Thursday, July 29, 2010

Note to Lord Turner, Take No Notice of the CML

I've been reading with interest what the Council of Mortgage Lenders has been saying about the FSA's mortgage review and I really don't like what they're saying.

The FSA's mortgage review can be found here, it makes a few modest proposals in particular that:
  • Mortgages are only issued to consumers that can afford them (the customer's mortgage payments should not take their total expenditure over their total income and should include a level of contingency).
  • Affordability is to be calculated on a repayment rather than in interest only basis.
  • All mortgages will require proof of income
  • When lending to borrowers with a bad credit history, total borrowing is to be reduced by a defined "buffer zone" amount (so if a borrower could normally borrow £150,000, it might be reduced by the buffer zone percentage, say 20%, to £120,000).
To me these proposals seem both sensible and reasonable (if a little tame), the UK housing market may not have been problematic so far, but we know from the experience in the US the damage that a bursting housing bubble could do. It's a surprise then, to read exactly what the CML thinks about the FSA review.
On a cursory review of the cumulative impact of the proposals in the FSA consultation paper, we do not believe the FSA will achieve its desired outcomes. And it risks serious unintended side effects which will be damaging to consumers' housing choices and to the economy more generally.
I just don't get this attitude, the mortgage market of the noughties is not something to be prod of. The level of choice in the market moved achived the kind of levels that mean't that whole industries sprang up centered around helping customer's decide. The rise of mortgages sold through financial advisers rose to the point that advisers were bidding against each other for potential customers.

Another clear lesson from the noughties is that increasing the available amount of credit didn't do much to aid housing affordability since house prices rose to reflect the increased availablilty of funds. Allowing consumers to stretch themselves is that lenders make more money, but that is not necessarily in the interest of consumers or the more general interests of society.

It really has to be asked why requiring borrowers to prove their income is unreasonable, and why these perfectly sensible measureas are some how depriving consumers of responsiblility. The proposals put forward by the FSA are a sensible response to an overinflated and incredibly risky housing market. The CML's response is nothing but partisan posturing in the name of it's mambers own profit seeking.

Thursday, July 22, 2010

A Brief Note on Inflation

I'm amused by the discussion between Mark Wallace and LeftOutside at LibCon about inflation, naturally my insticts are with LeftOutside on this one, but before I go on I thought I might point out a well known study on inflation by Robert Barro. Robert Barro is the man who came up with the modern version of what we call Ricardian Equivalence (the idea that an increase in government spending will lead to an increase of private saving in anticipation of future taxes), and hardly someone we could call an inflation dove. Here's the abstact of his paper:
Data for around 100 countries from 1960 to 1990 are used to assess the effects of inflation on economic performance. If a number of country characteristics are held constant, then regression results indicate that the impact effects from an increase in average inflation by 10 percentage points per year are a reduction of the growth rate of real per capita GDP by 0.2-0.3 percentage points per year and a decrease in the ratio of investment to GDP by 0.4-0.6 percentage points. Since the statistical procedures use plausible instruments for inflation, there is some reason to believe that these relations reflect causal influences from inflation to growth and investment. However, statistically significant results emerge only when high- inflation experiences are included in the sample. Although the adverse influence of inflation on growth looks small, the long-term effects on standards of living are substantial. For example, a shift in monetary policy that raises the long-term average inflation rate by 10 percentage points per year is estimated to lower the level of real GDP after 30 years by 4-7%, more than enough to justify a strong interest in price stability.

So an empirical study indicates that the effect of a 10% increase in inflation will lead to a loss of 4-7% of GDP over 30 years. That kind of number is so small to be insignificant, and that's for a 10% increase in inflation, the difference between a 2% and 5% would be far harder to judge.

The point I'd like to make from this is mainly to point out that Wallace's main claim that inflation destroys lives doesn't really add up, if there was a genuine negative effect from inflation it would be reflected in the GDP growth figures, since it isn't we can't really draw that conclusion. We can of course say that there is likely to be some level of redistribution from inflation, but there's not really any discernible effect on the nation's overall wealth.

Thursday, July 01, 2010

A Little TPA Silliness

Mark Wallace at the TPA comes out against the Forgemasters loan, suggesting that overall it's unlikely to make the government any money. His maths is correct, looking at the loan in terms of the rate that's been given there's even the possibility that the government might make a small loss on the loan itself but this ignores the bigger picture.

The government is not simply acting as a bank and considering the loan in terms of profitability it is also considering it's wider interests.

  • Firstly, although the loan is unlikely to make a profit, it's cost is going to be as close to zero as makes no difference, making this loan is not going to cost anything.
  • The business being lent to is in Sheffield, an area with a serious unemployment problem as well as providing jobs directly, it will give a boost to the local economy providing further jobs
  • By going ahead with these plans Forgemaster's would have presented a viable alternative to buying nuclear parts from Japan, future nuclear power plants in the UK could have been built with parts manufactured in Sheffield, thus reducing imports, the company could also have bid competitively for work in Europe thus generating exports, all helping this country's balance of trade
Another argument advanced is that if this was truly a viable business then the money have been obtained privately, I have my doubts about this line of reasoning. Right now, as banks attempt to rebuild their fragile balance sheets, companies are having to pay high rates as well as considerable fees to investment banks in order to raise money. The cost of obtaining the credit commercially at this point in time would not make it a viable business opportunity (this in my opinion is a problem with our banking system more than anything).

By cancelling this loan the coalition have missed out on a chance to provide good jobs in an area that sorely needs them and improve the country's balance of trade at virtually no cost, it's a terrible missed opportunity.

Careless Words

Yesterday, David Cameron made a terriblem mistake, when questioned on the subject of unemployment he said the following:
As shown in the budget, unemployment is forecast to fall every year under this government,
He is being very optimistic, in a climate where other nations are cutting back their spending in a major way and where the financial markets are plagued with panic and uncertainty such a bold unambiguous statement will surely come back to haunt him.

A Quick Question

Maybe a silly one, but right now, I have to ask: What the hell is going on? The FTSE tanked in a major way yesterday and today the Daily Mail is talking about doom and gloom in the city. Is there some unseen piece of this puzzle missing? Is something going on in the financial markets that we really ought to know about?