Gordon Brown promised to put an end to boom and bust. Having put an end to the boom, he now has a novel wheeze to put an end to the bust. Unfortunately, that wheeze is likely to put us right back where we started.
The Guardian reports that the Government is considering providing state insurance (initially outright but later by underwriting private insurance, which amounts to the same thing) to all mortgages secured with a deposit of less than 20 per cent.
According to this month’s banking white paper, “Some countries have adopted alternative models for mortgage insurance… Some UK stakeholders have proposed that the government considers the benefits of international models”. For stakeholders, read bankers and insurance brokers.
As the paper freely admits, “”this model helps [sic.] by encouraging risk sharing between insurers and lenders, and helping ensure that lenders do not take excessive risks when the economy is growing and do not withdraw from higher LTV lending during periods of economic disruption.” But when the insurers are themselves underwritten by government, what this effectively means is that risk is not shared but transferred completely to taxpayers. Banks would therefore have even less reason to take care when and to whom they lend.
The problem is not merely one of risk, however. Government caused the previous housing boom by massively expanding the money supply, which inevitably found its way into asset prices. While it was inevitable that (artificially) increasing the supply of mortgages would lead to more risky lending – banks are bound to lend to the best customers first, and only lend to less good customers if the resources are available – this was only part of the story. In the US banks were cajoled into lending to individuals from low-income groups in the name of “fairness”, loans which were inevitably “sub-prime”.
Government policies that encourage further risky lending on the back of even looser monetary policy than that of the last decade risk repeating the errors of the past. Rather than lifting us out of recession, they will create a new housing bubble and more systemic risk in the economy. The next recession starts here.