we're all done for. We're never going to recover from this. This is the end.

Merryn: One day that could happen.

David: One day it could happen but most times so far it hasn't, and so, you remember 2008-09, people said that the British economy can never recover from all this. It's too bad. It's too terrible. And I always say to people, well, there are healing properties there. There are natural healing properties.

I suppose the thing about the book is that not just mindless optimism that things in general do get better, even in the darkest times, but also you have to do the right things to make them better. So you think of some of the great episodes of disaster in the UK 1970s the IMF rescue, the winter of discontent, and so on. With policy change, things can get better, and so it's a glass half full title, rather than a glass half empty.

Merryn: OK, good. So, interesting. So let's go back to policy making things better. Do you think that post crisis policy did make things better? Or would a different kind of policy, or perhaps even no policy at all, would have made things better faster?

David: I think something had to be done and I think the two things that had to be done, one was that, what was quite good about policy making during the crisis was that interest rates came down pretty quickly, by past standards. I mean, you will remember previous recessions, where part of the problem was that interest rates couldn't be reduced, because, as I say, we were in the ERM in the early 90s, or weren't reduced quickly enough, because people still feared inflation.

I think one benefit of the Bank of England seeing the problem and recognising it was that they brought rates down very quickly, and I think the effect of that was to ease the impact of the crisis on most people, so most people didn't have the burden of high interest rates at the same time that unemployment was going up very sharply. So that was good, and I think also, people debate about how much the deficit needed to be brought down. In my view we had to show willing in terms of getting the deficit down.

Merryn: Had to show willing to the international markets? Because we're something of a weak link in the global economy at that point.

David: Well, to the international markets, the big financial sector, people saw the UK as quite vulnerable. I mean, look what happened to sterling over that period. This was the sitting on a bed of nitroglycerin period, and so it had to be done. It had to be a programme, and I think if you look what happened and you look at growth since 2009, given all the headwinds, given the fact that there was a decent amount of deficit reduction, I think it's probably not as good as it could have been, but it's not far away from being as good as it could have been. You know, growth has been OK in the post-crisis period.

Merryn: And was QE an absolute necessity as well?

David: I have slightly mixed feelings on that. I think in 2009 it was a necessity and I think it did do some good in 2009. I mean, when I get a little bit queasy about QE is when it is seen as a normal tool of economic policy. So I wasn't convinced it was needed in 2011-12. You know, the argument for doing it then was because of the eurozone crisis, and I am not convinced that the bank should not have reversed some of it by now, and, see what's happening in politics at the moment, people have got their eyes on QE for all sorts of reasons, for all sorts of reasons which would threaten bank independence, and I think if it had stayed strictly as an emergency policy; if it had been reversed quite quickly after the emergency, I don't think people would be talking about using QE to fund infrastructure or whatever, so I think there is a danger there.

Merryn: But could it have been reversed, given how much debt we have?

David: I think it could have been. You know, you think about the strength, which has taken us all by surprise, of government bond markets, a safe haven, appeal of gilts and so on, it wouldn't have been difficult, at least, to reverse that, almost by stealth, as the gilts matured just don't reinvest. You know, let it run down, and

Merryn: Yes. But we're still reinvesting now, aren't we?

David: We're still reinvesting, and they will continue to reinvest until rates have gone up. They won't actively reverse QE until rates have been raised to a level from which they can be materially cut, and who knows when that will be? So that's going to be sitting there for quite a long time, I think, and it will be a temptation for politicians. I mean, you hear people saying, well, it's effectively been written off already, because they've kept it for so long, and I think that is a danger.

Merryn: OK, so you're not, and I'm just guessing here, not a fan of people's QE?

David: Oh, people's QE is economically illiterate, I mean, it is ridiculous.

Merryn: OK, well, explain that, because, obviously I agree with you, but on there was a newspaper columnist who said, yes, there is a magic money tree, and when she was challenged on that, on Twitter, overnight, she sent out another tweet saying, if there isn't a magic money tree where does QE come from?

David: Right. OK. I mean, the whole thing about QE, the only thing that keeps it honest is that the Bank of England is purchasing assets with the money it creates. Those assets can be sold back at a later stage. If you're not doing that, if you're

Merryn: But we're not doing that. I mean, to be clear, we're not doing that.

