Wednesday, 19 March 2008

The first Darling Budget

What budget? Economy in meltdown and he takes a couple of pence here, a couple of pence there, all on the old staples like tobacco and alcohol. What's new?

It's ironic because the roots of our problems actually go back to Maggie rather than Tony and Gordon. I posted recently on this when I discussed Northern Rock, but in the light of the Bear Stearns collapse and now the news that HBOS could be in trouble there's a far bigger picture to consider.

The broad chronology goes like this:

The Thatcher government abandon controls on the selling of mortgages, saying that market forces should be the sole determinant of whether or not people get mortgages.

The building societies compete with each other, and with other providers, to lend large sums of money.

People obtain very large loans in order to buy property, regardless of ability to pay.

Because people are able to access these large sums of money, the price of property rises way beyond wage levels fuelling increases in the cost of living.

With property prices rising so fast, people who are financially stretched simply take out further loans, secured against the increased value of their homes.

Public housing is sold off on the cheap, which increases the demand for private rented property, so rent levels rise.

The returns are now so high that people start buying property 'to let'.

Governments start to live in fear of stopping property prices rising; not only do they risk upsetting 'home-owning' voters but they are aware that as soon as property prices stall the whole house of cards start falling down, as people with mortgages find themselves unable to meet their repayments. Many 'banks' (often de-mutualised building societies) are hopelessly overcommitted with high-risk mortgages, but market forces play no role at all by now as once banks start failing, they take the economy with them.

In all of this, it was the UK that led the way; the US, dazzled by our economic 'miracle', soon followed suit. And now we're both in the same boat, with property prices stalled or falling and mortgage defaults rising. Because of the general effect on the economy, the government can't conceivably allow banks to fail, so they find themselves pumping public money in and trying to bring interest rates down so that homeowners are under less financial pressure.

But we're going nowhere. We need an economy that supports higher interest rates and lower property prices. You can't continue to expand your economy on the basis of ever-increasing debt; it's the economics of the madhouse and Robert Mugabe; it can't be done.

Why do we need higher interest rates? Because it encourages investment, it encourages people to save, it provides the funding for our pensions (and god, don't we need that) and because it discourages financial institutions from reckless lending.

Why do we need lower property prices? Because it discourages speculation, it means businesses pay less rent so they don't have to charge such high prices, because it supports a thriving rural economy, because it makes it realistic for people to take a first step on the property ladder without being saddled with unrealistic debt.

Sooner or later, what goes up comes down, and property prices are no exception. Eventually it will happen, and at the moment it looks as though it will be sooner rather than later. Rather than hoping the problem will disappear, or better still that the collapse will come after the opposition have gained power, an effective chancellor would manage that process so that the worst pain is avoided, at the same time reducing the vast debt that is rife throughout our society.

We have, and have had, no economic miracle in this country. We do have a long period of apparent economic growth, financed not by hard work but by credit. We're past the point now where the government needs to call 'Time'. Not put a few pence on the price of a pint.

3 comments:

babooshka said...

I couldn't agree more with your uour latest piese on the Budget, and yes it's all Thatcher's fault ultimatley.

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Stephen said...

I'm not sure that absolutely everything can be Maggie's fault, although her legacy certainly includes a remarkable national financial recklessness. Brown, Darling, and the rest of the no-hopers who make up our government have had a significant say in things too, not much of it for the better I fear.

babooshka said...

Agree, what they have inherited New labour have continued with, rather than re shape the future. I am blinkered when it comes to Maggie, very much Old Labour.

Can't believe you renovated a house in Ramsey. Still have the occasional stormy night, but more laidback drizzly grey days. Very Manx.

Have you noitced,if you mention politics in a blog, people are scared and run away, but if you have"pretty pictures" they flock to it. The point proved with my blog and my partner's. I do despair of the human race sometimes.