Thursday 26 July 2012

Should we prick our bubble yet or sack George?

One of the main causes of the UK recession is our attempt to prevent a depression. By lowering interest rates we have stopped the property bubble from being pricked. Thus people are paying their low interest rates on their mortgages and not selling their houses. Lack of supply means that pent-up demand coupled with low building rates is keeping prices high. Plus new buyers have to save more for deposits and

as regulatory change has made the barrier to entry even higher - the days of 125% mortgages seems like a lifetime ago.

Overall, property debt is falling as people in the UK pay off mortgage debt - but this debt pile is enormous and the price of paying it down is the current, long, recession.

By not pricking the bubble, we are left instead with a slowly deflating economy - is this preferable to a crash and boom?

In the US, the ability to walk away from housing debt, in the form of jingle-mail, meant the housing bust has been very bad, but the economy has recovered quickly. In the UK we have a Japanese style zombie economy, caused to a large extent by banks sitting on assets with impaired values that they won't sell becuase the loans are still performing (i.e. payments are being made as the interest rates are low, the banks are still losing money though, as these rates offered in the past are below the banks cost of funds today).

It's easy to say sack George Osborne, but as much as he has made many errors, often by trying to raise taxes, his basic mantra that you can't borrow your way out of a financial crisis is sound. Spain is trying that, the USA is trying that - their national debts are going up much faster than ours, their economies performing only slightly better.

But is a bust the answer? I am not sure myself yet as it will be horrible. Chances are with the euro-crisis we will find out the answer in due course.


Electro-Kevin said...

For most people it won't be horrible.

For some it will be great.

For some it will be awful.

In the main it is what needs to be done.

I hear that in America the bankrupts are being allowed a lot of leeway and clemency. This is helping their recovery.

Anonymous said...

It's taken you this long to work it out!

I would have thought a savvy finance man would have twigged when the BoE pension fund moved everything into index-linked bonds - followed by masses of QE.


Mark Wadsworth said...

Do what John Major* did, allow house prices to crash**, recovery will start as soon as prices have bottomed out, this has been observed time and time again, it just works, even though nobody is really sure why.

For sure, the electorate won't forgive them for ten or fifteen years, but hey. Or, they can continue pandering to the bankers, the landowners, the Home-Owner-Ists and say sod the economy, our main goal is to stay in government and be the ones handing out money to our mates.

* The older I get, the more I realise how radical he really was, compared to today's timid bunch of corrupt finance sector shills.

** Even better, speed this up by collecting revenues from the rental value of land instead of from earned income and capital.

Budgie said...

It is actually quite hard to sack Osborne but he truly deserves it, so we should all try harder.

Moreover Osborne, or whoever takes over, should cease pandering to the Food-Mixer-ists by collecting revenues from the rental value of Food-Mixers.

There they sit in the back of the cupboard, having consumed valuable resources just to bring them into existence, yet in most cases doing nothing. Only smug Food-Mixer-ists could have any objection.

Sebastian Weetabix said...

Osborne is borrowing more money than Brown. This alleged austerity is bollocks.

hovis said...

SB indeed but the recession isn't - fun times eh?

Anonymous said...

It's not just residential property of course. The banks are up to their necks in commercial property exposure and a similar analysis applies.Here I think it's the yield gap that's key to keeping values up but there's also a lot of extend and pretend and witholding from sale.

Anonymous said...

IMHO there's no way to juggle supply side/demand side stimulus, QE, taxation, pension etc. that'll paper over the structural problems of Britain's economy.

So far, no politician dares to state the obvious - that by 2030, living standards will be on a par to those of 1930.