David: Not yet, but the

Merryn: We're still saying we're going to, but we're not.

David: Yes. But in time, that will happen, even, eventually, even through the route of allowing the gilts to mature

Merryn: It will happen.

David: it will be reversed. If you just print money or create money to hand out to households or to build bridges, or to build railways, and so on, you don't have you don't own the assets. The assets are owned by the country, and the Bank of England balance sheet becomes totally lopsided and the only thing that the government can do in response to that is eventually bail out the Bank of England. So it doesn't make any economic sense. But, by all means, I mean, there would be nothing to stop the Bank of England buying the bonds issued for the purpose of infrastructure spending, as long as they're tradable. There's nothing to stop the Bank of England buying bonds issued by housing associations as long as they're tradable, but there has to be an asset to set against the money that's been created, otherwise you do get into really dangerous territory, I think.

Merryn: OK. So we were talking earlier about politicians who dealt well with the crisis, and who your favourite chancellors are, or have been. Who was your top favourite?

David: Well, there are two people I would mention, and I think they both took over in quite difficult circumstances. They both had, quite difficult relations with their prime ministers, and the prime ministers did not make it easy for them.

The two I would name would be Geoffrey Howe, in the early 80s, and, the one thing I looked at

Merryn: That's an earlier crisis.

David: An earlier crisis, and you think about it, the Tories take over in 1979. Immediately they are dealing with the second oil shock, so inflation goes very high and the thing that Howe did which was quite extraordinary, was the austerity budget of 1981. You know, that was the one which provoked the letter from the 364 economists saying, present policy just deepens the recession, and so on, and it was an incredibly bold thing to do, and, some people would say he wouldn't have done it without being leaned on by, Margaret Thatcher and Sir John Hoskins at Number Ten. But it was done; it was done by a chancellor, and it was an incredibly bold thing to do.

I always think, you think about the chancellor in the sense of, not just things they have to deal with, but what shape did they leave the economy, when they left office, the office of chancellor, and there is no doubt that Howe left it in a much better shape. I mean, you think of the radical things that were done. Exchange controls were abolished very quickly, after the 79 elections.

Merryn: Amazingly, people don't really remember exchange controls any more. They hardly believe it happened.

David: Yes, no, absolutely not. You know, that was an incredibly bold thing to do. People thought, sterling, vulnerable currency. How can it exist, how can it survive without exchange controls? They were abolished. Some really big things happened on tax. I mean, it was under that Howe first budget, a month after election, top rate brought down from 83% to 60%, basic rate from 33% to 30%, set the path of lower direct taxes, lower income tax, which I think was incredibly important in the UK in the 1980s.

The other one is Alistair Darling. I had a lot to do with him during the crisis. He was always dealing with this hugely difficult situation, unprecedented for a modern day chancellor, but always courteous, always did things, I think, in a proper way, and I think most of what was done was very good, and I think often he was having to deal with, as I said earlier, the Bank of England was very quick to reduce interest rates, but it wasn't so quick to recognise the severity of the crisis, and I think sometimes the Bank had to be leaned on by Alistair to do something about that or to act more quickly, and I think all that was done very well.

Again, you think of the economy that he left in 2010 was recovering. I mean, we know there was still the huge budget deficit to deal with, but I think that the budget deficit was partly a product of the crisis, partly a product of the big spending increases before he was chancellor, so I don't think that can be laid at his door, so I had a lot of time for him, as well.

Merryn: And for George Osborne?

David: I would give Osborne quite high marks for bravery, because again, he's had to deal with not just imposing tough decisions on the country but also having to do it against quite an outcry from many economists, from many, you had things like the IMF getting cold feet halfway through and, warning him that he was playing with fire, and so on, but for sticking to it I'd give him quite a lot. For other things not so high. I mean, I don't think he's been a great tax reformer. You know, he's shaken things up in other areas, such as pensions, but the tax system now is

Merryn:The tax system is so harsh.

David: is more complicated now than it was. It's so?

Merryn: It's so hard to do. I mean, where do you even start with simplification?

David: Yes.

