The Economic Bubble that is English Residential Child Care Today
A contribution to the Public Accounts Committee Financial sustainability of children’s care homes Inquiry
It is necessary to understand Residential Child Care as an economic bubble. In doing so we can decide what to do to enable care for children to be sustained.
This piece sketches out future thinking.
It is a characteristic of a financial bubble that there is the suspension of disbelief when the speculative surge is occurring. The continuing numbers of applications for registration identify this is a current factor to be taken note of and especially in the knowledge that bubbles always burst. This bubble involves a child’s home.
A bubble, in an economic context, generally refers to a situation where the price for something exceeds its fundamental value by a large margin. This can be taken to be the reasoning used by those seeing a current feature in Residential Child Care of ‘eye watering’ ‘profiteering’. It is speculative demand, rather than intrinsic worth, which fuels the inflated prices in a bubble. Demand for children’s homes is high.
There are thousands of privately funded applications for registration of homes on Ofsted’s desks. It will take many months for an application to be processed. There are moves in Parliament form price capping and a reduced use of residential settings if the Children’s WellBeing and Schools Bill becomes law.
The damage caused by the bursting of a bubble depends on whether it is widespread or localised, and to what extent debt fuelled the investments that inflated the bubble. Children’s homes are nationwide. The focus of scrutiny is on profits, but the necessity is to look at the debt. It takes an experienced person to analyse the debt involved with children’s homes operations.
From the above we hope it is seen that Residential Child Care is a bubble here and now.
We need to think of what actions will be needed in order to have rescue ready when/if the bubble bursts, meaning the continuation of a child’s home.
Bubbles are unpredictable. When they burst they do so without focus, with force, and increasing momentum. It is speculative demand, rather than intrinsic worth, that fuels the inflated prices in a bubble. It is an inevitability that a bubble will be followed by a spectacular crash.
The five steps in the lifecycle of a bubble are displacement, boom, euphoria, profit-taking, and panic.
- Displacement
A displacement occurs when investors get taken with a new opportunity.
- Boom
Prices rise slowly at first. As more participants enter the market, the stage is set for the boom phase. During this phase, the asset in question attracts widespread media coverage. Fear of missing out on what could be a once-in-a-lifetime opportunity spurs more speculation, drawing an increasing number of investors and traders into the fold.
- Euphoria
Asset prices rocket. Valuation metrics are touted to justify the idea that no matter how prices go, there will always be a market of buyers willing to pay more and that the purchasers have the money, a local authority with an obligation to care for a child meets the criteria. This may be where are currently?
- Profit-Taking
Warning signs the bubble is about to burst brings closures, banking the profit so far, and sell offs, passing on the risk to another. Keynes observed that “the markets can stay irrational longer than you can stay solvent.”
- Panic
Once burst the bubble cannot inflate again. In the panic stage, prices reverse course and descend as rapidly as they had ascended. Investors and speculators, faced with margin calls and plunging values of their holdings, now want to liquidate at any price.
Bubbles begin when interest rates are low enough to encourage borrowing for spending, expansion, and investment in something in demand, where a price will rise especially where there are shortages.
The problem comes when an asset bubble begins to feed on itself, to swell out of proportion to the fundamentals, or intrinsic worth, of the assets involved, opportunistic investors and speculators are plunging in and pushing prices up even more. ‘Lots of people are doing it, why not me/us?’ ‘My financial advisor said it’s good for my portfolio’. ‘The immediate returns are good, and I can “beat the market” and make a quick exit’.
NCERCC have not seen any analysis on the above lines and sees that the government and sector are ill-prepared.
The evidence that needs to be made public is as follows:
- The economic underpinning of the Care Review and an assessment as to it being sufficient and thorough.
- The impact analysis of the Children’s WellBeing and Schools Bill especially regarding
- Price capping (especially alternative futures of various other methods of taxing)
- Regional care co-operatives and the effect on supply.
- There are government working groups on markets and workforce, the membership and the discussions have not been made public.
The PAC would be extending democratic accountability by making the above materials public.
There is a worry that that the internal DfE discussions have not been as informed as necessary. All alternatives need deliberation and scrutiny so that best choice is made. Policy-led evidence needs to become evidence-led policy.
That they have not as yet been made known and public to Parliament means current debates have not had the fullest materials from which to make decisions.
