House prices may not fall, whatever the cost (to the taxpayer). From The Torygraph:
Government failure to provide support for struggling homeowners will trigger a “tsunami of repossessions” which will damage house prices, experts have warned.
And who are these experts, pray tell?
Andrew Wishart, of Capital Economics, a research firm, said: "We now forecast that the unemployment rate will rise from 3.8pc to over 5pc, which will push up repossessions, though they should remain well below the levels reached in the house price crashes of the early 1990s and 2008." Capital Economics has forecast a 7pc house price drop over the next two years...
The article does not say on whose behalf they did this research, he who pays the piper calls the tune. And there are another three years to go before it all collapses again, they should know that by now.
A Government spokesman said: “We recognise people are struggling with rising prices which is why we are protecting the eight million most vulnerable families with at least £1,200 of direct payments this year, with a £150 top-up payment for disabled people.”
Why would banks lend shed loads of money to the "eight million most vulnerable families", knowing that any rate rises would tip them over the edge? Because they know the government will bail them out? It works out far cheaper (i.e. saves the taxpayer money and makes a reliable small surplus year on year) just building council housing for them.
And it's another reason for simply nationalising all lending to home buyers. Why let commercial banks make hay while the sun shines and bail them out when it starts raining? That way the taxpayer gets the profits in the good times, as well the losses in bad times. Without house price/credit bubbles and reckless lending, banks would be far more resilient and there'd be no need for taxpayer-backed bail outs.
Thursday, 18 August 2022
First Rule of Home-Owner-Ist Club
My latest blogpost: First Rule of Home-Owner-Ist ClubTweet this! Posted by Mark Wadsworth at 14:42
Labels: Home-Owner-Ism, Mortgages
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26 comments:
Gradually, all this financial chicanery and thievery has become the new normal, although I think people will finally get fed up with it this winter.
You're young, aren't you? Obviously too young to remember the 50s, 60s 70s. We've had nationalised industries and they all end up being run for the benefit of the employees. Not, as advocates of nationalisation always claim, for the benefit of the people. They cost more and perform worse than private companies.
The idea is great: run the business for the benefit of the people, why should capitalists make all that profit?
The reality is that with no competition, they always, always, end up being captured by the bureaucrats, whose only imperative is to grow the bureaucracy.
See NHS
See British Leyland
See British Rail
See... Well, you get the gist.
They tried nationalising home loans in the US of A. And that did not work out well at all. It just adds a whole layer of political and bureaucratic opportunity onto an unreformed and bankrupt money system.
Better to reform money and banking - one part by preference being the scrapping of the Bank of England, it being a total failure and arguably the main driver of house price expansion - and let market forces, exhibited by market set interest rates and the supply and demand for savings - sort things out.
(Obvs the planning system needs work as well. And scrap all the help to 'sell' nonsenses).
B, do you think that soon?
F, I can remember British Leyland as well as you can. And you have to learn to be a bit more nuanced.
There is a world of difference between:
a) competitive sectors where the profit motive leads to better outcomes (more innovation, cheaper or better products and services). That's cars or electricity generation.
b) natural monopolies, where the profit motive leads to higher prices and 'bare minimum' service quality, where there is no innovation needed. This applies in particular to anything to do with land.
Applied to banking:
- cash machines, payment cards and payment systems, personal and business loans, currency exchange etc. These are all competitive, require constant innovation etc. All this stuff can only exist if there are private, competing businesses. The 'state' would be useless.
- residential mortgages. This is basically collecting land rent. The houses are there, the land is there, the demand is there, the rental values are there. These exist quite independently of what banks do. Banks just tap into this and collect the rent. Resi mortgages require no innovation, the principles are unchanged for centuries. This is best in state hands.
As to "run for the benefit of employees", have you seen the salary inflation in monopoly sectors like water since they were privatised? Water co's are wasting water and polluting lakes with sewage, that's where profit motive gets you with monopolies. Worse service! With things like water, we end up with WORSE outcomes in private.
L, it went wrong because having nationalised it, then privatised them again, so there was
- the inherited laziness of a govt department,
- near monopoly position (which is dangerous in private sector)
- implicit promise that they would be bailed out by govt, which was never actually there but became self-fulfilling.
The problem wasn't the government providing home loans, the problem was privatising them again.
That's like privatising the Royal Mail, you get the worst of all worlds, govt/monopoly arrogance, high prices, shit service. Despite a centuries long monopoly by Royal Mail, the new private courier and parcel services are - by and large - much better, they have sussed it all out within a couple of decades.