Merryn: I mean, what would you do, if you were George Osborne and you set out to actually deal with our tax system, where are you going to start?

David: Yes. Well, the simple principle, which, again, I would give, in my league table of chancellors, if it weren't for the Lawson boom I would give, very high marks to Nigel Lawson for tax reform, because I think he had very clear ideas, which is you try and reduce tax rates by removing as many reliefs and allowances as you can, and that's a very simple principle, which he adopted both for personal tax and for corporate tax, and that worked very well. You know, you think of what happened to corporation tax during the Lawson period and so on. I think it came down from 52% to 35%. It's obviously coming down again now, but there is very little of that you can observe during the Osborne chancellorship. I mean, whatever the size of Tolley's tax guide when he took over

Merryn: It's bigger.

David: it is bigger now, and that was a criticism that the Tories used to lay at Gordon Brown's door, this guy has over-complicated the tax system, and there's been no real reversal of that. So I think, on a micro level, most of what Osborne has done has been, sort of, bitty. It's been interventionist. There have been little schemes here and there.

Merryn: But he did try. I mean, do you remember earlier in his chancellorship, when he tried to limit the amount of tax relief of any kind, including gift aid, etc, that anyone could have, over a year, and he just got kicked in the head until he backed off?

David: Yes. That's true.

Merryn: I mean, the lobby groups here are really tough.

David: Yes. I mean, exactly, and the 2012 budget, which was the one where it really that was a difficult time for him, because, reducing the top rate of tax from 50% to 45%, with a year's delay, but also all those other things, which I think did have a, kind of, simplification hat on, as you say, including, the pasty tax, the caravan tax, and...

Merryn: He was trying, and lost

David: He was trying there, yes, and then I think, after getting burned there, he probably realised, oh, I'll just leave it alone, there are bigger fish to fry here, and so in that respect I think it's been disappointing, but, the big task in 2010 was to get us back to safety, I think, and I think he's done that pretty well. I mean, people don't...

Merryn: So you feel we're safe now? As an economy we're safe?

David: I think we're safe in the sense that we don't worry that every Friday evening there's going to be a downgrade from one of the ratings agencies. You know, I always thought that once the deficit was on a, sort of, downward path, people wouldn't forget about it but they would be much more relaxed about it. It was when I mean, you think about 2010, and the Treasury was predicting we would have, budget deficit of £176bn, followed by £178bn. In fact they were over pessimistic. The peak was in the 150s, but these were enormous numbers and there didn't seem to be an obvious way of getting it down. The deficit has not come down as rapidly as he might have hoped, but it's come down enough and at sufficient speed to take it away as a crisis issue, I think. I mean, it needs to go down further, but, I think in that respect we have been made safe.

Merryn: And employment-wise we're doing just fine.

David: Yes.

Merryn: Wages are now starting to rise.

David: Yes. I mean, the employment story has been staggeringly good, I think. I mean, to have You know, if you think about I always think about the recession and the crisis itself, and the comparison I quite like is that in the recession of the early 90s, which was a recession which most people felt, more severely than the one of 2008-09. In the recession of the early 90s GDP fell by 2.5% from peak to trough. Employment fell by 6.5%. In 2008-09 it was exactly the opposite. GDP fell by 6.5%. Employment fell by 2.5%. You might have expected after that that we'd get very slow growth in employment after, once the economy started recovering, because employers had been hoarding labour during the recession.

In fact that very good outcome during the recession was followed by incredibly strong employment growth, particularly over the last two or three years, so I think it's been quite a success story, and I

Merryn: But you often hear people say that's part-time work, low quality work, people working 16 hours a week just to get their tax credits, etc.So in a way it's rather policy driven, part time, low grade employment, than high quality employment.

David: Yes. There was some of that and...

Merryn: Which is maybe better than no employment, right, but?

David: Well, I would agree with some employment is better than no employment, but you know, that was the story early on. That has not been the story for the past couple of years. The past couple of years, employment growth has been dominated by full time, conventional employment, so not even full time self-employment. Self-employment has gone down a little bit, as you know, and full time mainstream, the sort of jobs that we thought, we were told had disappeared

Merryn: Would never come again.

