The MoneyWeek Podcast: 17 years of change

As John Stepek leaves MoneyWeek after 17 years, he and Merryn look back on what’s changed in that time. From consensus politics to populism; financial crashes and the failure of independent central banking; and the one tax that the incoming prime minister should introduce.

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Merryn: Hello, and welcome to the MoneyWeek Magazine Podcast. I am Merryn Somerset Webb, editor-in-chief of the magazine. It is August 1, 2022. With me today is John Stepek, our executive editor. And today is an important day; a sad day even. I’m going to leave John to tell you why. John, something is about to change, something is changing.

John: Yes. Yesterday was Wednesday, our print day, and I put my last ever issue of MoneyWeek to bed. I’m leaving.

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Merryn: After 17 years.

John: 17 years.

Merryn: 17 years, we’ve been doing this together, John. It’s gone in a flash.

John: It has. It has. It seems like no time at all since August 2005.

Merryn: Now, in the editor’s letter this week… We’re not going to dwell on our miseries about any of this. We’re going to talk about more useful things. In the editor’s letter, which you wrote – thank you very much, it meant I didn’t have to – you wrote a little bit about what the financial world was like when you joined us in August 2005 versus what it’s like now. So let’s go back a little bit and talk about 2005, which, at the time… We were doing a bit of bitching and whining about various things, but at the time, most people were pretty happy, weren’t they?

John: Yes. The thing is there was a kind of broad consensus that essentially central banks had managed to fix the problem of boom and bust, and Alan Greenspan in particular, who was getting… There was a biography written about him, titled Maestro. I realise this…

Merryn: God, I remember that.

John: Yes. His halo had got tarnished by the 2008 financial crisis, but mainly for the wrong reasons. But yes, no, people were saying that, oh, he’d sorted everything out and that there was going to be no more boom and bust, which is obviously Gordon Brown’s famous catchphrase.

And for example, the most interesting thing about politics back then, which I’d slightly forgotten until I looked it up, was that the kind of things that people were moaning about were low voter turnout and voter apathy, and that basically, all the politicians agreed on everything. And obviously we’ve had quite a significant change in what political columnists are complaining about these days.

But that was just one big difference. The oil price. The oil price. It was hitting record levels. It was hitting record levels, but the record was $60 a barrel, which now seems really quite cheap. But it’s easy to forget that it really wasn’t until just after the 2000s that it even got to $40…

Merryn: Yes.

John: For the first time since the 80s or something like that. So there was quite…

Merryn: And then we had that wonderful moment when Goldman Sachs told us it was going to $150.

John: Yes.

Merryn: And you and I always say that they say they don’t ring a bell at the tops of the market, but they pretty much always do.

John: Yes, and that…

Merryn: You just have to be listening.

John: That was pretty much it as well then, because it hit $140 eventually, and then never looked back.

Merryn: Yes, that was that.

John: And, yes, the other thing is interest rates and their relationship to inflation. So the Bank of England… Actually, because the oil prices had been going up, and obviously, when the oil prices go up, that is a bit of a squeeze on the economy. And the Bank at the time was a little bit rattled by signs that there was a fairly mild slowdown. And so the interest rates had been at 4.75%, and then just, I think, the month I joined actually, they cut them to 4.5%.

And the problem is that all that did was it reminded markets that central banks were always in their back pocket basically, and so it kind of reinjected energy back into the housing market, which up until that point had been slowing down. And that was after the house prices had doubled in just five years. So people were really unhappy about house prices back then as well.

And that’s one thing that hasn’t changed. That is one thing that no one has managed to do anything useful to combat over the past, well, yes, nearly two decades, which, given it’s at the heart of an awful lot of our present political problems, is quite disappointing really.

Merryn: And we were very worried about high prices at the time, weren’t we? We were worrying a lot about the potential for a UK house price crash, but we were also worrying about the potential for a US house price crash. And where UK house prices have always been reasonably volatile, looking back, they’re up, down, up, down, up, down, the odd crash, etc., but in the US, there was a lot of talk about how house prices in the US had never fallen, and never would.

John: Yes, that was Ben Bernanke’s big thing. That was his big reason why the housing market in the US was going to be fine. I think, yes, the big difference between our housing market and the US housing market is that this was relatively unusual for the US in that there were a lot of regional markets.

