Mortgages: Government bailing out or copping out?
August, 03, 2008
A common view of market economies is that state intervention needs to be subtle. Arguably, since the Credit Crunch (reaching its first birthday) this hasn’t been the case. Look at Northern Rock (I know you probably rather wouldn’t, but bear with me), where the Government (or rather the tax-payer) propped up a financial institution that had made profound mistakes. The Rock made its bed and we’re all lying in it. As was said at the time, the New Labour administration was privatising profit but nationalising failure.
The theory is clear: if the financial institutions make epic mistakes (like lending large sums of money to people who can’t realistically pay it back) they needn’t worry too much. After all, the government will ride to the rescue with subsidies. This didn’t work for nationalised industries in the 70’s so why should it work for the financial sector now?
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Which is why the Crosby report, released last week for the Chancellor, is so interesting. The report suggests that the mortgage famine (my words, not theirs) will last for another couple of years. This has led to the Treasury considering direct support to the lenders by way of government-backed bonds designed to free up credit. In short, it means the Government injecting public money into the mortgage industry so they can lend it to borrowers. By doing so, the government stimulates the property market and so assists in economic recovery. It looks very tempting, and there are a couple of ways you can look at it.
Firstly, the UK is being hit so badly by the Credit Crunch because of the unique role property markets play in our economy (the expectation of equity is now in the financial DNA of the British public). Therefore, so this argument goes, it is appropriate for public subsidy of such an important part of the economy in such dire times. Carefully focussed bonds would have the same effect as a defibrillator on the ailing market. And it’s certainly a vote-winner for an embattled government on the ropes. Indeed, in the USA the Federal Government has already starting underwriting wholesale mortgage lenders to stave off the worst effects of the crunch.
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Conversely, the alternative argument is threefold: Firstly, meddling in the market is wrong – it rewards irresponsible action by business and rescues companies that should naturally die out as part of the law of the market jungle. Secondly, the ludicrously high property prices of 12 months ago saw a bubble that needed bursting – anything that might effect a natural readjustment is just propping up structural problems in the economy. And thirdly, from perhaps a more left-wing perspective, many Labour supporters might point out how unfair it is to use tax money from the poorest in society (remember the 10p tax debacle?) to bank-roll mortgages for the middle-classes. Put them all together and you’ve got an equally potent counter-balance to the intervention theory.
So there are some tough choices for Government. But New Labour has shown with Northern Rock that it isn’t afraid of intervention and it desperately needs to be seen to be doing something. The less interventionist suggestions on Stamp Duty (i.e. scrap it) and HIPS (ditto) have fallen on deaf ears. Will state bankrolling of mortgage lenders be the preferred option, and where will it take our economy in the medium term?
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SaveBorrowSpend Philippa Adam
