Wednesday, January 21, 2009

Spending our way to hell

Second, the old sell-mortgages-to-investors trick that caused the credit boom and subsequent credit crash is being reborn with Brown's own version of the US's Freddie Mac, where the Bank of England will swap these mortgages for Government bonds, created by printing money, which it will then sell on. It will also insure against losses - in return for banks agreeing to Government targets on the amount they lend out.

So we know how well the Freddie Mac trick worked, we know how well Government targets work and we know how well Government run things. And we know how well printing money worked out for the Weimar and Zimbabwe.

...Give it a few months and full nationalision of RBS and Lloyds - and potentally Barclays seems inevitable now....

...Now Vince. Vince isn't as worried about this. In fact, he thinks Brown isn't going far enough and should Nationalise the banks now.
I'm most worried by the so-called "good bank" part of the scheme. Northern Rock will be given Government money for mortgages (see 'expand activities of Northern Rock' in this FT article).

The housing bubble and market crash was caused by lenders handing out mortgages like candy. Remember the 125% mortgage, anyone? House prices rose to ridiculous levels so that, even this January:
London does not have a single local authority where prices are low enough to enable a purchase at the 4:1 ratio.
Credit was so easily available that UK personal debt is allegedly £1.4 trillion (this always seems an unreasonably large sum). This is equivalent to £23,000 per person.

Inequality rose as the partners of private equity companies made huge windfalls by buying and selling companies using borrowed money, according to Robert Peston's book "Who runs Britain?".

And the Government's solution to this? Encourage everyone to spend more money and buy more houses.

One sensible economist friend is calling for "investment, not spending". He says the Government should be throwing money at Cleantech companies, etc. not high-street shoppers. We need a zero-carbon economy, so why not invest in it now. We can employ the laid-off bankers with PhDs in physics and engineering to work on technological development, and train other people. Other countries will buy our expertise.

I'm not entirely convinced, but it's better than any of Brown's ideas.

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