And also, one of the reasons that the house price madness took off there was both falling interest rates and the introduction of the mortgage-backed securities. So it became… An awful lot of credit started flowing into the US housing market in particular.

Merryn: And those were the days, of course, when we believed… Well, not us, actually, because we didn’t believe it, but a lot of people believed that the high level of financial engineering in the mortgage market and across the financialisation of the housing market was a good thing because it made everything much more stable.

John: Yes, no, it was distributing risk.

Merryn: Cut the risks. Cut the risks.

John: Yes. Remember, we did a cover story in 2006 about credit default swaps and how they could basically destroy the financial markets. But yes, the mainstream view was that this was a good way to basically distribute risk to people who were willing to take it, whereas, in fact, all it was, was the mechanism for investment banks to make more money by bundling stuff up and selling it to investors who were desperate for yield because central banks had cut interest rates so far, basically.

So I think the whole story of the last 20 years has been one of increased moral hazard as the result of central banks keeping interest rates too low. So you could actually say it’s all about the failure of independent central banking rather than that being the great success that it was made out to be, and still is.

Merryn: Yes, well, I think that’s exactly right, and I think it’s something that people are beginning to understand now. We’ve begun to see quite a lot of commentators talking about how the problem is low interest rates and how that has led to a collapse in productivity, misallocation of resources, asset bubbles, house price bubbles, etc. So 15, well, 17 years ago, when you started, everyone was saying, the central bankers are saving us. Now we’re hearing, and we agree, that it’s the central bankers who have basically destroyed the global economy.

John: Yes. I still think that’s a minority view though. You hear it from some people, but there’s still this… And also, actually, to be fair, I think it’s also partly because inflation has taken off. And suddenly, people are thinking, right, well, so what do the central banks do now? And they’re realising, well, wait a minute, if they raise interest rates, that’s going to put up mortgage rates and that’s going to make life more expensive, and it’s not obviously…

Merryn: Yes.

John: Going to make fuel prices go down. So I think it’s that. It’s also partly that people have realised that, well, they’re not omnipotent and they can’t save you from this type of recession.

Merryn: Well, yes. But also, if they hadn’t behaved as they have for the last 20 years, we wouldn’t be where we are now.

John: Oh yes.

Merryn: Interest rates should never have been zero or 1%, and real interest rates should never have been negative. It’s not reasonable. And we’ve had commentators writing about that in the magazine over the last 20 years, so James Ferguson, of course, Bernard Connolly.

And we’re now beginning to see it come out in the mainstream press. So Charles Moore had an article the other day, repeating the kind of things that Bernard Connolly has been telling us for years, about how, if you muck up the price of the future, if you misprice the future, you destroy everything.

John: It’s nice to see them catching up.

Merryn: Yes, only 20 years on.

John: Yes

Merryn: 15 years on.

John: And maybe 15 years too late, arguably, but there we go.

Merryn: And even Liz Truss talking about changing the inflation target of the Bank of England. Although, of course, it’s not really about the inflation target, because throughout this earlier period, they met their inflation target easily, but not through any skill of their own, as a result of a global macroeconomic forces that simply moved the global inflation rate down by a couple of notches. Well, quite a lot of notches actually.

John: Well, yes. Basically, China flooded the world with cheap labour and cheap goods, and that, arguably, should have been obvious even at the time. And then, I don’t know, to me, it all comes back to this thing of how can it make sense that there are basically nine people sitting in a room somewhere in America who then make a decision about where to set interest rates that then moves markets across the entire globe?

That, to me, is kind of a mockery of free markets and capitalism and the idea that these prices should be set by individuals acting in their own self-interest. To have it constantly being fiddled with by just, effectively, the Wizard of Oz makes no sense.

Merryn: Well, it’s also that nonsense of precision, isn’t it?

John: Yes.

Merryn: And when you say it’s being constantly fiddled with, this is the point. The very idea that you can affect the global economy or national economy by changing interest rates by 25 basis points, by a quarter of a percentage point, and expect that to change the dynamics of an economy is absurd.

You can change the dynamics of an economy in a bad way by having your interest rate four or five percentage points too low. But can you genuinely make a difference in the short, or even the medium term, by shifting things around by 25 basis points? It seems slightly ridiculous.