David: Yes, would never come back. You know, it's been very conventional over the past couple of years.

So I think, in the early stages, you would expect those things, the part time jobs, zero hours and all those things, but more recently I think it's been good quality and there is evidence. I mean, the evidence is mixed, but there is evidence that, the new jobs are pretty good quality jobs as well, paying reasonably well...

Merryn: Yes, and the level that's coming through of wage inflation now, isn't it?

David: Yes, exactly. And part of that, there is thing the Bank of England and other economists sometimes talk about the compositional effect. Compositional effect, in the early stage of recovery, bore down on wages because the jobs, as you say, were low paid jobs. Now you're getting, as you say, more higher-paid jobs, so wage growth is going up. So I think it is pretty decent. I mean, the labour market has been, I think, a great success story, and I think as well as wages picking up now, the other thing that does seem to be coming through is stronger productivity growth. You know, it's taken a long time but I think we'll begin to see, during this year, and it looks as though we had a pretty strong productivity number in the second quarter. We haven't got the figures yet, but just doing the, what happened to GDP and what happened to employment, it looks as though it will be a reasonable number, and that, hopefully, is the return to something like normality, normality being 2% a year productivity growth. I think we can get back there. We'll never make up of the GDP we lost or the productivity we lost.

Merryn: The lost years.

David: But just getting back to some sort of normality I think will be, would be very welcome.

Merryn: On the matter of wages, productivity, etc, let's move north a little, from Blackfriars Road and talk about the Midlands, which is something you've written about a lot in this book about, George Osborne likes to call it the march of the makers, right. This resurgence of growth, particularly in manufacturing in the Midlands and particularly around Birmingham, right.

David: Yes. I mean, the reason I enjoyed writing the book so much, and I did enjoy this one, very much, was because I could write about...

Merryn: You're rather suggesting you didn't enjoy any of your others, David.

David: Well, this one even more. No, this one was really, because I could you know, it brought back a lot of memories, because I look back to where I grew up, which is in the Black Country and the West Midlands, next to Birmingham, the industrial area, and at a time when, as I say in the book, everybody's father worked in manufacturing. You know, this was a manufacturing area

Merryn: Did your father work in manufacturing?

David: He did, yes. He worked for a company called Metropolitan Cammell, which made, as well as the underground trains, the Tube trains, made lots of, sort of, big railway I mean, one of my memories is going to an open day there and there was this enormous batch of rolling stock ready to be shipped off to South African Railways. You know, so there was a big export business in a time when engineering was the thing and manufacturing was the thing.

The thing about growing up there was that it just you just felt it was completely and utterly permanent. This was

Merryn: There forever.

David: there forever. it would never disappear. It was solid and permanent, and it maybe, growing up in an area where everybody'se d father was in industry, you didn't hear much moaning and talking down about the businesses they worked. We believed that British was best and we believed that what we did was best and that things that were made in Germany You know, nobody, when I was, in the years I was growing up, nobody bought a foreign car. You know, well, one person did in the area we lived in. They bought a Renault Dauphine, and

Merryn: What did everyone think of that?

David: people just thought it was weird. You know, why would anybody do that? You had all this array of British cars you could buy, and I think it was helped, incidentally, by the fact that there were probably quite big, important roles on cars at that time, and so on, but anyway, somebody did, and they were regarded as weird.

Then, I think, what I described in the books is just the it's the suddenness of the decline. So this is not something that's everybody knows that manufacturing went into decline, in Britain as it did in many other countries, but there is this single decade from I put it 1973 to 1983. We start, the manufacturing is still pretty good, still pretty strong. You come to the end of it and it really has been, removed, or it's on the way out, even in the areas where it previously seemed permanent, like the Black Country, like Birmingham, and so on.

The story now, of course, is that we are seeing something of a revival, but I always think, it's a revival from a much lower base. I mean, the time I'm talking about, manufacturing was 40% of the economy. Now it's 10% and

Merryn: There are still a lot of people employed in the manufacturing business. I mean, when we

David: Well, yes, and related businesses.

Merryn: Yes, when we talk about manufacturing, your father's generation working up there, and no one will ever see a job in manufacturing again, but in fact there are I don't know. You tell me how many people working in the manufacturing business?

