To be honest, the news out this morning that the Nationwide house prices index fell by 1.7 per cent was a tad surprising. With news that mortgage approvals have fallen by 75 per cent, with banks doing a passing impression of falling dominos, it could have been a lot worse.

Then again, another surprise lurks in the Nationwide's own theorising. House prices are now down 12 per cent, according to the building society. The average price in September was £161,707. A year ago, the average price was £184,723. Actually, house prices peaked 11 months ago, and from the October peak, prices are now down by 13 per cent.

Nationwide's chief economist Fionnuala Earley told Radio Four's Today Program this morning, that house price falls seem to have peaked and are now reducing.

She based this comment on the following data. Both September and August saw falls of 1.7 per cent, July saw a fall of 1.6 per cent. Contrast these falls with the hefty drop seen last May, when prices were down 2.5 per cent. So, the housing price collapse peaked in May and is now easing.

It is just that actually, the 1.7 per cent falls seen this month and last, make August and September the joint second worse months seen so far. So, the data records the second biggest fall yet recorded. Nationwide says this is a sign things are easing. It’s a puzzle.

Ms Earley said:

"Nationwide has been measuring house prices since the 1950s. During that time there have been several cycles of rapid acceleration and rapid cooling of house price growth. One benefit of having such a long running data series is that we can clearly see that price movements at any particular point in time do not tend to say much about the long run trend. And, price movements from the peak to a trough of a cycle simply show the extent of the volatility in prices around the trend rather than anything more meaningful about their future path. The long-run trend growth in real house prices in the UK is around 2.7 per cent per annum and there is no reason to expect that over the longer term house prices should not continue to go up in real terms, even if we are going through a sharp correction now."

Okay, let's examine that comment. So the falls we are seeing at the moment are nothing strange. The Nationwide has seen it all before. Well, in that case why didn't they predict the falls ? Why were they predicting positive house price growth right up to the moment it went negative ? Why were they then saying prices falls would be modest, right up to the moment they were far from modest ? Why pronounce that house prices falls would be less than ten per cent, right up to the moment they were more than ten per cent ? Why talk about underlying strength of the economy, and a strong labour market right up to the moment... well you finish the sentence.

Sure, their data suggests a long-term trend of house price growth after inflation of 2.7 per cent a year. But, their data includes all the information from the last ten years. It includes data from the most remarkable period of house price growth ever seen, but excludes the correction, becase the correction is not yet over.

If instead, we remove the experience of the last ten years, you will find that average house prices in the mid 1990s, after allowing for inflation, were at their lowest level in 20 years.

Contrast, instead average house prices with GDP per capita. As the graph shows, if we were to examine historical data, it suggests house prices were grossly over priced earlier this year, and only much bigger falls than we have seen to date will correct this.

The truth is, that at the time of writing the ratio of Nationwide’s average house prices to GDP per capita is currently around. 6.4. The historical average is nearer 5.5. This means prices need to fall by a further 13 per cent before the ratio hits the historical average. This would mean house prices would fall by 24 per cent from peak. Of course, when bubbles burst, prices normally fall too far on the way down, just as they rose too far on the way up.

©2008 Investment and Business News. All Rights Reserved.

You know what it's is like arguing with a child. You say, 'yes, you must,' and then the child replies 'no, no, no.' So you say, ‘yes, yes, yes, yes,' and the ‘no's get louder and more frequent, and then you end up threatening to take toys away from the child. Eventually, after a cool off period, in which the child is sent to bed, you get your own way, or at least, sometimes you do.

Last night, senators voted to accept the Paulson plan. This time they voted 74 to 25 in favour of the plan. Here is the curious bit, the plan wasn't changed by that much, the only really significant change is that it has got more expensive. And yet, somehow it is thought this time it will get through. Friday night is when we will know, that is when the House of Representatives votes. Last time it was 228 to 205 votes against.

The consequences if the plan was voted down would be disastrous for the markets of course, a negative vote would lead to massive falls on stock markets across the world.

So these are the changes to the Paulson plan, and this is what is wrong with them.

First off, the maximum guarantee for money on deposit is being increased. Now, you can have up to $250,000 on deposit in the US, and if the bank goes bust, your money is still protected.

Secondly, there are going to be changes in tax breaks for US companies and individuals using renewable energy. Just re-read that. The Paulson plan mark 2, designed to save the global economy from a catastrophic banking meltdown, will include tax incentives to invest in renewable energy. Now there is nothing wrong with the idea per se of tax incentives to use renewables, but it is not exactly relevant, is it ? So the child won't go get off the swing at the playground and you offer to buy her a milk shake if she does.

The plan will also see one year's worth of extra relief from what's called the Alternative Minimum Tax. This scheme was supposed to tax higher income earners more heavily, but due to inflation was hitting more people than originally intended.

