Time to praise Will Hutton again

After all, it’s only 14 years since we last did so.

Without Will Hutton where would we be? How would we know what not to do if he were not there to guide us?

Thus praise is due to Will Hutton. As with the recent comment about Polly Toynbee from Fraser Nelson: every compass needs its butt end.

Amazingly, the subject matter is the same as well. Last time around he was insisting that there should be a “Gordon Mac” as with Freddie Mac and Fannie Mae in order to protect Britons from mortgage problems - a suggestion made two weeks before those two American institutions went resoundingly bust.

Now he’s suggesting that we should have long period fixed rate mortgages - something that would require that Gordon Mac - because:

Britain is experiencing the sharpest, fastest rise in interest rates since the 1980s, with more expected – and that after 13 years of rates at 0.5% or below.

True, other economies are facing interest rate increases. But what is unique about Britain is the degree to which borrowers are left to face so much interest rate risk alone. We need more than a review. We need a top-to-bottom investigation into the structure of British finance and how it could be made to work more fairly. And the institutions of economic policymaking need a makeover too.

Neither the complacent governor nor the chancellor of the exchequer – blithely saying that a recession is worth contemplating to get inflation down – seem aware of the structure of the British mortgage market. About 95% of British mortgages are either variable, linked to every quirk in interest rates, or a mere two-year fixed rate. So the rise in rates has proportionally more of a disastrous impact on household finances than anywhere else.

The bit that Hutton misses is that therefore interest rates will rise less in the UK than elsewhere. Because monetary policy is more effective here than elsewhere.

Think on it. We’ve - just to create a simple model - two sectors to the economy. Business and domestic. The domestic reaction to interest rates is determined by those mortgage rates - for, as Hutton is pointing out, variable interest mortgages do pretty immediately impact upon domestic finances. Business obviously has to also suffer whatever interest rate is imposed upon the economy.

So, now we need to raise interest rates in order to squeeze out that inflation. If we had long term fixed rate mortgages then the effect of higher interest rates on most households would be zero. The only ones affected would be those attempting to buy right now - everybody who has already bought is protected. All businesses of course face the new and higher rates immediately.

Protecting domestic finances in this manner will mean having to have high interest rates for longer in order to squeeze out the inflation. Or have interest rates have to go higher to squeeze out the inflation. So, fixed rate mortgages shaft business and industry more than floating rate ones whenever we need to raise them.

It is exactly that vulnerability of British households to interest rate changes which makes monetary policy so much more effective in the British economy than it is in many others. Meaning that as we’ve a more effective policy we only have to use less of it than others.

But, you know, as we said 14 years back, every compass does need that butt end, Mr. Hutton.