John: Well, yes. But also, the ridiculous thing is that what ends up happening, though, is that suddenly, all of your policymakers turn around and delegate all the responsibilities to the central banks. Because that’s definitely what’s happened economically. Our politicians, I think, are incredibly rusty. They’re now having to get back involved in things.

And the fact that Liz Truss is now running for Prime Minister of the Tory Party with one of her arguments being effectively to take away central bank independence shows you that this is something that they haven’t really been thinking about for a long period of time. And now they’ve realised that, well, with inflation raising and the central bank is not going to do anything that’s politically popular about it, then we have to take charge again. But now it’s like, well, what are we going to do?

And that’s why I think we’ll probably end up seeing stupid ideas, like price controls, coming back into favour, because politicians feel they have to do something but they can’t make any long-term decisions, and so they’ll just go for whatever looks the most painless option in the short term.

Like the pending energy disaster of everyone’s bills going up or doubling in October and then maybe going up by another third in January, that is not politically survivable without some sort of action. But I’m just slightly concerned as to what that action might look like.

Merryn: What might it look like?

John: Well, I don’t know. Windfall taxes are the obvious one.

Merryn: Yes.

John: Certainly if Rishi wins, because he’s already shown that he’s happy enough for that.

Merryn: Yes, he might be in the wrong party.

John: Yes, possibly. Possibly. I think more Lib Dem than Labour, but you never know.

Merryn: Yes. Well, he may be heading back in August 2005, when he thought that there is a middle-of-the-way political consensus that everyone will join, when there isn’t anymore.

John: Yes. That’s gone by the wayside.

Merryn: Yes. And a lot of politicians like him appear to be always looking for this middle way, that there’s an idea that you can suggest policies that everyone will agree with, when they won’t. And perhaps back in the day, everyone kind of agreed with the middle way because things felt okay.

John: Yes.

Merryn: When things don’t feel okay, everyone has very different views on how to fix them.

John: Yes, I think that’s the other key point. We had a consensus because it looked as if everything was all right at that specific moment in time, as long as you didn’t try to look too far ahead and wonder [overtalking].

Merryn: As long as you didn’t actually understand anything, it was fine.

John: Yes, basically. That was the whole… Going back to the UK, the whole economic model became based on the city makes loads of money and pays loads of tax that then funds the tax credits state that Gordon Brown established. And then in the middle, people buy houses and their value goes up and they feel rich, so everyone is happy.

And, well, that’s not sustainable in the long run, but it worked for a couple of political terms before it all blew up. And, yes, well, as you say, that model is not working anymore, so we have to find something that makes everyone feel happy again.

Merryn: So here’s a difficult question for you, John, given that you’re going. If you were Liz Truss, who looks like she’s going to be our next Prime Minister, whether we like it or not, what would you do?

John: Yes, that’s a difficult question, and it’s a good question, and I wish I had thought of an answer before I came on the show.

Merryn: Sorry, I should’ve warned you. I only just thought of it. You’re such a sensible…

John: [Overtalking].

Merryn: You’re such a sensible thinker, I thought maybe you’d make a good Prime Minister.

John: I think house prices are the key problem, the core problem. They’re the core political problem virtually everywhere.

Merryn: Okay. So what are you going to do about that?

John: Well, they’ve got to where they are because interest rates have been too low. Adjusting interest rates doesn’t make a difference really, because at the end of the day, the only thing that changes is the deposit that you need. And the idea of giving central banks some sort of mandate to have to lean against house prices is flawed as well, because that just means that some people get to buy them more cheaply than others over time. So I think it’s got to be something much more radical. And the one thing that me and you have been talking about for, again, decades is the old land value tax. So basically…

Merryn: Someone has been writing about that this week. We’ve got it in our Best columnists in the magazine, right?

John: Well, actually, I think it was in The Economist of all places.

Merryn: In The Economist? Heavens.

John: Yes.

Merryn: These ideas do come…

John: Yes, mainstream thinking.

Merryn: Yes. These ideas do come back and back and back, because it is a good idea, the idea that you tax the value of underlying land as opposed to the productive capacity built on top of the land because we want to not tax productive activity and we want to definitely tax unproductive assets. Land in itself is not productive. It’s what you do with land. So we want to tax that bit to force productive activity, right? That’s the basic idea behind a land value tax.

