And with one deft wave of his wand, Gordon Brown and his team made it all better. Today, Gordon and his Communities Secretary, Hazel Blears, will sit centre stage as they announce a raft of measures designed to kick-start the housing market. First off, would-be first-time buyers are to be provided with a helping hand on to the property ladder, with the government providing 'free loans'. Second off, a scheme is to be announced to help existing home-owners who face the danger of repossession. Thirdly, reports suggest the government plans to do away with stamp duty on homes worth less than £175,000, and for the next 12 months. Currently stamp duty for properties between £125,000 and £250,000 is 1 per cent.

Drilling down a little into these plans, the 'free loan' will be targeted at households on a joint income of less than £60,000, will be available for up to 30 per cent of the property's value, and for a period of five years. The 'free loan' is designed to help would-be first-time buyers with their deposit.

The plan for helping existing home-owners will entail the government taking on ownership of a part of the property, and renting it back at a reduced rate. This plan is now new, but the timing of it is new. £1bn has been brought forward to be available now, at the time of maximum crisis for the market.

Do the schemes make sense?

Firstly, credit where it is due. If your property is repossessed, it can be heartbreaking. The consequence can be real hardship. It is debatable how effective the scheme announced yesterday will be. After all, the John Major government tried a similar idea, and it flopped. But there are differences this time around. Remember, the market has already provided schemes for enabling people to sell their property and rent it back, but these schemes have received a great deal of bad publicity, and in the long-term can represent a very bad deal for the former home-owner. At least the government scheme is subsidised.

However, the government scheme will do nothing to help the majority of those unfortunate people who may find themselves owning a home of less value than the mortgage they have taken out on it. They may be able to pay the mortgage, there may be little prospect of repossession, but it can be tragic all the same. If your mortgage is higher than the value of your home it is next to impossible to move - so if you are offered a better job in another part of the country, you may have no choice but to turn it down. The government scheme does nothing to help these people.

It could be argued that the solution to this problem is to get the housing market 'moving again', to get prices back up, but there are two problems with this.

Firstly, the government action may fail. History tells us that governments which throw money at trying to reverse trends, invariably fail. The money is then lost. There is a danger the government itself could end up with negative equity.

Secondly, it is questionable whether getting the housing market moving again is a desirable action - it is certainly questionable whether trying to push house prices back up is a sound objective.

The snag with all this talk about the housing market is that many people are not looking at the bigger picture.

The interests of first-time buyers are best served by having cheaper houses. High house prices are no better for the economy in the longer-term than expensive oil. High house prices suck out the disposable income from first-time buyers, and do no more than re-distribute income from the workforce to landowners.

The buy-to-let craze sucked out would-be entrepreneurs, potential wealth creators, and turned them into property speculators.

Soaring house prices created the illusion that pension payments did not matter, because the value locked into one’s home could provide a future pension - a very dangerous assumption.

Despite this overwhelming list of reasons why rising house prices are a bad thing, the British public celebrate when they go up. And panic when they fall. Why is this? Inflation in the 1960s and 1970s provided the illusion that property investment can not fail.

Imagine this slightly unrealistic scenario, provided to illustrate the above point. Imagine you took out an interest-only mortgage in 1968, and forked out around 25 per cent of your income on just paying the interest on that loan, and your salary went up in tandem with the changes in GDP/capita. Within 15 years, your mortgage would have taken up just 4 per cent of your income. In other words, thanks to inflation, and real interest rates that in the mid 1970s were often negative, during this period buying a house was just about the smartest thing you could do.

This experience turned the UK public into property speculators - we became speculators, even subconscious speculators. Phrases such as the 'property ladder' crept into the British lingo. This metaphor would not have gained such widespread use if we weren't property speculators.

And this morning, Hazel Blears showed how much she is part of that psyche when on the Today programme she said: "Being a home owner is still a good investment."

"... A good investment." Since when has it been the government's job to give out advice on investing. If she had said, "Buying shares in new technology companies is still a good investment" she would have been lambasted. But when it is property it is different.

And that is the problem with the government scheme. It wants to provide loans to would-be first-time buyers to get them on the property ladder. They have to start repaying the loan after five years, but of course by then, goes the logic of the argument, it won't matter because house prices would have picked up. First-time buyers will have been able to use the rise in the value of their equity to pay off their loan. Similar logic justified the 105 per cent mortgages Northern Rock used to offer. So, in a way, the government scheme is a kind of Northern Rock II.

But this is all based on the premiss that the inevitable course of house prices is up. That rising house prices is a good thing. But supposing house prices fall another 30 per cent, and supposing they take ten years to rise back to levels seen in 2007, all of a sudden the government scheme for first-time buyers would be in ruins.