David: It's the low millions now, though. It's the low millions, and whereas, in manufacturing and related businesses you were 40% to 50% of the workforce in those days, and now we're talking about 10% of GDP, 10% of the workforce.

Merryn: And what kind of businesses are we talking about? We know the car industry has regenerated hugely with the Jaguar plant etc, and but what else?

David: Well, I think, we are The things that we are good at, and it's two things. You know, when I go and talk to people in manufacturing they will always emphasise the how good we still are at high value manufacturing. So we're still very good at that and the example that everybody gives is things like motor racing. But it's not just that. Things which actually do require quite a lot of technology, quite a lot of R&D and so on, we still do pretty well, but the other But curiously enough, there are some things coming back, which aren't high tech at all, I mean

Merryn: OK, so reshoring is happening?

David: There is some reshoring, and it's often the things which are just expensive to transport. People say piping is coming back. Some of the most basic building products, which people had outsourced to China and elsewhere. It's become cheaper to do it here.

Merryn: So that's about cost of transport but it's also about shorter lead times

David: Shorter lead times, yes.

Merryn: and being able to order in small batches and all these things.

David: Yes, and it's also about countries like China losing some of their cost advantages, because of labour costs and so on. So I think we should be a little bit cautious about the extent that reshoring is happening.

Merryn: No, don't be cautious tell us it's all wonderful.

David: Well, I would like it to be more wonderful than it is, because One reason I say we should be cautious is that the overall numbers for manufacturing are still a little bit depressing. I mean, at the moment we're not going through a great march of the makers, manufacturing is barely growing at all. The great hope we had, which seemed you know, 2010, 2011 was a very good time of manufacturing and it did seem that Osborne thing, this can be a recovery built on manufacturing revival was coming true, but, manufacturing at that time in the Eurozone had its downturn and it seems to be having quite a bad time now. It's having a bad time because some of the emerging markets are you know, demand has fallen there and it's I'd like to be more optimistic, but it's manufacturing is certainly not booming at the moment. Maybe it can, and I hope it will.

Merryn: But there are green shoots?

David: There are. There are green shoots, but they have a habit, as far as manufacturing is concerned, of getting stamped on rather, by one thing or another, whether it's the exchange rate, whether it's eurozone crisis, whether it's Sometimes I think it is incredibly difficult for I mean, the one thing I say in the book is that I think there was this critical moment when people in Britain used to think, I've got to buy British, because I, I know people who work in manufacturing. I know that it means jobs here; it means jobs there, and so it wasn't, sort of, blind loyalty, but

Merryn: It was in there.

David: People could join the dots. Once manufacturing fell below a certain size, and in particular once manufacturing was associated with disruptive trade unions, unreliable products and all those things, then that loyalty was lost, so even when you get, as we're getting at the moment, very strong demand for a lot of industrial products, consumer products, which are industrial products, including cars, people don't think, well They approach it in the way that, you might say irrational consumer. So they just look what car suits me best. I don't care where it's made, and, I'll go for the best finance package or the best something that just has the specification I want. They don't wonder whether it's made in Solihull or whether it's made in Korea. It doesn't bother them.

Merryn: I'm afraid I never think about that when I buy a car.

David: I do.

Merryn: Do you?

David: I do, yes. But it's

Merryn: What do you drive, David?

David: Well, I've got a very modest Jaguar. When I was growing up the great thing, the great aspiration, certainly for my father, was to have a Jaguar, and he never quite made it, so I feel

Merryn: So you bought one for him.

David: Exactly, yes.

Merryn: So, if our future is not in manufacturing where is it? I mean, obviously we're excellent at services, and you can see that happening in Birmingham as well, HSBC, Deutsche, etc, moving back office stuff, at least, from London to Birmingham. Is it there? Are we always just going to provide services? Is the creative industries? Is it?

David: Yes. I mean, I think it is always a mistake to attach the word industries to anything, particularly when you're talking about the creative sector, but I do in the book. I describe them as creative industries, and we are very good

Merryn: I'm just quoting.

