George Osborne goes ‘all in’

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…

This 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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24 Responses

  1. 22/03/2013, LERENARD wrote

    The Chancellor should have brought in policies to bring house prices down rather than pushing them up ever further. Instead, there will be more reckless lending on the way, with taxpayers picking up the tab. A case of listening to his friends in the City and learning nothing friom the financial crisis. Perhaps it is his last gamble before he sinks into political oblivion.

  2. 23/03/2013, Boris MacDonut wrote

    He might be “all in”,but is alos all out of ideas, all out of luck, all out of hope and soon all out of support. It’s all over. We only have to put up with toffs omni-shambles for another 770 days max.

  3. 25/03/2013, Neil wrote

    I think if he wanted first timers to enter the market then George should talk about (1) ending MIRAS on investment properties and (2) extending the 1% stamp duty band up to £1m.
    That way, the supply of FTB properties would increase, and Second Time Buyers could afford to move up.
    All George seems to be doing is increasing the pressure on the bottle neck.

  4. 25/03/2013, Engineer wrote

    When will we find a political party able to understand economics. they all want to dig the hole deeper to get elected by fraud. Not a numerate scientist among the whole lot.

  5. 25/03/2013, Getting Poorer wrote

    Bengt, you say low interest rates are set low for a long time, why? As far as I understand, UK is 2nd highest indebted “developed” nation, just below Japan with 2 or 3 times more debt than the others. At some time this will be due for repayment, we are not earning enough to pay it off so it will have to be replaced/renewed. But with falling exchange rate and increasing inflation who will want to loan UK cash at 2% for much longer?
    Could UK just print money to pay off debt? It can’t be done all at once – can it? Surely present investors would just quit UK which would force up interest rates and exch rate down?
    I suppose what it needs is US to sort them selves out (which with shale gas etc it may), take the lead and USD to become stable, so investors have somewhere safer to put cash and then UK would have fun!

  6. 25/03/2013, Baxter Basics wrote

    Moral hazard shmoral schmazard.

    And the winner is….. bzzzt! Karl Marx! The UK now has an economy that is near-as-dammit as centrally planned as the former Soviet republics. Simply substitute the rhetoric of state manipulation of nominal house prices for, say, five-year plans for tractor production and the parallels are eerily similar.

    Time to start accumulating snout ‘n’ booze for the inevitable shady barter economy, methinks.

  7. 25/03/2013, JREwing wrote

    Like the Chinese who first ran into Genghis Khan’s Mongols, the average person in Britain has no idea what’s coming.

  8. 25/03/2013, Simon wrote

    Here a question for you:- Now that the government commited itself to the housing market, what measures does it now have to rescue the pound if ther is a run on it?
    Normally it would raise interest rates, but that now that the government is on the hook as guarentee for all those overpriced houses morgated out to those who would certainly default if interest rates were raised to a level to support the pound, that is out of the question.
    Answer:-Thanks to Cyprus I think maybe we are all a little clearer on what action will be taken!

  9. 25/03/2013, Natalie wrote

    “Of course, we all know why. Osborne wants everyone to know that zero-rate policies are here for a long, long time”

    Only until 7th May 2015 when the great British public have the chance to vote in the next bunch of muppets.

    I’d vote for David Starkey next time around. At least he knows what he is talking about:

    http://www.bbc.co.uk/news/uk-politics-21895497

  10. 25/03/2013, DrD wrote

    I’m with #5 ‘Getting Poorer’ on this.
    Surely interest rates can’t be so easily manipulated for long? A discussion of any historical perspective on this and why we won’t end up with 15% interest rates like in the early 90s would be much appreciated!

  11. 25/03/2013, Mick Finn wrote

    @ 8 Simon

    Good post ! Even though it is tragic to see what ordinary people in Cyprus are going through, at least we are more illuminated now !!!

  12. 25/03/2013, Clive wrote

    Natalie

    “I’d vote for David Starkey next time around. At least he knows what he is talking about:”

    Just listened to it, he’s very short on specifics.

  13. 25/03/2013, Sophie wrote

    JREwing – what is coming?

  14. 25/03/2013, Sid wrote

    @ 6 Baxters Basics

    I’m stockpiling Vodka !!!

  15. 25/03/2013, JREwing wrote

    @ 13. Sophie – By 2017 at the latest, you should have your answer. :)

  16. 25/03/2013, Jago wrote

    I agree with the article, house prices are too high. It is totally unacceptable that young people are unable to buy a house or flat and are forced to rent This has the inevitable effect of pushing up rents to the point where it is not possible to save for a deposit.
    George Osborne’s mortgage guarantee will only be available to a minority and will push house prices even higher.
    Should we not be doing the opposite, bring in some credit controls and slowly, with a bit of help from inflation bring house prices down. Then as more people could afford to buy rents would have to reduce.

