UK Chancellor Builds Economic Policy On a Ponzi Property Scheme

by Mitch Feierstein about 6 years 11 months ago

At the last election, during a TV debate between the three putative chancellors (Messrs Darling, Osborne and Cable), Krishna Guru-Murthy, asked, ‘Do you agree that cuts we are going to be facing will be deeper than the cuts that Mrs. Thatcher had to put through Britain?’ Alastair Darling answered, ‘Well, … they’re going to have to be pretty deep.’ The other two men simply said, ‘The answer is yes.’

George Osborne

George Osborne

The economic realism of that (brief) period wasn’t simply about cutting government spending. It also had to do with the kind of economy we wanted to see. No longer one dependent on property, finance and borrowing, but one which would be led by industry, investment and exports. If the coalition government had walked that talk, the British economy would be on the road to real recovery. A long, arduous and stony road, for sure, but still: one heading in the right direction.

Alas, however, that road proved too stony, too steep. After some real world setbacks (Eurozone recession, a poor manufacturing performance) and predictable political hiccups (the rise of UKIP, some backbench restiveness), Osborne has, in effect, chosen to revert to the economics of fakery.

You can map that abdication in a number of ways, but the clearest signpost is the nonsense of the government’s help to buy scheme. Every single thing about that plan is terrible, starting with its basic premise. An interest free government loan guaranteed by taxpayers is intended to make it easier for buyers to raise a deposit, so that buyers can purchase homes after finding as little as 5% of a home’s purchase price.

The first obvious point to make is that the scheme does nothing to increase the supply of properties. Britain already has the smallest homes in Europe. Our planning rules are so restrictive that house builders are resorting to ever more marginal brownfield sites. No new towns are being planned. The old Green Belt rules are still enforced, no matter how antiquated they now seem. Investment in mass transit schemes and high-speed rail (which could link more areas to the prosperous south-east) are being squeezed by budget cuts. In short, nothing that would make a real-world difference is being done.

Since supply is restricted, easing the financial challenge of property ownership can only lead to higher prices. Those higher prices are artificial (based on government subsidy) and make the prospect of a housing crash ever more certain – because at some stage, interest rates will need to come back to normal levels and government will have to stop wasting cash on meaningless subsidies. Since we’ve already lived through the consequences of one boom and bust, it seems astonishing that we should choose to re-awake those evil genies.

The problems don’t end there. Higher house prices don’t just mean a greater likelihood of a crash, it also means that, yet again, the government is deliberately using debt as a growth strategey. Indeed, the basic design is, as I’ve argued in my book Planet Ponzi, simply a Ponzi scheme designed by government. You take an already overvalued asset (housing), throw a load of debt at it (mortgages in the household sector, guarantees in the government one), keep the merry-go-round moving (by keeping house prices on the up), then get re-elected before the whole thing collapses.

The trouble with these things is not just that they always collapse, but that the problems escalate all the time. In the US, the federal government used to be in the business of guaranteeing mortgages. When the solids hit the air-conditioning in 2008, the US Treasury ended up committing $187 billion in saving the two main agencies (Fannie Mae and Freddie Mac) from collapse. Osborne’s scheme is smaller than that, but it’s heading the same way. It’s built on the same disastrous foundations.

Indeed, the single worst thing about the whole scheme is the thinking behind it. The United Kingdom currently ranks 159th of 173 countries in terms of investment as a share of GDP. We’re outranked by nations such as Mali and Guatemala. Spending on machinery has fallen by a third since 2008. That lack of investment squeezes output today and restricts the economy of the future. It’s an economic catastrophe unfolding in slo-mo in front of our eyes.

And certainly, solving those problems would be hard – but those issues really, really matter. In choosing to chase the wrong target, in the wrong way, Osborne has shown where his priorities really lie: the good of his party, not the good of his country. Shame on him.


13 Responses to: UK Chancellor Builds Economic Policy On a Ponzi Property Scheme

  1. tony says:

    Thanks for this very erudite commentary. When Osborne boasts in the media that the UK economy has turned the corner it appears that he’s fiddling it. The proverbial light at the end of the tunnel really is a massive hurtling locomotive and the amazing thing is, he actually knows it! In your opinion is Osborne financially and economically illiterate; criminally malicious or psychotically addicted to political power? Or all three?

