Pimp my professor

Professor Willem Buiter was a fantastic source of insight and analysis into the credit crunch, so much so Citigroup bought him in 2010. Since then he has undoubtedly earned lots of money and got to associate with powerful bankers who, I'm sure, regard him as a terribly nice ornament that does a really good turn at board meetings and away days.

But, compared to pre-2010, his more recent public output has been unfortunately limited and involved pish like “Global Growth Generators” wherein “Citi economists Willem Buiter and Ebrahim Rahbari investigate the likely future sources of global economic growth between 2010 and 2050. They come up with 11 global growth generators, i.e. 11 3Gs”.

Or not given, dumb buzzwords aside, a 40 year forecast (anyone feel capable of accurately predicting the rate and scope of technological change decades in advance? Thought not), can be safely ignored as one of those as stupid as its glossy “thought leadership” pieces companies hand out to executives who typically don’t know any better.

What’s also notable is that here and elsewhere Professor Buiter relegates himself to co-authorship status with a nobody business economist, a nice gesture that lets the latter ride on the coat-tails of the former’s reputation *.

With that in mind lets move on to a piece in praise of “Help-to-Buy” by Professor Charles A.E. Goodhart and Melanie Baker. Now Goodhart is such a big dog British economist he’s got a law named after him. Now? He’s a senior adviser to Morgan Stanley where Melanie (who?) works full-time as a UK economist. Hmmm, see the pattern emerging? Anyhoo, they make 4 big claims in support of Help to Buy, which are:

1)       It will help address to a gap in the market for affordable housing.

2)       Supply-side dynamics should respond from historically low levels to this stimulus if house builders have confidence in its duration.

3)       The private sector could take over some or all of this role after year 3 – by privatisation of the nascent mortgage indemnity insurer, by introducing private competition, or via re-insurance.

4)       It could be used as a powerful macro-prudential tool. Regardless of whether it remains a government vehicle, we think the FPC should retain control over the key parameters – and the Canadian experience shows a possible role for tweaking terms.

These are all for the most part pants. In response to 1), so would an increase in social housing, but without the risks inherent in help-to-buy's reintroduction of the 95% mortgage. Plus, I reckon building social housing assets that would generate income for government/put downward pressure on rents (a reduction in housing benefits costs anyone?) would provide all sorts of additional benefits.

Re: 2), note their use of the word “should”, also think about the timescales here because it takes time to build houses, let alone buy landbank, get planning permission, confirm designs, organise and schedule the various trades, then sell the final product. Then compare this with the actual duration of the scheme (a few years) i.e. government is boosting demand now, whereas actual supply “should” only start responding gradually over the next 18-24 months or so, which means house prices will rise sooner rather later (rendering housing less affordable in the process. Doh!).

Re: 3), “could” is nice, but why should/could the private sector take over this role given the government response is predicated on notions of “market failure”. Oh and the period up to 2007 practically illustrated the risks attached to high LTV mortgages and their consequent limited appeal.

Re: 4), this is simply wishful thinking/disingenuous. Yes it could be a macro-prudential tool I guess, but then so could flexing bank risk weighted asset ratios on mortgage lending, which has far more appeal because it would reduce risk rather than, as with Help to Buy, increase it and transfer it to the public sector. However, the real point here is that in practice all this scheme is being used for is to actively increase risk i.e. it’s a policy lever that only moves in one direction.

Pulling all this together, you’ve got Big Dog Goodhart actively pimping out himself and his reputation to a big bank for mucho cash to give us a pro-government puff piece as vacuous as its dumb. This is a bad thing because, as the Reinhart and Rogoff debacle made abundantly clear, we're in an environment where politicians make aggressively selective use of people like Big Dog to justify their policies, however nasty, dangerous or just plain wrong.

Now back to Buiter; when he took the Citgroup job he stopped writing his Maverecon blog stating  “As a consequence of this career move, Maverecon will be mothballed. That is the logical implication of brand integrity and credibility.  In Maverecon I wrote under the cover of ‘academic immunity’ . Academics have no duty other than to state the truth as they see it – to ‘speak truth to power’.  This gives them the ability to be undiplomatic, blunt, tactless and outspoken in ways that are unacceptable in the wider world – the world of grown-ups…..  Inevitably, during my years with the MPC and the EBRD, both the form and substance of my public statements were more constrained than during my academic episodes before and after.  The same will be true during the years to come with Citi.” .

I’m not as yet aware of any similar statement by the all grown up Big Dog Goodhart**.

* Alternatively, the nobodies actually write and research such dreck leaving the Big Dogs to read over the final version, then attach their name to it to lend it credibility/get it published/raise its profile.
** Americans call such people "shills". Britain doesn’t have such a straightforward equivalent to shill suggesting a cultural difference, but only so far as the relative willingness to acknowledge the practice exists.