MW Not exactly. Wiki is pretty good on this. e.g. https://en.wikipedia.org/wiki/Fannie_Mae
The fact is that all the GSE's were set up with a political agenda. That never ends well. e.g. Clinton administration meddling.
Best to simply properly reform banking, central banking and money. That will ensure no major distortions and market forces will prevail.
L, let's not get bogged down in details and argue over how to interpret other people's interpretations of what happened in the past in another country.
Resi mortgage lending is easy. The govt has people's tax returns and knows what they earn (or what they say they earn). So people fill in a form, get an open ended mortgage offer, they know their budget and find a house. They buy the house, the bank does a couple of bookkeeping entries and collects the mortgage repayments along with LVT or Council tax/SDLT.
The seller in most cases just ports his old mortgage to his new house and continues paying it off. Or an heir sells up and gets money paid into a deposit account with govt bank. it's not real money until it is paid in or withdrawn.
If the bank sets interest rate "too high" or imposes a low multiple on all applicants, well so what? That depresses house prices, FTB's gain is heir's loss. Everybody else is selling/buying at same time so couldn't care less.
And if multiple is "too high" then rates will be lower accordingly, house prices will go up, FTB's loss, heir's gain, but in terms of £ per month being paid, comes to the same thing. And buyer/sellers = movers still couldn't care less.
Inflexibility is a good thing here, there won't be credit bubbles and busts if the rules on interest rate and multiples are fixed very long term.
There won't be insane wastes of taxpayers' money like big bail outs every eighteen years and crap like Mortgage Interest Subsidies (for banks). It is not difficult for a government to make a decent turn on this, seeing as it can borrow cheaply and lend at whatever rate it feels like (being a monopoly).
That leaves the private banks to focus on true value added activities, which are inherently competitive and more resilient, see list above.
MW. In theory all fine. But you are involving bureaucrats - HMRC - and 'ratios' set by politicians. I am just too cynical to concede that they won't be tempted. the incentives are just too great.
What I am advocating is like that but in reverse. You need to reform the banking system - which is a racket under the current settlement. That will take out 80% of the problems. And then you have to reform central banking and money. That takes out the other 20%. And since by that time we'll be on an LVT only tax system (ooo, look at that flying pig...) it will all pan out and we can sack more bureaucrats and shrink government further.
L, residual banking activities (see list above) can only be done by private competing banks, that is fine as it is, it does not need reforming and little need for regulation or oversight. They just match short term needs of people who need a personal loan for a new kitchen and companies willing to install them. These are all paid off within five or ten years, there is no systemic risk. That is 'real' money that oils the wheels of the private economy (all good stuff).
Yes, bureaucracies are a bit shit. But mortgage banks are just giant bureaucracies operating under a government umbrella, working on a "tails we win, heads the taxpayer bail us out" basis, with colossal salaries for senior employees.
As untrustworthy as pol's are when it comes to setting interest rates or multiples, in practice, it doesn't matter, see examples.
They can't be any worse than what private banks do - call in loans after a crisis, primarily from actual businesses not from mortgagees (damages economy) and then gradually loosen and loosen pushing up house price and sucking money out of productive economy (damages economy) and into land rents until the next crisis.
"Yes, bureaucracies are a bit shit. But mortgage banks are just giant bureaucracies operating under a government umbrella, working on a "tails we win, heads the taxpayer bail us out" basis, with colossal salaries for senior employees. the 'working under a government umbrella' bit. That's is precisely what I mean about 'reform'. That stops. No bail outs. And with money and central banking reform those 'colossal salaries' go.
And in practice it does matter whether politicians/bureaucrats v private business sets interest rates and lending criteria because incentives. P/B's have the wrong incentives. Private business risking it's own capital has the right ones.
L, I don't like vague terms like "money reform". I prefer looking at concrete examples.
Agreed on no bail outs etc.
My view - with LVT, residual house prices would be low, so perhaps safe for private banks or BSs to get involved. Or go back to the Good Old Days, when things provably worked better, ban banks from mortgage lending and only allow strictly regulated BSs (max multiple twice joint salary, or whatever) to do it. You can't argue that it didn't work better then. Was it perfect? Of course not, so what.
But with or without LVT, land rents are the ideal source of government finance, however that is split between "mortgage interest" and "council tax/LVT/SDLT/whatever". So why not collect the mortgage interest as well?
Sure, there are downsides to everything and the world isn't perfect. But better for govt to collect mortgage interest than to tax businesses and employment and private activity.