    • Mitch Feierstein says:

      Thanks Tony,
      Osborne is a lifetime politician – most career politicians reuse the same tired advisors no matter what mistakes they repeat…. All they seek is re-election..
      “We can’t solve problems by using the same kind of thinking we used when we created them.” – Albert Einstein
      This is precisely why I have written Planet Ponzi; presenting the untold story MSM and the government does not want to print…

  2. Steve812go says:

    Ed Milibands energy price freeze, in 2017 and for 2 years so they have time to reform the market, you couldn’t make it up. Also is like someone on the titanic 2 hours after being hit by the iceberg saying I want to sort this out, make me captain because ….. I’ll freeze the cost of ice creams on the journey back!

    • Mitch Feierstein says:

      Terrific Steve!
      It is a disgraceful populist “stunt” designed to win office at any cost.

  3. tony says:

    You are exactly right. Osborne is a politician and nothing else.
    I suppose the big question is: How can the individual/communities extract themselves from or best insulate themselves from the financial mess these avaricious nut-jobs have created. Can you declare neutrality in the financial war being waged? Is there anyone you know writing about this.

    • Mitch Feierstein says:

      Two words; accountability & transparency. Voters need speak out holding politicians feet to the fire!
      Example; Why are there no usury laws in the UK? Is the banking lobby so powerful?
      Firms such as Wonga, charging 5000% when Lloyds borrows at zero from the taxpayer, set the stage for civil unrest. Planet Ponzi is the manifesto intended to “motivate” a “dialogue”.

  4. Simon says:

    I agree with much of what you say Mitch -I for one cannot understand why the British aren’t much, much angrier. The last 30 years of banks syphoning wealth from our communities by what amounts to a real estate scam seems to have gone almost unnoticed! It is barely the topic of debate. I agree with karl Denninger that houses are places to live in and from where you are economically active, not the economic activity itself! There must be a tipping point soon, even for the good old narcoleptic British!

    • Mitch Feierstein says:

      Thanks Simon,
      Credit, debt and leverage caused the current crisis. Lessons learned; NONE. Housing is not an asset class, it is an asset bubble created by Fed (and other central bank money printing). People are starting to “get it” and part of the education is Planet Ponzi.. Join our movement – help move the dialogue forward!

  5. Whitney Watson says:

    The status quo must be maintained at any cost to the taxpayer. A financial pyramid exists that appears to be more like the leaning tower of Pisa on a bad day. The shadow banks looms ever larger over our beleaguered country layered with debt….normal service will never be resumed.

    The desperate drive to devalue STERLING and ramp-up inflation has not increased the GDP that much. The housing market boom based on current artificially low interest rates offers an alternative; or a temporary diversion? Buy a new car on credit confirms that people don’t buy the austerity lie. Being a faithful consumer deep in debt saves the day for our bag of tricks Chancellor.

    Mitch is our guiding spirit as we tiptoe the government rose garden based on artificial turf.

    • Mitch Feierstein says:

      Superb Richard,
      When Osbourne’s Ponzi house price subsidisation, at the top-of the market bubble, implodes the MSM will report – How could anyone have known? Taxpayers on hook for billions. Re-inflating a massive property bubble as a back door banking bailout to scrub bad debt off insolvent banks balance sheets will end in tears. The 4 D’s; Divert, Deflect, Deceive and Deny.

  6. Richard says:

    The pending British government review of RBS by Black Rock and Rothschild will be a real test of nerves and reveal the real face of the Chancellor as owner of this wounded giant. The option of unloading the contaminated baggage (as with Sweden years ago) will be the most controversial because the taxpayer becomes the fairy godmother once again. Another chance to raise the dead at the gates of hell?

    My understanding is that 300 billion Pounds of RBS toxic trash was actually transferred to the UK national debt in 2008 by our Chancellor Alistair Darling. By coincidence that equates to the 375 billion Pounds of QE money printing exercise by the BOE. The deleveraging process of the RBS bad apple cart still remains in dry dock….hence the review to permit the inevitable split. Moral hazard eat your heart out.

  7. Joan Grant says:

    Britain is no doubt headed for the rocks. But hopefully Mitch will post about the US again soon as their budget problems have only been solved for a matter of months. The US may yet default and take us all down with it.