That is not to say schemes to help first-time buyers are not a good idea - but they should be implemented when prices have fallen to an affordable level, not just a few months into the sell off. It has been suggested here before, there is a danger that when house prices reach a sustainable level, banks will still be caught up in fears that prices will continue to fall and may require substantial deposits that allow for future falls in price. That will be the time for government action.

Maybe the real solution to this would be some kind of government backed negative equity loan, perhaps repaid out of income in the same way student loans are repaid. This would help relieve the shackles from those who are unfortunate to have negative equity mortgages - but need to move. That way, the pain experienced from the existing home will be relieved slightly, while house prices return to a sustainable level.

©2008 Investment and Business News. All Rights Reserved.

The pound fell to a record low against the euro last night, and to the lowest level seen against the dollar since April 2006, and it was all Alistair Darling's fault. At least that's what media reports were saying this morning. Mr Darling's negative comments about the economy have so spooked the markets that the pound is in crisis.

Now, let's reword that. The pound fell to a record low against the euro last night and the lowest level against the dollar since 2006, providing British exporters with the long awaited improvements in their terms of trade. At last the UK can look forward to exporting its way out of trouble.

Whether it was intentional or just another example of the Law of Unintended Consequences, Mr Darling, it appears, has talked the pound down.

It is bad news for British tourists hoping to soak up some ultra violet rays in sunnier realms, as autumn descends on the UK. It is bad news for British importers hoping to cut prices, and it’s bad news for inflation, which in turn means it is bad news for those hoping the rate of interest will fall.

But, if you believe the UK's deeper ailment is that we have been running on empty, living off borrowed money, the illusion that higher house prices somehow made the UK a richer place, and a deficit on our current account that was just unsustainable, then the changes in sterling are just what the UK needs.

For many years now, the UK has needed to make the shift from a massive net importer, where savings levels were too low, to a big exporter where its citizens diligently save for the day they retire. The real impetus for this change has now been provided.

Some time ago, economists coined the phrase 'Dutch disease' to describe an economy where its currency has been pushed up too high by one aspect of the economy, leaving the rest of the economy uncompetitive. In the case of Holland, the problem was North Sea oil pushing up the guilder so that traditional Dutch businesses struggled to make their sales abroad.

In the UK, at first the disease also had oil as its fundamental cause. North Sea oil pushed up the pound, and British manufacturing went into decline. But more recently, the City has taken over from oil, and it has been the strength of the Square Mile that has helped keep sterling up.

In recent years, British-owned assets abroad have been worth less than foreign-owned assets in Britain. Yet, despite this, the UK has enjoyed a net positive flow of dividends and interest payments. How can this be? Well, until recently, just like with the US, money flowing in was being used to buy government and corporate debt - debt that offered only a modest yield. By contrast, British-owned assets abroad typically paid out a higher yield. Our spending was funded by cheap debt from abroad, while our choice investments abroad yielded a more healthy return.

But now it is different. This morning, the Telegraph reported that China’s central bank has bought itself a big slug of equity in the giant British coal-fired power station, Drax. "The stake building provides a further illustration of the extent to which the Chinese government is deploying its vast foreign exchange holdings in overseas markets as it seeks greater returns than those yielded by its holdings of US treasury bills," said the Telegraph. British banks, and to a lesser extent the wider business community, are shoring up their balance sheets with money from abroad. In the longer-term this will lead to significantly greater dividend flow out of the UK.

It seems likely that the credit crunch is changing the structural factors that have underpinned the pound in recent years. And Mr Darling just kicked this process along.

©2008 Investment and Business News. All Rights Reserved.

And with one deft wave of his wand, Gordon Brown and his team made it all better. Today, Gordon and his Communities Secretary, Hazel Blears, will sit centre stage as they announce a raft of measures designed to kick-start the housing market. First off, would-be first-time buyers are to be provided with a helping hand on to the property ladder, with the government providing 'free loans'. Second off, a scheme is to be announced to help existing home-owners who face the danger of repossession. Thirdly, reports suggest the government plans to do away with stamp duty on homes worth less than £175,000, and for the next 12 months. Currently stamp duty for properties between £125,000 and £250,000 is 1 per cent.

Drilling down a little into these plans, the 'free loan' will be targeted at households on a joint income of less than £60,000, will be available for up to 30 per cent of the property's value, and for a period of five years. The 'free loan' is designed to help would-be first-time buyers with their deposit.