The new plan is also supposed to put curbs on executive pay.

But really, it is just tweaking. This is a plan that was supposed to save the universe, and its modifications are really not significant. Well, they are significant in one way. The original plan was 4 pages in length, the revised plan 451 pages. So, at least US lawmakers are getting more reading matter for their money.

George Dubya is doing his best and has been getting on the blower, ringing Republican members of the House of Representatives, and the salesmen reckons he has already got four more votes. No doubt, he has got some hot leads too.

One snag is that while both Republicans and Democrats are against the plan, they are largely against it for different reasons. So changes designed to appease some, may antagonize others.

Yet here is the odd thing. The biggest worry with the first plan was that it was so expensive - $700bn. The new plan will be more expensive.

But the fundamental problem is this. It is still the wrong plan. The Paulson plan still amounts to little more than a bigger version of all those others plans that were implemented to save banks in the early 1980s and 1990s. View those previous plans from a longer-term point of view, and it appears they have not been successful at all, because surely the roots of this crisis lie in the solutions to the last crisis.

To work effectively, capitalism needs failure. You need to get rid of the dross, and let poorly run businesses fail.

The snag is, that a wholesale failure of the global banking system would lead to a major economic depression with all the horrendous social consequences of that.

The right plan, would be one that sees government money used to recapitalise banks, in exchange for equity. The equity would come at a massively discounted price, it should do, you always get bankrupt stock at rock bottom prices. The shares will also be available to the public, and sovereign wealth funds. This plan would be the right plan because firstly it deals with the fundamental problem of solvency.

It would also be the right plan because it punishes the owners of the banks, and thereby makes it likely the same mistakes won't be repeated in a hurry.

It is also the right plan because it means tax payers will enjoy a share in the recovery of the banks, when this happens.

The reason why this eminently superior plan is not being considered is because it smacks of socialism. But that is really missing the point. Socialism is when companies are nationalised, because it is felt that the state should own business because it is socially just, and because the free markets can't be trusted.

Rather, the plan described above would just be temporary, designed to reduce the social costs of capitalism working efficiently. Capitalism says investors in a business should be rewarded. Because the Paulson plan does not reward tax payers with equity, it is in fact the antithesis of capitalism.

It is as if socialism has become a naughty word - and anything that in any way bears any resemblance with that word is bad. It is like a asking a parent what sex their child is, and then another child who overhears the conversation sniggers because they heard the 's' word.

The reason why the right plan is not being considered, is down to semantics, and for that reason, US Congress are making a big mistake.

©2008 Investment and Business News. All Rights Reserved.

To be honest, the news out this morning that the Nationwide house prices index fell by 1.7 per cent was a tad surprising. With news that mortgage approvals have fallen by 75 per cent, with banks doing a passing impressions of dominos, it could have been a lot worse.

Then again, another surprise lurks in the Nationwide's own theorising. House prices are now down 12 per cent, according to the building society. The average price in September was £161,707. A year ago, average price was £184,723. Actually, house prices peaked 11 months ago, and from the October peak, prices are now down by 13 per cent.

Nationwide's chief economist Fionnuala Earley told Radio Four's Today program this morning, that house prices falls seems to have reduced. She said that prices reduction seem to have peaked at about 1.7 per cent.

She based this comment on the following data. Both September and August saw falls of 1.7 per cent, July saw a fall of 1.6 per cent. Contrast these falls with the heafty drop seen last May, when prices were down 2.5 per cent. So the housing price collapse peaked in May and is now easing.

It is just that actually, the 1.7 per cent falls seen this month and last make these two months the joint second worse months recorded so far. So, how you can describe data that shows the second biggest falls yet recorded as a sign things are easing, is frankly a puzzle.

Ms Earley said:

"Nationwide has been measuring house prices since the 1950s. During that time there have been several cycles of rapid acceleration and rapid cooling of house price growth. One benefit of having such a long running data series is that we can clearly see that price movements at any particular point in time do not tend to say much about the long run trend. And, price movements from the peak to a trough of a cycle simply show the extent of the volatility in prices around the trend rather than anything more meaningful about their future path. The long-run trend growth in real house prices in the UK is around 2.7 per cent per annum and there is no reason to expect that over the longer term house prices should not continue to go up in real terms, even if we are going through a sharp correction now."

Okay, let's examine that comment. So the falls we are seeing at the moment are nothing strange. The Nationwide has seen it all before. Well, in that case why didn't they predict the falls ? Why were they predicting positive house price growth right up to the moment it went negative ? Why were they then saying prices falls would be modest, right up to the moment they were far from modest ? Why pronounce that house prices falls would be less than ten per cent, right up to the moment they were more than ten per cent ? Why talk about underlying strength of the economy, and a strong labour market right up to the moment... well you finish the sentence.

