There’s been a lot of criticism of the chancellor’s plan to ‘double down’ on house prices. It’s worrying that the state will now act as guarantor for high-risk borrowers.
In case you missed it, George Osborne plans to offer loans on new builds of up to 20%. And more daringly, he plans to offer guarantees on mortgages. The idea is just like that of a doting parent, who offers to put up their own assets should things go wrong with the bank’s loan.
The flaws in the plan are so deep and so wide that I won’t waste your time discussing them. Instead, I want to focus on what this Budget really means. Osborne’s hidden message has considerable implications for your investments…
The only reason the scam works
Although the Bank of England has eased interest rates and made practically unlimited funds available to the banking sector, the banks have become more careful about how much they lend.
The best mortgage deals are available only to those with at least a 25% deposit. Long gone are the days when the banks would extend 95% loans (or higher!) alongside fantastic teaser deals with low rates. So when the government effectively says, “we’ll put up the other 20%” and brings back the classic 95% mortgage, that obviously has its attractions for many. The chancellor is counting on his policy to bring serious sub-prime lending to the UK and to kick-start the economy.
As I said, I’m not here to criticise the policy. I want to talk about what it really means…
policy scam needs one thing in order to work: interest rates have to stay pinned to the floor.
The UK is already considerably over-borrowed. And that’s why the Bank of England is bound to keep rates low. In this environment, I just can’t see how the central banks can consider raising rates.
The policy of pushing more punters into debt – and might I add, levels of debt the banks aren’t willing to countenance – will leave the Bank of England totally committed to zero interest rate policy.
And in case there should be any doubt, the chancellor introduced other important changes, just to make sure…
Head coach given strict orders
Pretty soon, the new governor of the Bank of England takes the reins. It’s pretty clear why he’s been flown in at such high expense. The planners wanted somebody with the ‘vision’ to implement ultra-loose monetary policies. Policies that, by my reckoning, should just about give us enough rope to hang ourselves.
In order to help the new coach, Osborne has changed his remit. You see, in the old days, the Bank was genuinely independent. Decisions on rates were made at Monetary Policy Committee (MPC) meetings, and the decision was duly reported to the markets.
But now, Osborne wants the MPC not only to work more closely with the Treasury in formulating ‘untraditional policy’ (read quantitative easing), but he also wants the committee to signal how long interest rates will remain at current levels.
Now, I ask you, what is the point in having regular meetings to decide interest rate policy (which is supposed to react to events in the economy), if you’ve already committed to your policy anyway?
Of course, we all know why. Osborne wants everyone to know that zero-rate policies are here for a long, long time.
He’s telling us to go out and borrow! It means forget about saving cash in the bank – just spend! And it says to any bank manager: “Get out there and lend – don’t worry if things go wrong. The taxpayer will pick up the tab!”
As if the average UK taxpayer isn’t already way over his head in guarantees to the banking industry!
And if you want to see what happens when the banks outgrow their (island) economies, then look no further than Ireland, Iceland and now Cyprus.
OK… so I couldn’t help myself from criticising Osborne’s policy. Sometimes my typing fingers get carried away (must try to control that!). But the real point I want to make is that this budget was a signal that rates are staying low for a long, long time… forever, if Osborne has his way. The UK is now structurally committed to financial repression.
They have the bond market sewn up too
If you think the bond market is going to police rates because the Bank of England won’t, then I’ve got news for you. The Bank of England will merely print money and buy up those pesky bonds if they don’t behave.
The implications are serious. For sure, a plunging pound will bring its own implications… but that’s sometime in the future.
In my opinion, today’s economic policies are incredibly dangerous for the long-term prosperity of the UK. But as I say, that’s the long term.
The short-term implications are quite different. Out of cash, and into things, is my best advice. Even housing is likely to get a nice little fillip from this Budget. But for your long-term prosperity, may I recommend international assets, as a hedge on sterling. And as far as international assets go – gold is a fantastic currency to be in.
We already knew that we were bank guarantors, pretty soon we’ll be guarantors on sub-prime housing too. All I can say is long live zero interest rates… because without them, we’ll be asked to make good on those guarantees!
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