Growth is good, right? If your objective is a bigger cake, then the shape that comes out of the oven hardly matters. The British economy is indeed getting slightly bigger, but much of the growth is the unhealthy fat of rising property prices, rather than the muscle of adding value to what we do.

As Monument Securities’ Stephen Lewis has remarked, the idea that Britain will become an export-led manufacturing powerhouse is a political fantasy; the government is stumulating the housing market, not because houses are far too cheap, but because it’s one of the few economic levers left for it to pull. Housing inflation encourages home-owners to spend what they see as their capital gain, even when they’re not earning more. This is hardly a basis for sustained economic expansion.

Andrew Smithers at Smithers & Co reaches a similar conclusion from a different angle. He doubts whether the 2.4 per cent average growth generated in the UK over the last 20 years can be repeated. His best guess is that it will halve, as curbs on immigration mean a static workforce and the baleful influence of the bonus culture discourages the business investment that generates tomorrow’s growth.

Still, it’s not all bad news. Banks are finding it harder to make money trading government bonds, and are cutting back, while smaller estate agents are going out of business, thanks to on-line portals. There are some talented people trading bonds and houses. They will now have to find something more socially useful to do.

Buying when you’d rather sell

It’s not immediately obvious why buying in debt for cancellation is a way to raise capital, a process which requires cash in, rather than cash out. So at first sight, Nationwide Building Society’s offer to redeem £715m of its permanent interest-bearing shares (PIBS) looks perverse, especially since its regulator is demanding a stronger balance sheet.

Nationwide stresses that the move is its own initiative, and reflects the failure of PIBS to work the way they had been expected to, rather than pressure from outside. Today these curious beasts look like a leftover from the days when both buyers and issuers reckoned that a juicy interest rate for a little less security was a fair bargain.

Designed to provide permanent capital to mutuals who cannot issue ordinary shares, PIBS stated clearly that failure to pay interest was not a default. Since such an event seemed almost unthinkable, they came to be considered as high-yield bonds. Passing a payment would signal financial stress, and might even trigger a run. As a result, only those societies close to collapse have failed to keep paying.

Now new rules dictate that PIBS no longer count towards calculating a society’s risk-bearing capital (Tier 1 Common Equity), so they are effectively an expensive form of debt. Unfortunately, redeeming them just makes the problem of meeting the capital requirements harder.

There are vague mutterings about “core capital deferred shares” which would be genuinely risk-bearing, and where interest could be suspended without promoting panic, but finding buyers for these strange beasts could be quite a challenge. Fortunately, while Nationwide can tap the Bank of England for almost costless cash, the savings on the coupons on the PIBS will allow (slow) accumulation of capital.

Meanwhile, Nationwide’s capital squeeze has caused it to scrap its plans to lend to small businesses. This activity is the political flavour of the month, but it’s not the politicians’ money that’s at stake, and it’s a deal riskier than, say, domestic mortgages. Vince Cable and his pals at Biz may not like it, but Nationwide is well advised to stick to its knitting.

Digging at Balcombe

The residents of the hamlet of Balcombe in West Sussex were not amused when a team of diggers arrived to start poking around under the North Downs. Just think of the posible damage to the water supply. And what about the risk of earthquakes? Ruining the environment, as the Greens might have described it. The year was 1841, and result was the tunnel for the London to Brighton railway, and the fine viaduct next to it. Still, the village did get a railway station in compensation. Perhaps this time they’ll get cheap gas.

 

This is an updated version of my FT column.

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