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.

The power of the skiver

The mainly macro blog is well worth a read I reckon what with it being erudite, insightful and awfy polite. But …………… its post on the cost of fiscal austerity i.e. spending cuts, just doesn’t work.

Personally, I agree with every point the blogger makes about the human cost of fiscal austerity, its hard not to. Actually, its easy to add in some more about how say in the current environment the more marginal members of the labour force face the double whammy of being disproportionately affected by unemployment AND benefit cuts. You could even start making a more pragmatic argument about how some of the human costs have obvious financial implications e.g. as unemployed people are more likely to be depressed, unemployment increases the NHS drugs bill.

But, the current political response to such human costs, which it's sad to say has popular support, is to simply dismiss it all as being the result of skivers whose personal failings are the actual cause of any costs, not impersonal political-economic forces. For instance, unemployment is associated with poorer health and diets? Well why aren’t the unemployed using their time to take walks and make soup then, eh? Increased incidence of depression? They should stop watching so much trash TV during the day then shouldn’t they and so on etc.,

So spelling out the human cost of fiscal austerity fails as an argument not because its wrong, but because politically  it’s framed as a moral, moralising argument to which the right already has an embedded response based on what it thinks is sound, common sense (the more generous pro-austerity lot might go so far as to say that's all very well, but that's why spending decisions are so "tough", except then they'd spoil it by saying something like "and what we need right now are leaders willing to make the tough decisions").

Instead of what are perceived to be appeals to the heart, to which the right will respond with what it thinks is its head (but is actually 3-4 feet south of that), I  reckon an alternative is to spell out the direct economic costs, which, given the mainly macro blog is by an economist, you’d expect to have been the case. Unemployment, especially long-term unemployment, which is now at record levels, destroys skills and employability, it leaves deep scars that undermine an economy’s medium to long term productive capacity and all that means in terms of potential growth and inflation. There.

Can I just be clear though, the moral argument against fiscal austerity and what are clearly avoidable high rates of unemployment is right, but we’re in this weird place where such “moralising” is dismissed in favour of what its proponents consider to be hard-nosed, common sense.

Yes, support for spending cuts is increasingly nothing more than a nasty, little "moral" tale of its own, but that's the way things are. Positively, this also means its possible, actually its easy, to make a "good, "sound", "common-sense" "economic" case against it i.e. to beat them at their own game.

The return of mercantilism

My simplistic understanding of mercantilism is it’s a notion of the economy wherein the total sum of wealth is essentially fixed, this reflecting how mercantilist ideas were pre-industrial i.e. when agriculture dominated the economy and land, which is unavoidably finite, was regarded as  the basis of wealth.

A different way of describing this would be mercantilism views an economy/wealth as a cake, hence mercantilists engaged in fights over how it got cut. By contrast, capitalism, aided by the division of labour and what no, is, its ideologues tell us, all about making the cake bigger. Like, why does so and so earn £10 million a year? Because every year he makes the cake that bit bigger that’s why.

Except, what if capitalism stopped making the cake bigger, would that mean the mercantilists were right after all? Well that’s obviously a fanciful, 17th or 18^th century notion isn’t it? ..... isn't it?

Well in 2006 the “Gross Domestic Product: chained volume measures” i.e. the basic measure of the size of the UK economy was 150,1528. 6 years later in 2012 it was 150,4777 meaning it had grown a stonking great 0.22% i.e. it hadn’t grown at all. Over the same period, as I’m sure you’re aware, average incomes have fallen in real terms, a lot. And unemployment has also increased. Wealth? Less so, which is hardly surprising given monetary policy has fixated on boosting the value of assets i.e. wealth via quantitative easing and what not.  So mebbe, instead of being distracted by how big it might be tomorrow, we should start thinking about how the cake is gets cut today.

Bandits vs aliens

For me the working papers churned out by the Karel Williams crew based at the Manchester University Centre for Research on Socio-Cultural Change, setting aside the pointless sociologese chat, constitute the most significant critical analysis of modern Britain available today. I mean for one thing they figure large amongst the teeny minority of lefties, liberals and sociologists who actually have a reaonable grasp of finance.

More importantly they use that to generate a whole slew of insights into practical political and economic matters. So its easy to say I enjoyed their latest paper on elites in modern Britain. One wee thing I reckon is they could have done with articulating how these elites position themselves with regards to the state and for political purposes come up with some justifiable, but deliberately pejorative titles for said elites (hence the title of this post).

They talk about finance, I reckon we should talk about aliens. Helpfully, they chart how over time manufacturing’s importance, in terms of Britain’s biggest companies, has reduced. I think this matters a lot because of what it means about how elites relate to specific locations.

Here, a hypothetical example to illustrate what I mean; in the past a big Coventry based car maker was bothered about the quantity and quality of local supply chain companies to be sure, but also had a vested interest in the associated infrastructure, like the schools, roads, sanitation and so on, basically all the things it needed to ensure a continuous, 9 to 5 supply of adequately skilled labour.