John: Yes, it’s that idea. It’s the simple idea that if you tax something, then you get less of it basically. So it’s really stupid to be taxing, for example, wages at incredibly high levels once you get above a certain earnings amount, because it just puts people off working.

And so the best thing to do is to tax the unproductive users or owners of land heavily so that they then have an incentive to sell to someone who is going to make better productive use of it. So I think that that would be… It’s politically extremely challenging and administratively difficult. And obviously, the problem is that most governments would add it on top of, rather than substituting it for an income tax or whatever.

But I think that if we want to address that key problem, then that is probably the biggest step towards doing it. Because you could just build more, but even building more, the physical supply is dwarfed by the credit inflows. So you have to somehow find a way of stopping houses also from being this kind of investment substitute. Because a lot of people still think of their house as certainly part of their pension planning.

Merryn: They definitely do. Definitely do. People are forever telling me that their house is their pension. And I’m like, oh…

John: Yes.

Merryn: So where are you going to live when you’re old?

John: Well, exactly. But also, people are itching to not… They’re desperate to pass it on to their kids as well. It forms this, it’s your castle and it’s your pension and it’s your kids’ inheritance. And that somehow has to change. And that’s not uniquely British by any means. I know people go on about our obsession with the housing market, but really, it’s pretty clear that anywhere that house prices go up for long enough, people will get obsessed with the housing market. We just need to find a way to take the heat out of that particular problem.

Because it’s affecting global fertility rates now, arguably. This is at least one big reason why young people or whatever aren’t setting down as early, is because they can’t afford to buy a house and raise a family. So yes, that’s the one thing that I think we need to do something about.

Merryn: Yes, although some people would say global fertility rates falling is no bad thing.

John: Some people would say that. If it stops people from whining on about how our population is going to destroy the planet or whatever, then that would be great. But I don’t think it will. I think those people are going to keep going on about that anyway.

Merryn: Well, the problem with the population scaremongers is that even if we all stopped having babies immediately, the population would still go up because people live longer and longer and longer.

John: Yes.

Merryn: We’re not going to be able to stop having babies, but if we all went down to, say, one child each, the population would still rise, right?

John: Yes. And hopefully, medical science will get better, so that problem will continue to get worse, actually.

Merryn: Yes. And then the question is, if we don’t have babies, who is going to look after all the old people?

John: Oh, you see, the old people won’t need looking after. This is one thing why I always think these demographic questions are tricky, because if people are living longer and living healthier, then the real question is, why is the pension age still at 65 or whatever? We just need older… We need to redefine our idea of what is old.

Now, obviously, that does boil down to medical science getting a lot better. Because somebody was telling me about… This statistic really shocked me. But it was something like only 9% or 10% of men in the UK get to pension age without having at least one serious medical condition. And I was thinking, one in ten? That can’t be, surely.

Merryn: That seems extraordinary if pension… It depends on what you’re defining pension age as.

John: Well, I think you have to think about how you’re defining a medical condition, because I didn’t get to see that. It probably includes things that we wouldn’t necessarily think of as being mega serious. But I thought, even if that’s a quarter right, that’s still quite shocking.

Merryn: It is shocking, isn’t it? Hah. Well, let’s not worry about that then.

John: Yes, I actually must [overtalking]. Yes.

Merryn: We’re far off pension age, you and me, so this isn’t going to happen to us.

John: Yes, true. Yes, I’m not planning to retire until I’m at least 80.

Merryn: You’re not going to get a choice.

John: Yes.

Merryn: Right. So what else do you want to tell us before you go?

John: Ach. What else do I want to tell you? Well, I am going to be springing up pretty soon elsewhere, so please do keep an eye out for…

Merryn: Keep an eye out.

John: Sadly, I��m not retiring. So if you want to follow me on Twitter, I’m @John_Stepek. And also, if you want to follow me or ping me on LinkedIn, then feel free, although, I must say, I’m just not a big fan of LinkedIn. So if you want to see more, Twitter is probably best.