The poor deserve what they get. Always

The bedroom tax is an increasingly bad move for the Tories, you know this when the government sends out no-marks like Sajid Javid (who?) to respond to Labour i.e. none of their big dogs wants to be seen to be standing up for it.

Yet, judging by "any questions" at the weekend, the notions of fairness presented in support of it still appear to carry some weight, this being people renting privately don’t get a spare room (am sure lots actually do), so why should those in social housing? Eh? Except, this is by definition yet another example of the mealy-mouthed, shit on thy neighbour cos someone bigger shat on thee mentality that politicians are playing up to as hard as they can right now.

By contrast, the facts of the bedroom tax are straightforward:

If you live in social housing, then by definition, you have a social need i.e. you are poor.

If you crank up the cost of social housing, then you are taking money off the poor.

There are not enough smaller properties for people judged to have a “ spare room” to move/"downsize" into.

So, again by definition, the bedroom tax simply takes money off the poor and the vulnerable who are effectively trapped. And because they are poor i.e. don’t have much if any spare money, the end result is a jump in rent arrears, an increase in suicides and all sorts of good fun.

And, because the bedroom tax is hitting people councils have an obligation to house - because they are poor and have a social need - it's creating all sorts of unanticipated costs, due to the explosion in rent arrears, of having to re-house people and move them into new housing, said people being mad skivers who reckon cerebal palsy justifies them getting state aid.

But, we’re talking “fairness” here, so lets be fair. Alongside the bedroom tax that’s supposed to save £505m in 2013-14, then £540m the year after, the Tories have also introduced the help to buy scheme, which has already set aside a £3.5 billion honey pot of taxpayer money to be used to give completely free loans (for five years) to people wanting to buy a house.

Now just chew on that for a few seconds. On the one hand, poor, disabled people are being evicted to save what was intended to be £0.5 billion a year, but will actually save less due to the costs involved at the same time as £3.5 billion is being pissed away to boost house prices and house builder profits so people with good jobs and good wages can get a completely free i.e taxpayer subsidised loan of potentially hundreds of thousands of pounds for up to five years.

You really couldn’t make it up. Like, I don’t know about you, but that doesn’t strike me as fair. Or moral. Or civilised. Or decent.  Or good economics. Or moral.

But, it does make clear what the values of the modern Tory party are; they are disgusting, nasty, piss on the poor because they've the temerity to be poor cunts. And if the bedroom tax was put in its actual context, which is the broader Tory housing strategy, then the notions of “fairness” being presented in support of it simply melt away.

Its all gone a bit Paul Ryan

The thing about Paul Ryan, the former vice presidential candidate, was how the mainstream media in the US, and here largely ignored the fact he's mental. There was a self-selecting, self-sanitising thang at work where the party projected rhetoric about him being a deep thinker and policy wonk was bought into and the reality - he's a nasty, bigoted, fantasist with an aggressively pragmatic approach to the truth - was ignored. I reckon a similar process is at work in Britain today and has been for some time now.

The most obvious example of this was the muted reaction to the ConDem's appropriation of a 1970s National Front slogan, which they stuck on the side of a van and sent round multi-ethnic areas at the taxpayers' expense.

The bedroom tax is another obvious one and in a different way so are the various help to buy schemes i.e. profoundly unfair and vicious, shitty policies geared to punishing minorities at the same time as subsidising the well off on an industrial scale.

All these policies prompt the same simple reaction - that's just wrong. Except, it appears they're so wrong and so nasty, they're so hard to reconcile with the notion of David Cameron a someone who hugs hoodies, could lose some weight, christ he's almost like you and me bullshite that they either get ignored or any attention paid is allowed to quickly peter out. They also raise far more important questions than  the Nick Robinson type pish about who's in or out of favour in either party or whether Boris is going to challenge Dave.

Well, lets quote some reality about what the current nasty bunch of bastards are actually doing:

1) You're disabled, you're on benefits as a result despite not wanting to be and you live in social housing. You have a spare room you keep equipment in/a carer sometimes stays in overnight - the government's policy is that you will be charged extra for the spare room. And no there isn't a one bed flat you can move into.

2) You earn c.£112,000 a year, you have £30,000 of savings in the bank, the current government's policy is to lend you up to £120,000 for free (for 5 years) to buy a house.

That's the reality of the current government's policies. That's just wrong.

No seriously, the help to buy scheme really is mental

First off lets be clear, the various government Help to Buy schemes are and will make a lot of people a lot of money. House builders obviously, but you too could cash in if you:

1)      Borrow as much as you can to buy a house in London and the S.E. of England within the next 18 months.

2)      Live in it for 24-30 months

3)      Sell it and buy somewhere cheaper outside London and the S.E. of England

4)      Use the profits to travel the world for a year or two

5)      That’s it.