Sure their data suggests house prcies growth in real terms, that is after inflation at 2.7 per cent a year. But this data includes all the information from the last ten years. It includes data from most remarkable house prices growth ever seen, but excludes the correction, becase the correction is not over.

If instead, we remove the experience of the last ten years, you will find that average house prices in the mid 1990s, after allowing for inflation, were at their lowest level in 20 years.

Contrast, instead average house prices with GDP per capita. As the graph shows, if we were to examine historical data, it suggests house prices were grossly over priced earlier this year, and only much bigger falls than we have seen to date will correct this.

The truth is, that at the time of writing the ratio of average house prices according to the Nationwide to GDP per capita is currently around. 6.4. The historical average is nearer 5.5. This means prices need to fall by a further 13 per cent before the ratio hits the historical average. This would mean house prices would fall by 24 per cent from peak. Of course, when bubbles burst prices normally fall too far on the way down, just as they rose too far on the way up. But, if you consider historical data, maybe the above analysis will help shine some light on the matter.

©2008 Investment and Business News. All Rights Reserved.

If you don't think madness is rife on Wall Street, consider this.

A heated debate is raging on Wall Street over the way accountants do things. This may not seem that serious to you, and yet it cuts right to the heart to the matter of the credit crunch and banking bail outs.

When companies value their assets they are supposed to use something called "mark-to-market.” So, if one company is forced to sell its assets as part of a fire-sale, then all companies with similar assets are forced to revalue them, in accordance with this fire-sale price.

It all boils down to mortgage securities. Their value is plunging, because those banks that need the money desperately are being forced to sell on the cheap. Therefore, all banks with these types of mortgage securities have to make write-downs, creating losses, and then creating a banking crisis.

So, all we need to do to end this financial crisis, is let banks put a more sensible value on their mortgage securities.

But here is the snag with this idea. Who is to say what the right value is for these assets ?

The only way you can determine the value of assets is through market valuation. Those who want to remove this rule are somehow suggesting the markets are wrong, and they are right.

But it is curious, isn't it ? When these securities were rising in value, you didn't hear many complaints then.

The key, though lies with transparency. There has to be a method for valuing assets that has some basis in reality. A move towards some other method of valuing these assets has the makings of the next Worldcom and Enron controversy.

©2008 Investment and Business News. All Rights Reserved.

Here is something to get the blood boiling. Nothing seems more certain to get tempers flaring than the topic of immigration. It has gone a bit quiet of late. Over the last few months people seem to have had other things on their minds - although occasionally you hear comments along the lines that since unemployment is set to rise, immigration clearly needs to reduce.

But now KPMG have really gone along and thrown the cat amongst the pigeons. ”The UK and other developed countries such as the US, Western Europe, and Australia" says KPMG, “face a slow-down in the supply of both skilled and unskilled labour in the next few years, if there is not a significant increase in the immigration intake.”

It is all the fault of the baby boomers. Our Gordon once said no more boom and bust. Well, it appears boom and bust is not just a phenomenon of economies, it applies to demographics too. The babies of the 1946 to 1961 generation boomed. And the eldest of these boomers is close to retiring now.

The bust occurred between 1976 and 2006. The result, as baby boomers retire, less indigenous workers will enter the work force.

KPMG says "in the UK, the recent growth trajectory suggests that there will be a contraction in the growth of the working-age population in the year 2013. In some countries, such as France and the Netherlands, the working-age population will shrink from around 2010 onwards. Either participation rates must rise or the productive capacity of these nations is affected as a consequence."

Bernard Salt, a partner with KPMG in Australia and primary author of the report, said:

"Without a surge in the annual intake of working-age migrants there will be a slow-down, if not a contraction, in the pool from which the labour force is drawn at the end of this decade in the US, and by the middle of the next decade in the UK and in many other developed markets. This will have a number of implications for corporates. One of these will be that, over time, large multi-national corporations will increasingly expand their head offices out of the traditional western headquarters and into the new territories of the developing world. We are going to see a change in the landscape over the course of the next few decades."

Jill Storey, UK partner in KPMG's International Executive Services practice, said:

"Increasing globalisation combined with the effects of demographic change will present some big challenges for businesses. From 2011 onwards, when the first Baby Boomer passes the age of 65, the supply of labour in many developed nations will start to slow down. This may be off-set to some extent by increasing the participation of older workers in the labour force as well as by changes to migration policy. However companies that are likely to be increasing their international footprint over the next ten years need to start laying the groundwork now to ensure they are equipped for the future."

©2008 Investment and Business News. All Rights Reserved.