From The Torygraph:
"[Mortgage] Lenders, as a whole, do not have enough funding for mortgages to help promote the economic activity that will help lift the UK out of recession."
The article was posted on the HPC Blog, and I commented thusly:
"... why is there this general perception that mortgage lending stimulates the economy?
All it does is mean that more borrowers are paying more interest to more depositors. If the depositors are from abroad, then interest payments are going abroad, which reduces the money we can spend. If it is all domestic, then it's a break even at best, and probably mildly negative (more people working in banks shuffling paper etc)."
There are so many things you can spend money on, you can invest in your education; a business can invest in market research, product development, plant and machinery, staff training and advertising; people could withdraw money and invest in new shares, enabling companies to repay borrowings (thus helping to deflate the credit bubble in an orderly fashion); heck, people could withdraw their money and spend it (remembering that businesses vastly prefer £1 income to £1 loan). All of these things stimulate the economy, or put it on a sounder footing.
There are very few things you can do with money that do not stimulate the economy, but borrowing to the eyeballs to bid up house prices again is certainly one of them. Even physically burning money is better for the economy, as it is like cancelling government debts, so lifting the future tax burden a bit.
Answers on a postcard.
Wednesday, 11 November 2009
Economic Myth Of The Day
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17 comments:
Hi Mark,
Kind of agree - can only see it increasing "demand" for solicitors & estate agents, & even then, only marginal.
However (thinking outside the box a bit), if mortgage lenders are insisting on better LTV and so on, does that mean people will be saving for deposits rather than consuming?
Just a thought.....
a mortgage is a debt. saving for a mortgage is saving to ensure the enabling of a ( almost lifelong) debt. i can't see how that in anyway can bring any country to any real turnaround.
addendum, what the corrupt thing is about the second home of the politicians is that they are 'by the system' able to to make such a debt and profit from it richly when they sold or sell the property. it is like playing the stock market with much less risk, well, none really, as it is enabled and paid for by the tax payer, their employer.
Anon 1, I don't see how having more solicitors and more estate agents contributes to GDP :)
But turning to your main point, with stricter LTV ratios, people will save harder for a few years for their deposit and will probably work all the harder too, i.e. produce more; and all things being equal, with stricter LVT ratios, house prices will come down, so once they've bought a house, they'll be paying less in mortgage payments and 'spending' more in the productive economy for the next twenty-five years, so overall, demand for goods and services provided by the productive economy will go up, even if only marginally.
Anon 2, exactly. So why do so few of the MSM journalists see it this way?
Anon 3, I assume you are also Anon 2, yes, I have made that point many times. They even fudged section s 222 onwards of the Capital Gains Act 1992 to exempt their ill-gotten gains from tax (but you have to read between the lines to spot it).
Hi Mark, Anon 1 here again...
I don't think I articulated my point very well....
At face value, totally agree. A few busier estate agents, surveyors, removal men and so on will not recover the economy.
However, surely the recovery must be demand led? Thus to be demand led, people need cash in pocket and not save it for mortgae deposits etc?
Agree that in the long term (i.e. 5+years) our propensity to save rather than consume will drop back to normal levels, but at the moment surely this must be stifling demand somewhat?
Don't get me wrong, I'm a huge advocate of house prices becoming more affordable for everyone, again coming back to basic supply & demand, if prices get too high on the supply side, there is no demand.
But, on to more important matters and that is the economy. Totally agree with your para "There are so many....".
At this moment in time, we need bold decisions (i.e. investment in a downturn). Sadly, not only the government, but many private companies have run their balance sheets so tightly, there wasn't much put away during the good times.
I'm really not sure how we are going to get out of this with any sort of pace. I'm certainly onside of those who are predicting a double dip unfortunately.
Positive actions?
We can't afford tax cuts, in fact we need the opposite due to debt levels.
Firesale of assets to reduce the debt - this will have to happen, but how far do we go? Massive sale of government real estae & lease back? Flog the inland revenue?
Reduce govt. spending - would be nice but think of the redundancy pay off's for staff etc. Long term probably the right thing to do, but right now will just incur more debt.
I just don't know Mark is the honest answer (bit of a rubbish postcard I guess).
The only thing I can think of is that we need to innovate oursleves out of this. New products, technology, IP etc. Don't know if we still have the talent for it though!