The plan for helping existing home-owners will entail the government taking on ownership of a part of the property, and renting it back at a reduced rate. This plan is now new, but the timing of it is new. £1bn has been brought forward to be available now, at the time of maximum crisis for the market.

Do the schemes make sense?

Firstly, credit where it is due. If your property is repossessed, it can be heartbreaking. The consequence can be real hardship. It is debatable how effective the scheme announced yesterday will be. After all, the John Major government tried a similar idea, and it flopped. But there are differences this time around. Remember, the market has already provided schemes for enabling people to sell their property and rent it back, but these schemes have received a great deal of bad publicity, and in the long-term can represent a very bad deal for the former home-owner. At least the government scheme is subsidised.

However, the government scheme will do nothing to help the majority of those unfortunate people who may find themselves owning a home of less value than the mortgage they have taken out on it. They may be able to pay the mortgage, there may be little prospect of repossession, but it can be tragic all the same. If your mortgage is higher than the value of your home it is next to impossible to move - so if you are offered a better job in another part of the country, you may have no choice but to turn it down. The government scheme does nothing to help these people.

It could be argued that the solution to this problem is to get the housing market 'moving again', to get prices back up, but there are two problems with this.

Firstly, the government action may fail. History tells us that governments which throw money at trying to reverse trends, invariably fail. The money is then lost. There is a danger the government itself could end up with negative equity.

Secondly, it is questionable whether getting the housing market moving again is a desirable action - it is certainly questionable whether trying to push house prices back up is a sound objective.

The snag with all this talk about the housing market is that many people are not looking at the bigger picture.

The interests of first-time buyers are best served by having cheaper houses. High house prices are no better for the economy in the longer-term than expensive oil. High house prices suck out the disposable income from first-time buyers, and do no more than re-distribute income from the workforce to landowners.

The buy-to-let craze sucked out would-be entrepreneurs, potential wealth creators, and turned them into property speculators.

Soaring house prices created the illusion that pension payments did not matter, because the value locked into one’s home could provide a future pension - a very dangerous assumption.

Despite this overwhelming list of reasons why rising house prices are a bad thing, the British public celebrate when they go up. And panic when they fall. Why is this? Inflation in the 1960s and 1970s provided the illusion that property investment can not fail.

Imagine this slightly unrealistic scenario, provided to illustrate the above point. Imagine you took out an interest-only mortgage in 1968, and forked out around 25 per cent of your income on just paying the interest on that loan, and your salary went up in tandem with the changes in GDP/capita. Within 15 years, your mortgage would have taken up just 4 per cent of your income. In other words, thanks to inflation, and real interest rates that in the mid 1970s were often negative, during this period buying a house was just about the smartest thing you could do.

This experience turned the UK public into property speculators - we became speculators, even subconscious speculators. Phrases such as the 'property ladder' crept into the British lingo. This metaphor would not have gained such widespread use if we weren't property speculators.

And this morning, Hazel Blears showed how much she is part of that psyche when on the Today programme she said: "Being a home owner is still a good investment."

"... A good investment." Since when has it been the government's job to give out advice on investing. If she had said, "Buying shares in new technology companies is still a good investment" she would have been lambasted. But when it is property it is different.

And that is the problem with the government scheme. It wants to provide loans to would-be first-time buyers to get them on the property ladder. They have to start repaying the loan after five years, but of course by then, goes the logic of the argument, it won't matter because house prices would have picked up. First-time buyers will have been able to use the rise in the value of their equity to pay off their loan. Similar logic justified the 105 per cent mortgages Northern Rock used to offer. So, in a way, the government scheme is a kind of Northern Rock II.

But this is all based on the premiss that the inevitable course of house prices is up. That rising house prices is a good thing. But supposing house prices fall another 30 per cent, and supposing they take ten years to rise back to levels seen in 2007, all of a sudden the government scheme for first-time buyers would be in ruins.

That is not to say schemes to help first-time buyers are not a good idea - but they should be implemented when prices have fallen to an affordable level, not just a few months into the sell off. It has been suggested here before, there is a danger that when house prices reach a sustainable level, banks will still be caught up in fears that prices will continue to fall and may require substantial deposits that allow for future falls in price. That will be the time for government action.

Maybe the real solution to this would be some kind of government backed negative equity loan, perhaps repaid out of income in the same way student loans are repaid. This would help relieve the shackles from those who are unfortunate to have negative equity mortgages - but need to move. That way, the pain experienced from the existing home will be relieved slightly, while house prices return to a sustainable level.

©2008 Investment and Business News. All Rights Reserved.