But other than that, it’s been great. And I just wanted to say thank you to all the readers because we couldn’t do this without our readers and we couldn’t do this without our listeners. And much as finance is a very frustrating subject in lots of ways because, well, you see so many people doing stupid things and can’t do anything about it, it’s also endlessly fascinating.

I must admit, 17 years on, I guess the main thing that I feel I’ve learned is that you just can’t take anything for granted, and the market always does something that you’re not expecting, which is why I’m always going on about the value of contrarian thinking, because it’s really useful to think, how could this go wrong, if everything is going right, and how could this go right, if everything is going wrong.

And at the moment, I’m actually mentally trying to focus on, well, look, how could this go right? Because at the moment, it doesn’t feel very hopeful, and it’s very clear that lots of people feel like that. The sentiment surveys are all at rock bottom. And you can see markets are reacting to that. You can see markets have started to bounce.

Merryn: Yes.

John: And so I’m still sitting here, thinking, I just don’t see how these problems can be solved in such a way that it’s market-friendly. But maybe I’m wrong. Maybe I’m missing something, and there is a solution.

Merryn: Or maybe you’re not wrong. Maybe things just aren’t quite as bad as you think.

John: That’s maybe true. That could be true. I’m willing to hear why you think that may be the case.

Merryn: I’m not going to develop the case for optimism right now. I’m just going to say, as you said, that you can never have linear expectations when it comes to economy and markets.

John: Yes.

Merryn: It’s not the way it works.

John: And also, well, the rather interesting thing is I don’t think people think about the feedback loops much at all. There seems to be this idea that… And I think this boils down to that thing about this sort of stupid sense we have that the economy is an engine, and it’s just a really bad analogy.

Because your car doesn’t really care what mood you’re in whenever you go to drive it, and if you press a pedal on one day, then it will do the same thing the next day. The economy just doesn’t work like that because it’s made up of people, so it’s a constant feedback mechanism. So just because something worked this time doesn’t mean it’s going to work in the future.

Merryn: Yes.

John: And I think that people crave too much certainty about that, and that ends up making their thinking flawed because they’re not… I would say that actually, do you know what, it’s a bit like the independent central banking, where the idea is that central banks being made independent has fixed the economy, and now that’s just the way that it is. But we’re now seeing that as politics comes back to the fore, central banks are five minutes away from losing their independence, not just in practice but actually in actual theory on paper as well.

Merryn: Yes.

John: So reflexivity. Soros came up with it ages ago, but I think that’s the other big, important thing to keep in mind whenever you’re thinking about markets.

Merryn: John, thank you. Now, I have to tell you all that you do have one opportunity, one last opportunity to see John in person under the MoneyWeek brand, because we are doing our show at the Edinburgh Fringe again this year at Panmure House, once home to Adam Smith all that time ago, his last home, and where I think he did the second edition of Walth of Nations, though I will have to check that, and Moral Sentiments as well.

You can now book tickets for that. I’m afraid we’re being a bit lazy and only doing it for four days this year, 25th to 28th, because I want to be on holiday for the rest of August. But there are tickets available on all those dates still. So book quickly, because last year… Actually, not last year. Whenever it was, before all the chaos of lockdowns, we sold out every single date three years in a row. Or was it two years in a row? Can’t even remember now.

But it’s great fun. There will be fabulous speakers on with me, John, of course, being one of them, and lots of the other names that you know from MoneyWeek and from our writing. So if you’re in Edinburgh, if you’re going to be in Edinburgh, please do book tickets, and John and I will look forward to seeing you then.

And other than that, what can I say, John, except for it’s been a wonderful 17 years. I know we will be seeing each other regularly in future. And thank you for everything, from me and from the readers, who I’m sure would like me to say thank you to you from them too.

John: No, thank you. It’s been great, and I’m feeling quite emotional, a wee tear, wiping a wee tear away.

Merryn: OK. Well, we’re ending this before the emotion. There’s no emotion on the MoneyWeek Podcast. Everyone, you know where to find more of us,, @MoneyWeek on Twitter, Instagram, etc. John, do keep following him. @John_Stepek on Twitter, and he’s also on LinkedIn, as he says, although he’s not mad for that so don’t be bothering him too much on LinkedIn. And I will talk to you all again, without John, in a few weeks. Thank you very much.