Better to battle with a govt bureaucracy every ten or twenty years when you move home and take out or port a mortgage than to battle with bloody HMRC every year over your PAYE and VAT liabilities!!
And for lower earners, forget about risky loans to them, build them council houses instead, which makes modest profits and is very low risk. Better a slightly naff council house for £80 a week than insecure private tenancy in possibly a dump for £200 a week.
This Thatcher/Blair-ite "sell off council housing" was a massive loss to the taxpayer and to lower earners now stuck renting privately. It was purely politically motivated and was terrible economics.
"You're young, aren't you? Obviously too young to remember the 50s, 60s 70s."
Wrong, I remember the 60s and 70s and agree with Mark.
"We've had nationalised industries and they all end up being run for the benefit of the employees."
ALL large organisations end up being run for the benefit of the senior management, which you would know if you had studied the matter in any detail. In some cases the senior management are also the owners, in which case, fair enough, but in most cases, they aren't. The owners (the shareholders) are nearly always powerless to do anything except make an ineffectual fuss once a year at the AGM, that is if they are not a pension or some other fund, in which case no-one really gives a shit, so long as the share price remains high.
The problem with the "nationalised" industries after the war was that they weren't nationalised. All that happened was that their owners changed from being individual shareholders to the State, thus substituting political meddling for indifference. The limited company model works indifferently at best in the private sector. It doesn't work at all when the owner is the State. The failures of the nationalised industries was a failure of the limited company model, not a failure of nationalisation.
L, Mark, I don't think it's a state/private thing at all, I think the problem is size. Once the banks get too big, they are indistinguishable from bureaucracies, anyway. L, you say "Private business risking it's own capital has the right ones." wrt incentives, but in a large organisation like one of the big four, who (as in which individual) is risking what? No-one gives a shit, it's not their money. Someone once described merchant bankers as "people who throw other people's money around in a way they laughingly call investing.
Nothing vague about 'money reform'. Let the market choose what it should use as money. Scrap all the 'legal tender' nonsense. You cannot - as history proves - trust governments and bureaucrats with money.
B, as to Ltd companies, in private sector, the better alternative is Deposit Funded Corporations.
Cars, steel, electricity generation, coal mines should never have been nationalised in the first place. Not natural monopolies.
National Grid, water should never have been 'privatised'. They are natural monopolies and their income is basically rent.
Royal Mail should never have been a state monopoly OR privatised. Parcel delivery is something the private sector does very well if left to its own devices, and there's no reason why they shouldn't be able to deliver letters, apart from the overlapping costs.
Is it just size? Dunno. But with mortgage lending taken away from them, banks would shrink to about one-fifth their current size, as measured by balance sheet and they'd have to work harder/smarter to earn their money from oiling the wheels of the economy. Size in itself is neither good nor bad.
L, we've done "Scrap all the 'legal tender' nonsense" before.
Govt can issue its own 'paper' currency (printing), provided it then un-prints that money again by taxation. This is to prevent inflation AND to create demand for bits of paper in the first place. In itself, that is innocuous.
If the general public wishes to use those units as a denominator for convenience, fine, if it wants to use another currency, or use barter, or price everything in gold or some made up crap like Bitcoin, also fine. This is all perfectly legal and rightly so.
On the LVT bit. Yes, you'd collect LVT on the location premium of the house. But surely you'd also levy a bank asset tax? As a proxy for LVT.
I concede that I am implacably prejudiced against government and bureaucrats getting involved in anything vaguely commercial or at all. That prejudice is based on the evidence of history. You just cannot rust governments. OTOH you can trust the bloke you do business with. Incentives matter. Your butcher is incentives to look after you. Your government and bureaucracy is not.
I also know that the current banking settlement is an absolute racket. An inflation machine. A legalised counterfeiter. So you have to reform that in order to make their borrowing and lending and financing work and be accountable.
I also happen to agree that the bulk of mortgage lending should be from something like the old building societies. (I was dead against de-muutualistation). I think our forebears were better switched on the dangers of land speculation and currency and credit expansion and understood LVT lite when setting the rules for BS's. But you have to restrict both sides of their businesses. They cannot be psuedo banks. They have to focus on savings for house purchase and loans. And other cash savings products like term deposits.
'made up crap like bitcoin'. Oh I sooo agree.
L, OK, with or without LVT, a tightly regulated BS sector with strict maximum multiples like in Olden Times would be great. Leave BSs to sort out the details. That puts a lid on house prices, and what doesn't go up can't come crashing down. A key part of Georgism Lite!!