David: Yes, fair enough. We are very good at those. I would hope, manufacturing will play a part in it, but there are, we are pretty good at quite a lot of those. You know, financial services, obviously has been through a difficult period but we are still good at it, and we're good, I think, over and above that, at professional and business services, so everything from accountancy to architecture through to something beginning with Z, which I can't think of, but, we are good at those things. But I think it has to be mixed. So it is good that we are seeing at least a discussion about regional rebalancing.

So, mostly in the context of Manchester, but also Birmingham. You know, Birmingham, as you say, companies, in a way that I thought would never happen, like the HSBC and as you mentioned, Deutsche, thinking of Birmingham in a way that I don't think, five years ago they would have done. So I think that is encouraging, and re-establishing I mean, these regional cities used to have a lot of company head offices. They used to have their own, kind of, economic ecosystem, because they had so they had all the business and professional services to go with the large manufacturing activities they were doing, but now

Merryn: Yes, but you still see that around. There's so much money left knocking around Birmingham as a legacy of that time.

David: Yes, there is, and in a lot of other cities. I mean, you go to a place like Liverpool and you recognise how, just how successful it was, because of all that.

So, I mean, the one thing I didn't mention about Osborne was I think that whole northern powerhouse thing was very imaginative. I mean, it's easy to think

Merryn: And it does really mean something to you.

David: It does mean something, yes, and I think it would be easy for, particularly a Conservative chancellor to think, well, they're never going to vote for us up there, so why bother? But I think that that was imaginative, and I think if that starts something which is, we've been through many, many periods of really lousy and unsuccessful region policy, so if this is a kind of, cooperative, in other words, different authorities cooperating with each other; if it's based on the private sector investing when the infrastructure is there, I think there is something that could be sustainable in these places.

Merryn: Could it ever be successful enough to end the housing crash in Northumberland?

David: [Laughs]. That's a good point, yes. Well, I'm not sure it could. Well, Newcastle Again, it's odd, because you've got, Newcastle is a successful regional city but surrounded by quite a lot of unsuccessful towns, some of which are suffering because they were the recipients of public sector jobs in earlier stages of regional policy and when the public sector cuts back over dependence on the public sector is a real killer for some of these places, and I think that's a problem.

But Newcastle has got, its own successful industries, including one of those creative industries, the game industry, computer games, and so on, so I'm not pessimistic about those.

Merryn: Newcastle and Dundee.

David: Sorry?

Merryn: Newcastle and Dundee.

David: Yes, quite. You know, I'm not pessimistic, but I think we shouldn't be cynical and we shouldn't be sceptical because there is entrepreneurial talent all over the country. It's just a question of harnessing it and having the finance, and obviously that has been a problem for some new or embryonic businesses recently, but I don't think we should think it can't happen. I think it's We've been through this period, probably living with the legacy of the decline of manufacturing, and we've just thought, well, these places can't do it any more. I don't think we should be that pessimistic.

Merryn: Let's talk briefly about the thing that, actually, to be honest, readers care about most, house prices.

David: Yes.

Merryn: Now, you've taken on a new brief, writing in the housing section of the Sunday Times, haven't you?

David: Yes.

Merryn: What's going to happen to housing prices? Shall we go out and buy some buy to let flats now? Is it too late? Where will we buy?

David: Yes. I mean, I should say this is a temporary brief, so I will

Merryn: But you're so good at it. Well, I hope you're good at it; that's why I'm asking you these questions.

David: Yes. I mean, what's going to happen to house prices in the short term is that house price inflation's going to get stronger, so if we're talking about the next, sort of, three, six, nine months, and that is because this, sort of, curious phenomenon we've got, which is that everybody talks about housing supply and they mean new housing; you know that the housing supply that really matters is the supply of existing homes, and people just don't want to sell.

You know, older people aren't downsizing. They're living longer. Maybe they've been persuaded by George Osborne and inheritance tax that if they want to pass it on they need to stay in the family

Merryn: That was a pretty dim-witted policy. I know we've been quite praising of George Osborne. That was a really dim-witted policy, wasn't it?

David: Yes, I agree with that, and I think all the reassurance that people will be able to take their allowance with them, people just don't believe that. They think, if I want to pass on this family home I've got to stay in it.

