WEEKLY COMMENT 3-10-2013
By Barry Edwards
The Madness of Congress and the Wrong Approach about ‘Help-to-Buy Mortgages
Closing down government funded initiatives and stopping payment of salaries to government employees is a uniquely American political negotiating tactic. This is the 17th shut down since 1977; It could not happen anywhere else in the world, even in other countries that have a democracy. The rest of the world is amazed that the biggest economy in the world has a system that allows politicians to play games with the livelihoods of decent upstanding people who are purely doing the job they have been employed to do.
Until today where we have seen some nervousness, investors and stock markets seem to have taken this abuse in their stride and believe that a resolution will be forthcoming and life will return to normal. This is purely a ploy to find favour with like-minded voters by certain politicians who can demonstrate their condemnation of policy.
A lot has been said about this strange tactic and most people say that this is another example of the ridiculous games that politicians play which has nothing to do with running government. The confidence of people worldwide is slowly dissolving when the question of responsible government is discussed; the politicians need to be cautious that people do not react and decide they should be replaced by people who would implement government policy properly.
The madness of Congress is a poor example to the nations of the world that are trying to emulate the benefits of democracy and the confidence in freedom and rights that it can provide. It seems strange this is not important in the minds of those politicians elected in the USA and some other developed countries and consequently it is not surprising that we see the abuses of rights in many countries denying freedom to their people.
Leading by example is the most successful method of demonstrating how to manage countries, the Americans are not showing the way which will only make the Middle Eastern problems more difficult to solve and will not encourage governments to evolve that allow their populations to flourish without fear.
The new ‘Help-to-Buy’ schemes devised by the UK government to support mortgages for new and existing houses have come under criticism recently. Some people believe the government has no place in this market and should leave it to the private sector entirely; others think it could be done in a better and more effective way.
We have even learnt that the only banks to have signed up to administer the schemes so far are controlled by the government. The main reason for the hesitancy of the other banks is their concern about the terms and conditions of claiming on the guarantees that support the schemes when things go wrong. I am sure this will be clarified and the apprehensions of all the other lenders will be resolved.
While these new schemes are establishing themselves, the mortgage lending market has been going from strength to strength and is on its way to returning to the levels prior to the ‘great recession’. The reason for government involvement is purely political and that is never the best motive to interfere with the efficient mechanism already in place. In effect, the government is stimulating the mortgage market at the same time that the economy is improving rapidly which could overheat the market in the Southeast of the country.
Despite all the discussion surrounding this policy, I believe the government is right to encourage first time buyers but they need to explain why it is a good idea much more clearly. For me, this is more about encouraging savings for younger people who do not earn enough to invest in private pensions and have sufficient income left to live properly. By paying off a mortgage young people are actually saving for the future instead of paying rent. They have to live somewhere and therefore using that income to create an asset must be beneficial and with government support it should encourage young people to get involved and adopt a saving culture when they start earning more money.
In my view, it would be far better if the government worked closely with mortgage lenders to create an organisation which could issue 25 year bonds at fixed rates to allow people to know the actual cost of a mortgage for the entire period. It would make the big problem people have saving for a pension much easier to manage since the organisation could be very flexible and link with social housing when problems do occur.
The ‘Help-to-Buy’ scheme is the first step and once it has got established the government in the future may consider adopting this approach although it is currently a very controversial subject. This coalition government has stated that it does not wish to emulate the system they have in America which did substantially increase the number of homes owners after it was created 70 years ago.
However, the labour party under Ed Milliband could well consider this approach as it would work well for the lower end of the market. That could well steal the thunder that David Cameron believes he has gained by starting government involvement in the mortgage market. As usual, time will tell and we will just have to see how it plays out.
That’s all for this week, more observations next week.