The UK will contract by an annualised rate of 0.3 per cent in the current quarter and by 0.4 per cent in the final quarter of this year, said the OECD this morning. The UK is the only G7 member that the OECD reckons will see contraction during the period.

Of the other G7 members, Germany and Italy will move the closest to recession. The OECD is forecasting zero growth in this quarter for both countries, expects to see a sharp pick up in Italy, but predicts annualised growth of just 0.1 per cent for Germany in the final quarter of the year.

Japan is expected to be the star of the show, with 2.4 per cent annualised growth this quarter, while the US is expected to grow by 0.9 and 0.7 per cent in the third and fourth quarters.

The OECD said: “Banks appear to have recognized most of the losses and write-downs related to sub-prime based securities. Continued financial turmoil appears to reflect increasingly signs of weakness in the real economy, itself partly a product of lower credit supply and asset prices. The eventual depth and extent of financial disruption is still uncertain, however, with potential further losses on housing and construction finance being one source of concern.”

Still on the theme of house prices, it added: “The downturn in housing markets is still unfolding, with reduced credit supply likely adding to pressures. US house prices continue to fall, threatening further defaults and foreclosures that may again depress prices and boost credit losses. As regards construction, however, there are some hints of eventual stabilisation with permits and sales of new homes having ceased to fall and inventories of unsold houses coming down. In Europe, downturns in prices and construction activity appear to be spreading beyond Denmark, Ireland, Spain and the United Kingdom, with sharply lower transaction volumes likely a precursor of downturns elsewhere.”

In recent weeks three respected economic groups have predicted a recession for the UK. First off it was the British Chambers of Commerce, then Capital Economics, but the OECD is the real biggy - it has an annual budget of 342 million euros - not bad for economic pondering.

What is especially worrying is that the other two predictions for recession were applied to next year. So, if the OECD and Capital Economics are right, the downturn could be on course for lasting four or even six quarters.

©2008 Investment and Business News. All Rights Reserved.

And from the battle of the economy to the battle for the future of IT.

The war between Microsoft and the pretender to its throne Google has reached new heights, with three major announcements coming during the last few days.

The first two strikes came from Microsoft. First off, it revealed a new feature for Internet Explorer called InPrivate. The feature enables web browsers to visit web sites without disclosing this information. It means users can browse in private, which is potentially bad news for Google. At least that is how the press have described it.

Google recently bought advertising network service DoubleClick. As a result, or so goes the argument, the company will know less about the browsing habits of its customers, and so will target its ads less effectively. Both the FT and The Times ran big stories explaining this earlier this week. However, some have argued that this argument is overplayed, that actually Google does not acquire information in this way, and this particular Microsoft move will have a neutral effect on Google.

But then, Microsoft revealed a $486 million purchase of online price comparison web site Ciao.

Microsoft said in a statement: "The acquisition signals a further milestone investment for Microsoft in Europe and will see Microsoft increase its European commercial search capabilities as part of its intent to make Microsoft Live Search the premier destination for consumers looking to research and purchase goods and services online, as well as enable merchants to drive greater online sales." Ummm, so that seems pretty well aimed at Google, then.

Then this morning Google struck back when it announced plans for its own web browser.

Apparently, Google has been struggling to make its own word-processing and spreadsheet tools work effectively using Internet Explorer. If users instead use the Google browser, Chrome, then this problem will be solved.

Above all, Google is vexed by the idea of its big rival controlling the web browser. Anti-trust suits notwithstanding, it fears Microsoft could in some way make its browser favour its products.

It’s all good news, of course, for us. As the two titans roar at each other, we see more choice and cheaper software.

People fear monopoly, but no monopoly lasts for ever. In the short-term, a giant such as Microsoft may have such a stranglehold on the market that other companies struggle to compete, but in the longer-term new ideas win through.

At the beginning of the last century, the economist Alfred Marshall drew up a list of the top 100 companies. So large and powerful were the companies on Marshall's list, he argued that they would probably survive indefinitely. He referred to them as the Californian Redwoods - trees that can live for so long that to us humans, with our short life-span, they practically appear immortal. Redwoods have in fact been known to live for over 2,000 years.

But in 1999, the economist L Hannah revisited the Marshall list, and discovered that of the 100 largest firms in 1912, 29 had, by the time of the study, gone bankrupt, 48 had disappeared, and just 19 of them were still in the US top 100.

Even the mighty fail, eventually. The war raging between Google and Microsoft illustrates why this is so. Microsoft may of course win through, eventually, but this outcome is far from certain - in the meantime it is being forced to innovate - just to survive.

©2008 Investment and Business News. All Rights Reserved.