Merryn: OK, so in the short term house prices are going to keep going up, because the supply simply isn't there, turnover's too low.

David: Yes, exactly.

Merryn: But longer term?

David: Well, we have different views on that.

Merryn: But it's your views that matter here, not mine. You'll be wrong, of course, but your views are important.

David: Yes. I mean, I've always said, when we used to debate this at the Sunday Times; we used to say that there's no such thing as spontaneous combustion for house prices. You need something to happen.

Merryn: But we did have something happen. We had a proper crash in the UK, and in real terms only small areas of the UK are back to where they were in 2007. So, we did have a proper crash. So the argument from here is, is that crash over, or is there another on the horizon?

David: Well, I mean, that was a once in a century crisis. I always say to people, you don't get two once in a century crises in the space of a few years.

Now, maybe there are some you know, there are some of the repercussions of that still coming through, and we see maybe we see it in emerging markets now, but in terms of I mean, quite a lot of areas of the country are You know, it depends which measure you use. Quite a lot of areas in the country are, in the case of London and the southeast, well above pre-crisis levels. Some areas are just about there, and some are still, as you say, some way below.

The thing is, I think it is different, post-crisis, because even though mortgage lending is going up again now, it's going up quite modestly. Transactions are quite low. Mortgage volumes are quite low at the moment. So you're not getting the, sort of You know, it's an odd situation where you've got reasonably strong house price inflation but low transactions, not a lot of money coming in through from mortgages. So it is almost a, sort of, just straight forward supply/demand thing, and until that goes away, and we're in the party conference season at the moment, every politician is going to promise more housing and more social housing and everything else, and then, it never happens.

You look at the house building industry. The house building industry has adjusted down to volumes it knows it can be profitable in, and rebuilding it to build a quarter of a million new homes a year, or building it up to build a quarter of a million new homes a year, is actually quite difficult.

So I think the situation we're in, which is that demand does not have to be fantastically strong to keep house prices rising.

Merryn: For prices to go up.

David: Even though we used to debate it, I would never like to give the impression that I think strongly rising house prices are a good thing.

Merryn: I shouldn't think anybody thinks that any more, do they?

David: Nobody thinks that.

Merryn: I mean, by now everybody must realise that it's bad for all of us.

David: Yes. All I'm trying to describe is how I see the reality and again, if you think about what has brought house prices down in the past, in the absence of a crisis of the sort we saw in 2007, it's been sudden and sharp rises in interest rates, and we're assured by the Bank of England that that's never going to happen again. You know, that when interest rates go up it will be gradual, to another level much lower than in the past

Merryn: Do you believe that? I don't believe that for a second. It never happens the way central banks think it's going to. If things happen in the way central banks thought they were going to we would never be where we are today, let's face it. So believing them now, on this, clever as Mark Carney appears to be, seems a mistake.

David: Yes, well, I think that will be true until he He's at Bank of England until 2018, and I think it is quite likely that what we see on interest rates between now and then is something like what he talks about, sort of, gradual moves away from the zero bound, away from and to something, which we would regard as still quite low, historically, so 2.5%, 3%, and that's what the markets expect and that's what You need something to come along, either a sudden collapse in sterling or something like that, or some inflationary shock, and I can't see that for the next couple of years. I mean, I just don't see where that's going to come from.

Beyond that you're right to be sceptical. I mean, it is then anybody's guess, what happens. The moment you start thinking, well, low unstable interest rates are the new norm is the moment you break away from it.

Merryn: Something goes horribly wrong.

David: So, five years' time, seven years' time, ten years' time we could be in a very different environment. You know, we could be back to, not necessarily back to the kind of levels that we've had in the past but certainly the You know, we've moved from one form of control that we thought we had, which was that anything the Bank of England or the other central bankers did had these magical properties, they only had to adjust rates by a quarter of a point and that was you know, it was precision control of the economy, to one where we don't know whether they've got any control at all now, but we seem to be stuck at very low interest rates. But that could easily turn around. These things, these changes don't last forever, I think, so you're right to be sceptical.

Merryn: OK, well, I'll end it there. Thank you very much, David.

David: OK. Thank you very much. Thank you.