By contrast a London based financial elite don’t give a shit. As we’re continually told they recruit labour from a global market, so if London schools are crap, who cares, they’ll just ship in some Frenchmen (and of course there’s the rarely mentioned importance of British private schools and elite universities when it comes to churning out the raw materials investment banks need to get by).

So for the financial elite, state welfare, state education and so on is an irrelevance not least because the wages are so high their staff simply buys in private provision of whatever it is they need. Also, unlike the Coventry carmaker, investment banking is primarily about banks trading with other banks i.e. they don’t give a damn about actual consumers. Like, median wages rise or fall? Who cares, it don’t mean shit in terms of derivative contract sales.

In these kind of ways investment banking is at a remove from i.e. is alien to and has alienated itself from the rest of Britain. Basically, as long as London continues to attract enough migrant labour willing to serve investment bankers coffee for hee haw an hour, then they’re OK and the rest of the UK can go raffle.

That’s the aliens, what about the bandits? Well, that’s the outsourced from the puiblic sector companies that is. Now, you could call them parasites I guess, however, the criminality associated with them makes bandits more appropriate as a name I reckon given stuff like G4S and its tagging shenanigans and her who advised the government on getting people back into work and all the shenanigans her business got/gets up to.

Now this lot do care about the state because it i.e. us, is what pays for their holiday homes, tasteless executive villas, range rovers and what not. And their big thang is as follows – cheap, cheap, cheap-ity cheap labour. There, that’s it, that’s all they want (or what they and politicians call “private sector efficiencies”). Like is your prison staffed by trained and competent staff? Feck, that, lets get in some casual labour on the cheap and cut costs (oops, suicide and violence rates go up). What about your granny, is she in a home being looked after by well trained and competent staff? Again feck that, lets get in a Polish teenager and some local who has difficulty counting to ten even with her fingers cos they're cheap and means the company can undercut the public sector alternative and still make a fat profit. And oh dear, did we just fail that last inspection? Who cares because the politicians have such a vested interest in it all they’ll gloss it over.  

And yeah the aliens and bandits do go together. The aliens like the notion of outsourcing because it might create some new opportunities for financial engineering (as in we’re tip toeing to a place where private companies eventually run the school system), while the associated spending cuts lessen the pressure to actually tax them fairly. Similarly, the bandits like the sales pitches the aliens give them about how this or that bit of fancy financing could make them millionaires and also their hurrumphs of support for more outsourcing.

So yeah, rather than an elites or executives, or financiers or what not I reckon we should talk about bandits and aliens.

Ca.sino Roy.ale

The credit crunch eh? Casino banking, casino banking, mega bonuses, eh? Investment banking, eh? Know what I mean? Know what I mean? That Fred Goodwin, that Bob Diamond (see above), ring fence casino banking, put it at a remove from decent, ordinary banking, eh?

Bollocks.

Via the power of wikipedia here’s a list of the British financial institutions that failed and/or where taken over due to the credit crunch:

The Catholic Building Society *

Alliance and Leicester

Derbyshire Building Society

Cheshire Building Society

Halifax Bank of Scotland

Bradford and Bingley

Barnsley Building Society

Northern Rock

London Scottish Bank
Scarborough Building Society

Dunfermline Building Society

Royal Bank of Scotland

Chesham Building Society

Do you see the pattern there? Here, here’s a clue, “actual or former building society” There, thought that might help.  Picking thru the list only one of the feck ups (RBS) had anything even remotely resembling a casino banking bit to its business meaning it was the exception to a broader rule, which is that the British credit crunch was about actual and former building societies destroying themselves doing too many shit mortgages, too many shit commercial property deals and a hearty soupcon of shite private equity deals as well, all  funded via too much of a reliance on short-term wholesale funding markets (as opposed to customer deposits)  End of.

Now a couple of things follow on from these dull, plodding, pedestrian facts. One, all the chat about casino banking and ring fencing, electrified or otherwise, distracts from the reality of what actually happened and whose to actual blame here i.e. whose balls should have been nailed to the wall years ago. Like to give one example, what in the fuckin’ name of fuckity fuck is Alan Dickinson doing sat on the board of the Nationwide given he was a senior corporate boy at RBS when it was pissing - what turned out to be taxpayer money - allova shit deals? I mean seriously, him being sat there is just wrong in all sorts of potentially libellous ways. What Alan DICKinson's continued career proves is that yer average punter has been spoonfed an account of why most people in Britain are worse off to the tune of hundreds of pounds a month that is (a) fundamentally wrong and (b) has let the guilty parties off the hook. 

The other, the one this post is intended to flag up, stems from the second thing which relates to the current Archbishop of Canterbury and the tosh he spoke about credit unions vs pay day lenders (plus the broader trite, shite about credit unions as an alternative to mainstream banking you get in the liberal press), which misses out two v.important, if dull facts. 1) Credit unions are teeny, like I mean seriously teeny; the total assets of the entire sector, at £961m in 2012, equate to a rounding error in the annual accounts of just one high street bank and 2) Britain used to have a reasonably chunky alternative to banks, they were called mutual building societies. 