Bank asset tax is a transitional thing. That will drive banks out of low margin and highly risky (from a macro economic point of view) mortgage lending. And it will incentivise specialised, higher margin lending. In a perfect world, receipts won't be much.
And leave them alone to do the really clever stuff like payments systems, debit and credit cards, cash machines, foreign currencies, letters of credit, business lending, personal loans. Quite clearly, a govt bank would be shit at all this, or never even have invented it in the first place.
B. The accountability bit. I disagree - sort of. banks are 'too big' because of the fundamental corruption of the money and banking system. More localised banking with smaller banks - as long as banking was reformed - would work well. (e.g. Bank of/on Dave?? https://www.burnleysavingsandloans.co.uk/ )
In re merchant bankers. They perform (did perform??) a useful service in financing trade. Trouble is it's all gone wrong because of all the money and credit expansion. Hedge Funds and PE could not work without all this ridiculous mis-priced money.
'Legal tender' thing ends up making Gresham's Law happen. The bad mandated 'legal tender' drives out the good alternative. You just cannot trust governments with money.
"That prejudice is based on the evidence of history. You just cannot rust governments."
Nor, if you look at history, can you trust bankers. In the C18th and !9th, banks used to go bust all the time, taking all their depositors' money with them. Yes there were banks that didn't, but also there were civil servants who were interested in actually serving their country. If you only look at the bad examples, that cuts both ways.
Another problem with private banks is that there are not enough of them, so they are in a de facto cartel. As I discovered long ago when setting up a business, it's no good switching banks if your bank is offering poor service, becasue another bank will won't be offering anything better. As customers, we are left powerless as the instinct to collude is as least as strong, if not stronger, than the instinct to compete. At least with a state bank you have some sort of recourse through your MP and, as "Yes Minister" amply illustrated, once something is part of the Civil Service, the civil servants can keep the pols under some sort of control.
"If the general public wishes to use those units as a denominator for convenience, fine, if it wants to use another currency, or use barter, or price everything in gold or some made up crap like Bitcoin, also fine. "
You need to distinguish between money as a unit of value and money as a unit of taxation credit. The former has been around for far longer than the latter. Having a unit of value is useful, as you can say, my cow is worth six units and your wheat is worth one unit a bushel, so I will swap my cow for six bushels of your wheat. In most countries the unit was a weight of a precious metal, usually silver. However that didn't mean that there was actually any silver involved in the transaction. It was governments who started actually issuing bits of silver to make currency, but the world got on fine for thousands of years without any currency at all. So it was the government using, hijacking in fact, what was already ancient custom amongst the public, not the other way around. As soon as currency was invented, we also got inflation as the value of the currency started to get divorced from its original value in precious metals and hence everything else and what was a measure of value simply became a name. How many people today know that a pound was originally a pound weight of silver? It's now 1/230th of a pound of silver.
B, sure, silver has been used throughout recorded history. Purely paper currencies for about three hundred years. So why did people voluntarily give up silver..?
The point is that back before coinage, there had still been thousands of years of credit. It made transactions easier to have a unit of value that used a precious metal, but that didn't mean that any actual silver changed hands, any more than it does now.
B, of course. But 'credit' is not backed by silver, it it backed by the borrower's ability and willingness to earn some silver in future and pay it back. That is just 'money' which nets off the nothing.
Clue - if there is a debit and a credit; a borrower and a lender etc, that is 'money' and nets off to zero.
Silver is just an asset. There is no negative silver waiting to cancel it out. You don't need to borrow silver to own silver. It is not magically created by banks, it is dug out of the ground and refined.
Well yes, if you are going to have credit, it makes life much more convenient if you can assign agreed units of value to that credit. If you are going to assign agreed units of value to credit, it makes trade much more convenient if those units of value are expressed in something that is a) desirable and therefore valuable and b) has widespread availability, albeit in limited quantities. Shiny metals fill this brief admirably, which is why most societies used them. Where shiny metals were not available, people used other things, like cowrie shells. The point is, you didn't need any actual shiny metal until coinage was invented.
B, we are going round in circles and you are forcing me to restate the blindingly obvious for the umpteenth time.
A debt is a debt is a debt, however denominated. In net terms, it is not an asset.
I mow your lawn, you 'owe' me a favour. You might make good and help me move some furniture, or take in my parcels when I'm on holiday. You might default. I might 'lend' you a pint of milk and you 'owe' me a pint of milk. This does not increase the amount of furniture shifting or milk in existence.
Whether you owe me silver, a pint of milk, some bank money, a favour, whatever, that is a debt/money and not a net asset that really exists, (except as contractual arrangement) between us.
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