  17. 25/03/2013, Lupulco wrote

    @ Simon
    Answer:-Thanks to Cyprus I think maybe we are all a little clearer on what action will be taken!

    Depending how the Bank levy pans out. There may be a collective one off? levy [say 25%] on the net assets of all Companies/Banks registered within the G20 or maybe G8 .
    In one swoop it should resolve the problem of what a company should do with all its cash reserves [pay divi/invest] and repay the debts that Governments and State Banks have run up. The the game can restart again.
    Plus, where can a company move its assets to in the long term? a non G20/G8 Country?
    What if these non G20/G8 Countries do the same thing unilaterally?

  18. 25/03/2013, Justin wrote

    Anybody with savings had better get them out of the banks and out of this country ASAP! The government has set the UK on course for the next sub-prime and government debt crisis. The coming banking meltdown will make the last one look puny in comparison. The pound will continue to be trashed. The cost of living is going up, up, up!

    Never trust a politician or a banker. If the electorate has no trust why should foreign investors continue to support this government? When the trust (confidence) runs out, they will have to put up interest rates to be able to sell the debt. When a politician says there is no alternative, do not believe them. There always is an alternative. And do not believe them when they say zero interest rates are here to stay. It’s only a matter of time.

  19. 25/03/2013, M Prince wrote

    Its a reckless move by George Osborne and co and contradicts much of what he and Cameron preached about lending in the first place. They said we were to get back to sensible banking and only lend to those that can afford. House prices are overpriced, it does not take a genius to work that out when compared to average earnings. Earnings are falling like a stone and will continue to do so while inflation stays high and keeps rising, so pushing more money into sub prime lending and allowing an echo bubble to form will just price sensible 1st and 2nd rung buyers even further out of the market.
    The loans offered by the government still need to be repaid, if you cannot afford 20% for a deposit then you should not buy. There is a very big reason the banks want a cushion of 20-30% of your money before lending, they do not want a reposession on theirs hands worth less than what was paid.
    Continued next comment

  20. 25/03/2013, M Prince wrote

    With central banks around the world printing like its going out of fashion and a currency war in its early stages, the BOE may be forced to raise interest rates once hyperinflation takes hold, world events are very likely to force their hand.
    This is George Osbornes final experiment at trying to kick start a dead economy, don’t be a fool and be a guinea pig in his experiment, if you have a deposit they buy gold with it, put it in a safe and in 18 months to 2 years you willthank your lucky stars you did.

  21. 26/03/2013, GotoItGeorge wrote

    Good article.
    I personally think Osbourne continues to make positive steps in lifting us out of Labours graveyard. This one helps will help keep our housebuilding sector ticking along on a recovery path. I believe he is signalling to the industry that the financial industry is going remain crippled for a few more years and in the meantime the government is playing its part in keeping the housing market moving. What he is offering is no more than was common place in the 1960s and 1970s when Building Societies would provide up to 80% of your loan and then if you met appropriate criterea you could take a third party insurance policy which would cover a balance loan up to 95%.
    Any thoughts of a boom disaster re-occuring from a £3.5B advance loan are misplaced. More of the same please George.

  22. 26/03/2013, Jo wrote

    The central banks have long been genuinely independent and it is they that control government policies – not the other way round. This is why even with all the various governments around the globe, we have global recessions.

    It doesn’t matter if the government is red, blue or sky blue pink, its the banks that call the policies. The way they earn money is to swing pendulums from one extreme to the other.

    At this moment it does “feel different” this time, like they want to exterminate the current economy. Maybe this is how we all get caught up in the pendulum game?

    Everyone into assets to save their savings, then raise interest rates and bring assets down?? Or is it “different” this time, like going for a new world bank currency???

  23. 27/03/2013, Boris MacDonut wrote

    #5 G Poorer. The majority of UK debt is only so in name. At least 40% of it is owed between companies within the same group. An artificial arrangement to avoid tax.
    I’m with Natalie #9. The disingenuous lot today told all Government departments to expect cuts of 10%…. in 2016…..the first year when they’ll be out on their ear.
    JR Ewing. You sound like some medieval soothsayer foretelling thet “there be dragons” and “we’re all going to die”. Youi just aren’t sure where or when. 2017 is it. I’ll mark my calender not to book World Cup tickets for 2018.

  24. 03/04/2013, Pete C wrote

    This is a totally dumb idea, but George is only the latest in a long line of chancellors attempting to manipulate the UK housing market. The sad truth is that its not so much he’s run out of ideas but he’s run out of the courage required to do what needs to be done. He’s failed to deliver real austerity but has delivered psychological austerity which is the worst possible scenario, i.e. he’s convinced the general population that austerity’s happening which is undermining their confidence in the economy but has not delivered any meaningful deficit and debt reductions required to sort out the UK’s financial position. Cameron has to replace GO asap with someone who not only has ideas but the courage and conviction to see them through.

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