Monday, Feb 01, 2010
Fighting for the Home-Owner-Ist vote
BBC: No swingeing cuts in first year, says David Cameron
Reading between the lines, the Labour government want to prop up house prices via the "fiscall stimulus" (i.e. massive over spend and over employment in the public sector; and printing money to prop up banks to prop up house prices) whereas the Tory opposition are playing a longer game - they say that excessive government borrowing will ultimately lead to higher interest rates, which will kick away the last crutch propping up house prices. So, as ever, the two big parties have the same ultimate aim - to prop up house prices. The only subtle difference is the manner in which they intend to achieve it. If we weren't such a debt-ridden economy, why would we care about interest rates? If we really were net savers and investors, we'd welcome higher interest rates, surely?
23 Comments
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1. mrflibble said...
Looks like we've all been had - time to dust off the emigration forms me thinks as life on shoebox island isn't looking to be improving any time soon. Cameron is starting to loose my vote...
2. jack c said...
Sounds like a man famous for riding his bike to work is starting to rapidly back pedal
3. letthemfall said...
Given the near financial collapse of the last 2 years, isn't it depressing that the politicians, banks and other economic institutions are still reciting from the same old dog-eared, burnt-around-the-edges pamphlet? Fodder perhaps for all the other pamphleteers in this country that stare out the window and see only their own reflection.
4. icarus said...
"Prop up banks to prop up house prices". I think it's the other way round.
5. Billy said...
I thought there were more savers than borrowers in this country and they want to keep interest rates low! They have just lost the vote of this saver.
I have just told them so on their site http://www.conservatives.com/Information/Contact_Us.aspx
6. tenant super said...
"Prop up banks to prop up house prices". I think it's the other way round.
It is actually mutual/ symbiotic.
Bail-outs and QE means banks don't have to sell of repossesed properties at firesale prices. They drip them onto the market to strangle supply and keep prices high.
Other more direct interventions in the housing market (low interest rates) support prices and mean fewer bad loans coming to fruition which helps the banks.
7. matt_the_hat said...
As George Galloway put it "two cheeks of the same backside"
8. icarus said...
Propping up asset prices is seen as essential to keeping banks solvent (or less insolvent) and therefore keeping the world from ending.
9. mark wadsworth said...
OK, fair point on who's propping up whom, but same difference, one's as bad as the other.
10. mystie010 said...
I was thinking about gving Cameron my vote this time (I'm a floating voter of no particular political persuasion), however after what I just saw on the news from one of the shadow cabinet, has just about made me want to vomit. The tories are now singing from the same old song sheet as New Liebour and bleating on about the let's keep interest rates low mantra. Is there no-one out there who appreciates what madness this is! They have just come out and said we must do everything we can to keep interest rates low! It looks like it is going to be much of the same whoever wins. :-(
11. jack c said...
It's all shaping up for a hung parliament and a major crisis (probably Sterling) to follow.
12. tom101 said...
Is the aim not to use inflation to get ourselves out of debt....? Low interest rates, printing money etc...
13. mrflibble said...
Sadly I think it will take a Sterling Crisis to finally sort this mess out. The country is in the worst shape it has ever been with over 450% debt to GDP (public & private) and the media is currently running around printing stories about house prices increasing by 20% over 3 years. Still if
no party is prepared to do any cutting then we can live in whatever fantasy world we choose. Not sure what is going to happen with QE but the powers that be need to start getting real if they are going to sell our debt on the open market.
14. Crunchy said...
Hyperinflation, food shortages.
15. jack c said...
@mrflibble - agreed, they (the politicians) cant put off making and taking the tough decisions forever otherwise the markets lose confidence and a crisis ensues.
The big story of 2009 was quantitative easing; the big story of 2010 will be quantitative tightening. (see this article for more info www.investmentweek.co.uk/investment-week/feature/1584971/quantitative-tightening-impact-2010)
16. icarus said...
Here's one summary which is not wide of the mark -
! A depression was borne out of high levels of private sector debt, the unsustainability of which became apparent after a financial crisis.
2.The effects of this depression have been lessened by economic stimulus and government support.
3.Government intervention led to a reduction in asset price declines, which led to stock market increases, which led to asset price stabilization and more stock market increases and eventually to asset price increases. This has led to a false sense that green shoots are leading to a sustainable recovery.
4.In reality, the problems of high debt levels in the private sector and an undercapitalized financial system are still lurking, waiting for the government to withdraw its economic support to become realized
5.Because large scale government deficit spending is politically impossible (or otherwise unsustainable), expect a second economic dip.
Regarding 3 If the assets on the balance sheets of banks are falling, then govt (1) buys them at higher prices - this is the purpose of the US TALF (Term Asset-backed Loan Facilty), mortgage relief programmmes, the US TARP.(Troubled Asset Relief Program) and the Public-Private partnerships to buy up those assets (with the public side taking the hit) (2) eliminates the mark-to-market accounting rules that are making them fall (3) reduces interest rates so that debtors can make debt payments and lessen the need for writedowns.
Larry Summers spelled out the thrust of US policy:
Declining asset prices lead to margin calls and de-leveraging, which leads to further declines in prices.
Lower asset prices means banks hold less capital. Less capital means less lending. Less lending means lower asset prices.
Falling home prices lead to foreclosures, which lead home prices to fall even further.
A weakened financial system leads to less borrowing and spending which leads to a weakened economy, which leads to a weakened financial system.
Lower incomes lead to less spending, which leads to less employment, which leads to lower incomes.
http://blogs.wsj.com/economics/2009/03/13/summers-on-how-to-deal-with-a-rarer-kind-of-recession/
17. matt_the_hat said...
Gold is looking relatively cheap compared to sterling
18. icarus said...
The policy implications of Summers' analysis led, coincidentally, to favourable treatment to the constituency which makes the greatest campaign contributions and funds the greatest number of lobbyists.
19. matt_the_hat said...
The government has two choices:
A) public sector cuts - GDP drops (50% public sector), unemployment rises, multiplier effect means tax take drops by more than savings - deficit increases until bankruptcy.
B) status quo - deficit increases until bankruptcy.
The problem can't be solved - we are 10 years too late - most communist states went bankrupt for the same reason - with 50% GDP from public sector we are in that boat!
20. mander said...
We are the only country in this world that still bangs on about property prices going up and wonder who deos still genuily believe that.
There is an urgent need to diversify away from property and let the market decide the value of properties. The more they try to prop up house prices the more confidence in the market will fade away.
21. 51ck-6-51x said...
MTH
- I think your two choices are bang on. How long before B is discarded though? Furthermore, as pointed out in The Economist last week, much of Northern England is now more dependent on the state than most communist states were (I have not verified this however).
22. jack c said...
51ck-6-51x - currently 54% of those employed in the North-east of England are public sector workers and a high proportion of the balance (judging by the fact that the Metro Centre which is Europes largest shopping complex is full morning, noon and night) must be on benefits.
23. mark wadsworth said...
@ 21 and 22.
There's a pamphlet out today by CentreForum that says a large part of the reason why some parts of England are so reliant on public sector jobs is because of national pay scales - normally, low-wage areas would have a competitive advantage, i.e. lower wages, but all that happens is that everybody in those areas rushes for the better-paid public sector and private employers just can't compete. Conversely, schools'n'hospitals in London and SE find it hard to get good teachers etc.
That seems like a perfectly sound theory to me - scrapping national pay bargaining in the public sector was always part of the MW manifesto, but this is yet another argument for doing so.