Except now we don’t because institutionally, the credit crunch in Britain is actually about the failure of demutualisation. Remember that? You know it was that Thatcherite policy where people opened up savings accounts left, right and centre in the hope that the building societies they were saving with would demutualise, and hand them a fistful of free shares. And what did these wonderfully efficient were building societies became PLCs subsequently do? Pissed away what eventually turned out to be taxpayer money on shit deals is what.

What follows on from that is straightforward – yeah, yeah, credit unions are lovely, so good, change the law to encourage them. But, mutual societies are also lovely, have far more of a track record, and are already  much bigger. So if you seriously want to encourage more competition in high street banking, establish a powerful alternative run on a more prudent basis, less exploitation etc.,, etc.,  then encourage building societies as well even if its just to get former corporate bankers off their boards. 

And yes demutualisation was the the fault of the Tories

* New one on me

P.S. Aug 15th - Oops, I forgot about the Co-operative Bank, or more precisely its acquisition of the Britannia Building society, which has in turn knacked the Co-op, which is now having to sort out - wait for it, wait for it, can you guess?, yup, that's right - all the crap commercial property deals the Britannia did. Ring fence casino banking? Ring piece more like.

Sympathy for the tobacco industry

My favourite is sunbed bloke whereas Mr Throat with the manky ‘tache gives me the heebies. I’m talking about the pics on the side of tobacco products of course, which are to continue to co-exist alongside product specific branding after the ConDems backtracked on introducing plain fag packets. 

Now would plain packaging discourage more young people from smoking? No idea, probably I guess, which would be a good thing. More concretely, generic packaging would limit the scope for smokers new and old to develop or maintain any brand loyalty with this undermining the price premium branded products currently enjoy. I reckon this is the real reason fag companies oppose plain packaging.

To give a practical examples, there have always been what were known as “pleb” fags. When I was a teenager it was Kensitas Club, a brand whole families smoked so they could collect the coupons and exchange them for goods at the Kensitas Club shop off Sauchihall street. Hence, smoking Club, fags being a visible thing in social situations, was a marker of (limited) social status.

Latterly, Lambert and Butler took the pleb fag crown because they were a chunk cheaper. No idea what it is now, but I do know 10 Marlboro lights remains the lower to middle middle class Friday night fag of choice. In fact, Marlboro light are the iPhone of fags, both because of who smokes ‘em and because they’re also premium priced. And crikey, having just had a look, branding matters given the 60p difference between the cost of 20 Lambert and Butler King Size vs 20 Marlboro (a 7.5% difference).

Now, put all fags in plain packaging, stand outside a pub, take ‘em out, crash a few even, it doesn’t matter because no one looking at you would be any the wiser as to what brand you were smoking, meaning one of the main reasons for paying extra would disappear in a puff of smoke.

Back to the premium pricing though and the recent legislation forcing supermarkets to sell fags from secret cabinets; thinking about it, these could well become one of the best friends tobacco companies have ever had. Before, when fags and how much they cost were on display, the consumer could compare/contrast prices while standing in the queue. On reaching the till he or she could then choose on the basis of both price and brand. Now, no one has a scooby how much cheaper/expensive the alternatives are. By taking this vital price information off the shelf, the government has made it easier for tobacco companies to charge and maintain a premium of almost £2 in some cases on 20 fags (and retailers who can add a cheeky few pence on and you'll be none the wiser) (1).

Oh and hiding something just out of reach behind a wee, secret door doesn't attract the interest of children? Seriously?

 (1) Combining generic packaging with readily available price lists ordered from most expensive to cheapest per fag or per gramme i.e. to avoid fag companies mucking about with packet size to obscure things, strikes me, a rollie smoker, as the way forward.

The earth is flat and other fiscal fairy tales

Pesky facts and actual experience having comprehensively destroyed the supposedly practical arguments once presented in support of fiscal austerity, the question now is why are they still at it. The answer, scanning thru George Osborne’s recent mansion house speech, is simple; dogma.

So why are we having to endure “a tough, credible fiscal policy that bears down on our excessive deficit”?  Previously, it was to preserve Britain’s AAA credit rating, the notion fiscal austerity promoted growth and the Rogoff and Reinhart claim that beyond a certain level government debt undermined economic growth. Oh and there was probably scope for runaway inflation too. Now that each these notions has turned out to be utter pants, Osborne says its because we have “a public sector that was too big, paid for by a private sector that was too small” and that “(t)here are more difficult decisions. There have to be when the country is living way beyond its means.”

So there you are then. Why are libraries closing? The public sector’s too big. Benefits being cut? Again, because the public sector is too big. Roads a pot-holed mess? The country was living beyond its means.

Obvious really, except this is moralising tosh that only merits attention because of who is trotting it out given (a) the long-term damage to Britain’s productive capacity fiscal policy continues to wreak (as per the recent growth in long-term unemployment), (b) the strong negative correlation - pointing to causation - between fiscal austerity and economic growth and (c) as examples of rank rotten nasty dogma.

As ever, big dods of Keynes are needed here. One, because, as he observed, an increase in debt funded public sector spending on infrastructure is needed to take up the slack left by a cautious private sector and two because, in place of dogma, as he wryly observed, "When the facts change, I change my mind. What do you do, sir?