The fisherman and the businessman

Paul Coelho says that this is a classic Brazilian story:

There was once a businessman who was sitting by the beach in a small Brazilian village.
As he sat, he saw a Brazilian fisherman rowing a small boat towards the shore having caught quite few big fish.

brazilian fisherman

The businessman was impressed and asked the fisherman, “How long does it take you to catch so many fish?”
The fisherman replied, “Oh, just a short while.”
The businessman was astonished. “Then why don’t you stay longer at sea and catch even more?” Continue reading

The problem with mortgages

A recent article in the Times “New funding rules force builders to apply brakes” (I read the print edition from Saturday 14 February) highlights one of the problems of commercial debt

In my white paper I explain that having debt in an economy creates problems. It allows the economy to overheat when things are going well (debt financed growth) and then makes the recession worse when things are going badly (debt repayments mean that the total fall in GDP is bigger than any underlying reduction in real production).

So the mortgage market in the UK has pushed house prices up, because we think nothing of borrowing large amounts of money over long terms to buy houses. The debt means that more houses can be “afforded” and therefore increases the number of houses bought. This in turn means that more houses are built and the house builders are very happy. Economists are happy because house building contributes to GDP and everything looks great.

And then along comes financial regulation – last year (2014), the Financial Conduct Authority carried out a review of the mortgage market and came up with some new guidelines, which have meant that mortgage lenders are looking at mortgage applications more carefully and as a result reducing the amounts they are willing to lend. And this is what the Times article was complainingHouse under construction about – house builders are reducing the number of houses they build because these rule changes mean fewer houses are being bought.

This supports my view that the mortgage market – commercial lending – has affected the housing market and pushed prices up.

If my suggestion of outlawing commercial lending is followed through, then the housing market will not have the support of mortgage lending and house prices will fall (relative to earnings). This would be a good thing in that house prices would no longer be buoyed up when the economy is strong and sink when the economy falls, but will remain more stable.

Sadly there is another side to all this – which is the effect of withdrawing commercial lending on the economy as a whole. As the Times article indicates, house builders are building fewer houses because buyers are finding it more difficult to get mortgages. And the same is likely to be true of many other areas of the economy – by restricting lending, economic activity will be lower (as measured by the GDP measure economists use).

Are the benefits of a more stable economy and freedom from some of the other adverse effects of debt worth paying the price of lower levels of GDP? I would say yes.

Those rotten bankers again

They’ve been at it again; or rather, we have found out about it. HSBC has got a branch in Switzerland which its clients were using to hide profits from tax authorities (and thereby evade tax properly payable in their home countries).

What has this to do with lending?

The simple answer is bankers.

You see the problem I am trying to address is not lending itself but the way in which it gets misused. And it seems that relying on bankers to change their ways is too much to ask. After all it was bankers that came up with the idea which led to the collapse in 2008 and it was bankers who came up with the idea of creating an artificial “LIBOR” interest rate which led to Bob Diamond, the chief executive of Barclays bankStephen Green, resigning in 2012.

Whether the former head of HSBC, Stephen Green, will need to take a similar course and resign as a Tory minister is yet to be seen.

And of course it is not just the bankers, but also borrowers who create lending problems. If you cannot afford it, you should not take out a loan and yet many people get into financial difficulties because they think they can borrow their way out of trouble and end up owing lots more than they can afford in pay-day loans and overdrafts and mortgages with negative equity and credit card debts. And not just individuals but countries too have ended up borrowing so much that they cannot now afford to pay for health and education or other important public services.

So the evidence is that we cannot trust bankers or borrowers and so need to do something about the problems associated with lending a different way. And my suggestion is legislation which outlaws commercial lending.

Yes, there are downsides. Yes borrowing does help some businesses to grow, but it is also the reason for most bankruptcies – if businesses could not borrow, they would have to grow more slowly, but would have a stronger capital base. And slower business growth probably means lower growth in living standards for those in the rich western countries.

The upsides are removal of debt (obviously) which would be good for highly indebted countries both poor and rich as well as those with unmanageable personal debt.