Now bearing in mind the scheme hasn’t fully kicked in yet i.e. its not boosting house prices as much as it's about to, lets do some sums. If you bought (and remember the more you can borrow i.e. the bigger your income cos this is about helping the already well off, the more you’ll make) a £300,000 house, all you’d need is a £15,000 deposit. If the current rate of house price growth was maintained, after 30 months you’d be something like £54,000 up on paper. Nice. And I guess making the housing market more accessible does generate the broader economic benefit of freeing up the labour market/making labour more mobile. Despite that though the schemes are still feckin’ mental and profoundly unfair.

Lets bring some additional reality into play now. Most people get a 2 year fixed price mortgage (really, right now you should try and get a 5 year fixed – please don’t consider that professional advice BTW). Except, depending on who you talk to interest rates are now expected to start rising from late 2014 onwards and even more likely to start doing so from 2015/16. Then you look at the details of the government schemes and see that after 5 years of being a freebie they start charging 1.75% in year six and then retail price inflation plus 1% thereafter.

This means:

1)      Government policy is to help people who can’t afford a mortgage get a mortgage

2)      The cost of these mortgage will start rising from 2014/15 onwards

3)      It’ll really start rising when the charges kick in

4)      Pay rises are pants and lag house prices. A lot.

Now I guess one way of dealing with the government charges is to remortgage i.e. borrow more and use that to repay the government, except that’s to assume asset prices only ever go in one direction (see here for a list of companies that made this same assumption). Alternatively, you're taking a punt that banks will be more willing than they are now to do higher LTV mortgages.

Really, what we appear to be contending with is a government whose policy is to increase risk/enable people to go bust from 2018 onwards i.e. they are planting a cheeky wee economic time bomb at the same time as boosting already questionable house prices by helping voters borrow to buy something they can't afford. This will also direct money towards unproductive assets i.e. houses rather than say new factory equipment.

It is truly mental.


P.S. A thing that's always struck me about the left is they're very good at critique, but pants at proposing an alternative. Here's one. Instead of giving free guarantees to the middle classes worth tens of thousands of pounds, give them to housing associations instead or establish a big pot of debt for them so they can build tens of thousands of new social housing. This would push down on rental costs, create state assets and give more people decent homes. The current proposals do none of these things.

I'll house you

I really don't get it. Like why exactly, given the billions (and eventual billions and billions more) being set up to get pissed away on that new fast train line, why the government isn't instead borrowing to pay for a massive social housing programme now that would:

1) increase the supply of accommodation so push down on private rents, cutting the cost of housing benefit and private rentals
2) create assets that could be sold off,  if required, at a later date
3) before then generate revenues
4) you know, provide people with decent homes
5) address the horrendous problem with the bedroom tax which is the poor sods getting clobbered with it don't have alternative accommodation to move in to
6) create thousands and thousands of jobs and opportunities for apprenticeships
7) be used to regenerate/rejuvenate areas
8) be accurately costed and start generating at least some of the above benefits way before completion

By contrast HS2 will:

1) Do hee haw to ticket prices other than cause them to be raised to cover the cost of it
2)  cost spectacularly more than current estimates. We know this. We also know that the later phases will be postponed indefinitely - wrote someone who cycles past the Edinburgh trams every day - undermining the rationale for doing it in the first place
3)  become simply one part of a broader, subsidised network
4) because of the way procurement works, it'll generate all sorts of fat contracts for non-UK companies that means the benefits of the government spending involved will leak overseas
5) be based on mickey mouse notions of its economic benefits whereas the reality will see it suck even more economic activity darn sarth
6) waste time and money until phase 1 is complete.
7) let some English people feel less inadequate about the state of British railways vs the French

So yeah, why can't we have a massive social housing building programme now* rather than cutting however many minutes off the time it takes to get from Manchester to Leeds in however many decades time?

In the meantime, help to buy is all very good, ish. No, not really, not at all. Essentially, its a lower and middle middle class subsidy that will crank up personal debt levels as it bumps up housebuilder profits, but does hee haw about supply and is generally mental.


* rhetorical question. Successive governments have clung to a dogmatic prejudice against state social housing provision even when, as is obviously the case right now, building more would very obviously be a very good thing for the entire economy.

The help to buy scheme is mental

The government’s help to buy scheme is all sorts of bad rolled into one. Here’s some quick context as to why; one of the main things the actual and former building societies that blew themselves up in the financial crisis did to blow themselves up was to lend too much against assets. House costs £100 grand? Here, borrow £120 grand - i.e. a loan to value or LTV of 120% - so you can buy new furniture and a car as well. 

Things subsequently changed with the onset of  the credit crunch - we’re still very much in - as (a) the more mental banks failed/where taken over and (b) the remainder started using tighter lending criteria to ration credit, that being what a credit crunch is.