Folks ought to understand the basis of Fractional Reserve Banking and how money is created. Money is created as debt on the banks balance sheet at the time you sign the mortgage deal, no new mortgages means no new money is created, and as debt is paid down and retired the monetary base shrinks, all the money in the world would disappear long before all the debts were paid. Its calles deflation eventually everyone with a loan would default as more people chased a shrinking money supply, its crazy really when you think about it!
Oh Dear MW you've attracted the usual FRB nuts.
When oh when will the Great British Public realise that buying a house on mortgage sterilises cash capital. It does absolutely nothing to boost the economy. No wealth at all is created when that debt is used to buy a house. If that debt was used to buy a more efficent machine tool, for example, wealth would be created.
In the particular I am absolutely against any form of rationing of mortgage finance by compulsorily restricing LVT for example. It's just another arbitrary price control and price controls never work as they destroy the accurate information the market provides hence agents work off false assumptions.
Lola,
I think you mean LtV, not LVT?
What's the difference between Regulatory Reserve Requirements (which we nearly all agree on) and regulatory maximum LtV?
AC1 - You are right. Many apologies.
LtV's ratios are a market price indicator. In a sense they are a measure of perceived risk.
RRR is a statutory requirement on banks to hold capital. Isn't it?
But doesn't raising the RRR lower the LtV?
Personally I believe that credit is created between banks (rahter than by banks), and as the state has a currency monopoly it should try to regulate credit volume via RRR. This linkage regulates LtV.
L, agreed, trying to restrict LtV by regulation is doomed to failure. Far better to keep prices down with LVT.
AC1, now you're dabbling in one-sided economics again.
When you say "reserve requirements" do you mean reserves as in "shareholders' funds" (on the financed by side, which is a Basel thing) and which is itself a balancing figure; or "cash and near cash" (on the assets side, which is the historic meaning of 'fractional sreserve')?
As it happens I'm in favour of both, but let's be clear what we are talking about.
PS, 'credit' in the traditional sense is not created between banks, it is created between borrowers and savers, banks are just middlemen; 'credit bubbles' are created between banks!
... why is there this general perception that mortgage lending stimulates the economy?
Precisely.
AC1. As I see it RRR has no linkage with LtV ratios at all. Sure RRR may restrict banks quantity of lending by increasing their capital requirements according to some arbitrary bureauctratic calculation of 'prudency'. But if a bank was prepared to lend to homebuyers at high LtV's because its risk underwriting of both borrower and security were within its own assessment of acceptable commercial limits then why shouldn't it lend? It is a free market and if the bank feels it wants to take the greater risk of a high LtV - and charge the appropriate rate of interest to reflect that increased risk - then why shouldn't it?
High LtV lending was NOT the problem with the recent past mortgage lending. Nor were Self Cert mortgages. The problem was the exessive quantity of money allowed to be created by Brown's bonker policies which was then offered at far too low a price. He hosed all this liquidity at the retail banks in order to fuel his growth illusion. Banks were just his witless accomplices in this nonsense.
In fact I believe the banks are more embarrassed about their witlessness than they will admit. They want to preserve their cartel and going agressive with the government on the causes of the credit crunch would likely as not see their cartel, and their scandalously unchecked monopolistic pricing power, dismantled as revenge.
Government and banks are two of the three traps that enslave us. The third is a Job combined with PAYE. Gvernment needs us to pay taxes. So they encourage us to get a job and buy a house on mortgage. This traps us in work as we have to pay the mortgage and because we are trapped in a job the government can tax us to penury using the coercive and confiscatory PAYE system. The only way out of this is to support the black economy and work for cash. Which is why the government and the banks are so keen to get rid of cash and substitute traceable card payments. Which brings me right back to the privatisation of money which among other advantages takes the power of easy confiscation away from the State.
Lola, but the underlying force that thing that enslaves us is Home-Owner-Ism...
Once the government has handed over the right to collect its natural source of revenue (ground rents) to private tax-collectors (land-owners), two things follow:
1. Capital land values skyrocket, so banks can lend people huge sums of money to buy back what they helped create in the first place, so we become debt slaves (or refuse to play along and prefer to remain rent-slaves).
2. The government has to raise taxes from something else instead, i.e. wages and economic activity generally.
MW You know I agree with that. I just did not say it that way round.
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