Tuesday, 26 August 2008

The same daft ideas from Darling

There is nothing more dangerous than a desperate politician. History is full of examples of cornered wounded hacks, who risk everything on one last gamble in order to survive.

Alistair Darling definitely falls into the desperate category. He sees his future as inextricably linked to the housing market. The thinking, which is admittedly rather crude, goes something like this: "If only house prices stabilized, then Labour's electoral prospects would improve".

I am not sure whether this is even true. In electoral terms, Labour has probably sunk below the point of no return. Defeat can only be delayed, but not avoided. This inevitability hasn't stopped Darling from conjuring up some really stupid ideas. The Times today gave us a flavour of what to expect.

Extend the Special Liquidity Scheme

Darling wants to extend the scheme to include post-credit crunch assets. The scheme was not supposed to support new lending, yet here we are, with the government considering what had been previously ruled out. It is a little inconsistent don't you think?

I didn't think that this scam would help much when it was first introduced. Now, it seems the Treasury also thinks that mortgage lenders need more. This brings us to the other big idea - guarantees.

Government guarantees for mortgage lending

This idea is horrifying. This is our own version of Freddie and Fannie, and does anyone need reminding just how much trouble those institutions have caused? Of course, the press release from the Treasury will deny this. It will be described as guaranteeing only high quality mortgage debt.

There is one key lesson from every loan guarantee scheme ever foisted on the poor tax payer. If I may paraphrase Buzz Lightyear, banks have every incentive to expand it to infinity and beyond. Since it takes the risk out of lending, it becomes very profitable to have the largest possible portfolio of loans.

Moral Hazard? Don't worry about that. The UK needs a vibrant housing market. Bad lenders? No problem, the government will pick up the cost. This is the story of Freddie and Fannie. Those insolvent institutions now hold the greater part of mortgage debt from the largest economy in the world. The US government managed to accumulate this problem with only an implicit guarantee. When comes to government guarantees, a nod and a wink is all the banks need and they will have offloaded 75 percent of mortgage debt onto the government balance sheet.

At this point, the Treasury is going to say "the guarantee will be limited". Well, the UK mortgage market is now so large that a limited guarantee will be useless. For a guarantee to work, the Treasury will have to big it up. In other words; keeping it small is a waste of time; making it effective means making it large; and large means a massive liability for the tax payer.

Besides, what is so special about mortgage debt? Why not guarantee credit card debt, or loans for manufacturers, or for that matter, loans taken out to finance lottery tickets. If the argument is that we need mortgages to spur economic growth, well the same is true for a low interest government guaranteed loan that finances production.

This idea is not about consistency or equality of treatment. This guarantee scheme is about desperation.

Suspend Stamp Duty

Darling now wants to give tax breaks on home purchases. Again, what is so special about home buyers that they need special treatment. Lottery ticket holders pay a heavy proportion of their expenditure on taxes. Why can't I, as a stupid lottery ticket holder, get some relief from the Treasury. I could certainly use the extra cash.

Desperation takes hold

Of course, these ideas won't work. They won't save Darling and New Labour, who as I said, has crossed the line in terms of political popularity. It won't even reverse the declining fortunes of the housing market.

The simple fact is that house prices broke free of long run fundamentals. Anyone buying a house today would need to take on crippling levels of debt. A large proportion would quickly run into trouble should the economy slow, which is of course, what is happening right now.

Besides how would more housing market liquidity, tax breas for buyers and mortgage guarantees resolve the UK's chronic economic problems. Does it resolve the lack of competitiveness, the growing fiscal deficit, the massive external deficit, its negative net international position or the bone crushing levels of household debt? The answer is, of course, it does nothing at all.

So go ahead Darling, push those daft ideas forward, but don't think it is going to help you.


Anonymous said...

Come on Alice, tell us how you REALLY feel.

I'm pinning my hopes on the bond vigilantes. I would love to know how much of the government's existing debt needs to be rolled over soon, and how much is at adjustable rates. Darling needs a cash-out refi and I don't think the Chinese or Germans are going to give it to him.


Alice Cook said...


D'ya think I got a little emotional?

I hate this idea of guarantees; it is obscene.


Anonymous said...

Darling has already made a killing for other banks out of Northern Rock: reducing the size of their mortgage book means letting other banks cherry-pick the best loans and leaving NRK with the rubbish - at an eventual cost to the taxpayer of how many billions, I wonder.

Who suggested this plan? A banker...surprise, surprise!!!

B. in C.

Anonymous said...


Don't you realise that the statists have tumbled to the perfect plan:

1. Lower interest rates to zero
2. Guarantee everything
3. Increase "liquidity"
4. Tell everybody it's okay now.

How could that possibly NOT work? Surely the real question is how did we waste all those centuries of having normal interest rates, risk premiums, money supply limits and so on.


Alice Cook said...


Your four point plan is exactly what Darling and the gang have in mind.

Tbere is nothing new under the sun. This has all been tried before, and it always ended up the same way.


Markbaldy said...

I am not surprised at Darling's comments about his future riding on the housing market.
The so called boom has been due almost entirely on house price inflation - a situation where people have felt wealthy, spent more (borrowed money !) to keep the economy going, house prices have been hyped up again, people have felt even more wealthy... and so the cycle continues.
Sad to think the UK economy is all smoke and mirrors and not based on successful exports or anything sustainable !