Or in more straightforward terms, there aren't any banks willing to do stupid LTVS. Or in even more straightforward terms borrowers have to stump up a much bigger deposit.  The problem is in a consumer driven economy and our consumerist culture - at a time when actual policy is to keep real savings rates negative to encourage spending and borrowing - borrowers need and want to spend rather than save, hence the housing market falling into the doldrums, people moaning on about not being able to buy a house and Sarah Beeny not getting as many channel 4 presenting gigs as she used to.

In response, the help to buy scheme neatly fills the gap between the deposits consumers have and what banks are willing to lend, so go go help to buy. Except, the amount banks are willing to lend is saying something very straightforward, which is this; we do not consider lending at high LTVs to be an acceptable or affordable risk. 

Turns out the government response to this is to say fair enough we’ll put the taxpayer on the nail to cover the gap - i.e. take on board the risk you consider unacceptable - between the deposit someone has and what you’re willing to lend. Lovely.

Now, another thing the actual and former building societies that failed  failed to do was to adequately price for risk. Again that’s not so much the case these days. Here’s the mortgages the post office is offering as of today to illustrate what I mean: 

• For a mortgage where the LTV is 60% the overall cost for comparison is 4.2%.
• For a 75% LTV its also 4.2%, 
• By 80% LTV its crept up to 4.3%.
• It's 4.4% for an 85% LTV mortgage. 
• Finally, at 90% LTV it’s 4.6% or 4.7% for a 5 year fixed rate mortgage. 

 I’d put in the 95% rate except they don’t do one that high. Similarly moneysupermarket.com told me there aren’t any mortgages for an LTV above 90%, presumably because EVERY bank in Britain right now thinks that’s just too risky. Still, the Post Office example makes the point, which is the higher the LTV, the more expensive the mortgage i.e. the greater the return required to compensate for said risk*.

This is nice and straightforward really; more risk = borrowers being charged more to borrow, that being what the lender uses to encourage bigger deposits and to cover the losses lending to higher risk borrowers entails (think whatever 1000% p.a. Wonga charges if you want another example).

Now lets look at the terms of the help to buy scheme: “you’ll need to contribute at least 5% of the property price as a deposit” – here, hang on a mo, this taxpayer backed scheme is open to people with a deposit the British banking industry considers too low? Crikey. Well I hope there’s a charge to compensate for the risk this involves …… “You won’t be charged loan fees for the first 5 years of owning your home.” – sorry? Are you serious? Nothing extra, like not a penny? Nope, I missed the small print; “In the 6th year, you’ll be charged a fee of 1.75% of the loan’s value. After this, the fee will increase every year”. Thank Christ, so its not simply a handout intended to turn house buyers into Tory voters.

Except, hang on a mo, going back to the Post Office example, the higher the LTV, the greater the risk, the more the borrower should be charged isn't it? So what about the help to buy scheme, like if I got support worth 20% of the place I was wanting to buy I’d presumably have to pay more than if it was only 5%, wouldn’t I? Wouldn’t I?

Nope, you’d be charged the same, which is nothing for 5 years i.e. the government’s scheme not only puts the taxpayer on the nail for risks banks are no longer willing to take, it appears to take absolutely no account of the different degrees of risk doing so involves. Even worse it creates an obvious incentive to get as much government aid/save as little as possible because to the recipient its essentially 5 years worth of free money be it bridging the gap between a 5% or a 15% deposit and what a bank will lend. Brilliant, so this actively encourages an increase in the risk being dumped on the taxpayer. And, as the Post Office example shows, because it lets borrowers reduce the LTVof their mortgage, they get to borrow at cheaper rates.

Obviously, a lot of things can happen over 5 years. House prices can be kept unsustainably high, helping people borrow more will kick hard against the deleveraging that’s supposedly a central plank of government policy, it'll expose more people to the risk of interest rates rising in however many years time than might otherwise have been the case etc.,. Oh and because of the time it takes builders to respond to market signals cos  it actually takes a while to build a house, then other than Wimpey and what no getting to trouser the profits resulting from a sudden pick up in house prices,  it won’t actually do hee haw about the size of the total housing stock either this year or in 2014.

So in return for the potentially Orish levels of risk the government has decided to dump on us all, this risk being something the entire banking sector is simply unwilling to take on (and the associated potential damage to Britain’s credit rating against which Osborne used to say he should be judged, that being presented as a reason why there’s all those shitty spending cuts) we’re officially getting f’all before 2018 in return**.



* the risk here is straightforward – can’t afford to pay your mortgage? The bank repossesses your house and sells it to repay what its owed. The higher the LTV, the less likely the bank is to get all of the mortgage repaid (what with it being a fire sale, the borrower not having had enough money to keep the property up to scratch and so on). 


** Reading a bit more its banks that appear to have to pay a fee. Hiding things behind the scenes like that just makes this look even more like bribing voters.