Different ideas about housing

I talked about change last week and how it is difficult because we cannot imagine what it would look like.  This week I need to talk about one type of debt which needs to be replaced with something else but I cannot imagine what.

I have thought about and come up with ideas of what might replace most kinds of debt in my white paper, but I am stuck with this one – borrowing to buy houses.

And then I began to think about what I said last week.  And maybe we do not need an alternative to debt; maybe we need a completely different way of thinking about it.  I am British and we like to live in our own homes – statistics say anything from 60% to 70% are owner-occupiers – we own the homes we live in.

Not every country is the same – but when I tried to find real numbers, it seems that most of Europe goes for owner-occupation (see European Housing statistics).  So we are all in a similar situation and there is no obvious model to follow for changing anything.  Even comparing houses financed by borrowing, a lot of north European countries (which are generally the wealthier countries) seem to go for this whereas eastern Europe have more properties owned outright.

So whatever answer we could come up with is going to look very different from what we have at present.

Perhaps there is part of the answer in my idea of phasing in changes.  If we set ourselves to change the world over 50 years, all of the current house loans would have been repaid by then, so we would end up with people owning properties outright, rather than property being financed by debt.

Would housing become more affordable?  The answer is almost certainly yes since the housing market (in the UK) depends upon available borrowing to keep values high which in turn encourage lenders to provide funds to buy houses.  If the underpinning of borrowing is taken away, then house prices will be lower.

Would affordable housing be a problem for existing home owners?  This is a more difficult question since we cannot be sure how people would react to the withdrawal of finance for house purchases.  There might be a house price freeze so that property becomes relatively more affordable as a result of inflation but there might also be a fall in house prices (perhaps to below the level of the amounts borrowed) – particularly if (as seems possible if not likely) inflation is closely related to growing debt.

Whilst this sounds like a disaster for existing home owners; it is not necessarily a problem.  Lenders want their money paid back – they only care about the underlying security if and when repayments stop being made.  So for most home-owners who pay off their mortgages, there is no problem.  If personal circumstances change (losing a job through illness or redundancy for example) then there is a problem – but there would be anyway when the main source of income stops.  In these situations state aid may be needed; or alternatively mortgage lenders could end up absorbing the drop in value in the same way they do on mortgage defaults in the current system.

How to make a difference

I guess the hardest thing about looking for a major change is that we cannot imagine what it would be like.  So moving from a world which bases almost all of its commercial transactions on debt to a world without debt is unimaginable.

But it was Einstein who said

Insanity is doing the same thing over and over and expecting a different result

And Henry Ford (founder of one of the biggest car manufacturers in the world) said (possibly quoting someone else)

If you always do what you’ve always done, you’ll always get what you’ve always got

Changing the world means doing something that hasn’t been done before.  If it’s been done before it isn’t a change!

It does not mean it is easy or that people will like it.  I don’t understand half of what Einstein said and when Henry Ford offered his Model-T in “any colour as long as it’s black” he may have lost a few customers.

So the question is – should we try?

And my answer is that we have tried the other way over and over and keep on getting the same results – personal, institutional and national debt which has become unmanageable.

So why not try something new and see if we can get a different answer – a world free of debt – economies which do not have built in mechanisms which automatically move from boom to bust – a world free of bankers who are forever trying to lend more money than we can afford – a world free of banking crises.

It’s not just me

It can be difficult deciding what to write next.  Everything seems to have been said already.

And then along comes the weekend newspaper.  The Times Saturday June 27 and Philip Aldrick.  If you have a subscription you can read his article We ought to be scared: too much debt is being combined with too much blind faith.

In simple terms what he was saying was that some important economic indicators are heading the same way they went before the big crash – the  2008 disaster brought about by banks lending too much to people who could not pay them back.

So – money is cheap thanks to Quantitative Easing and very low (or zero) interest rates.

Probably as a result, lots of borrowing has been going on – according to the article $57 trillion in 7 years – which is massively more than the economic growth in the same period.

So debt is now 286% of GDP.  Is this worrying?  Well it was less than that – 269% of GDP – before the crisis.

And where is the money being lent?  “Emerging markets” seems to be the answer – Latin America, the Middle East and Africa are all running deficits borrowing from Western economies.

As I see it, the problem is simply our debt-ridden system.  Because of low interest rates in the Western economies, bankers need to find someone else to lend money to who will pay high rates of interest.  Germany is financing Greek debt at higher interest rates than it can get elsewhere in the EU, but even this is not enough to produce returns for the financial sectors in the West.

As a result money is lent at higher risks to countries which offer a much higher rate of return.  This means money in junk bonds and frontier bonds.  Or put another way in risky companies and risky countries.

Some risky investments will go bad and the question is whether the financial gurus have got it right this time and balanced the risk with the return or whether, as happened before 2008, they went for return at all costs and ended up offloading the risk onto governments who did not dare to let the banking system (and therefore the banks) collapse and so underwrote the debts in massive bailouts.

My answer is simple.  If commercial debt is outlawed, then bankers and other financiers cannot do this to us again.

This is not an easy fix, because we have been brought up on the present system and imagining a different world is difficult.  And bringing in a ban on commercial debt will require considerable planning and ruthless implementation (because any loophole will be exploited because the financial sector is all about exploiting situations – such as different interest rates in different countries – to make a profit).

Is this a crazy idea?  Possibly, but we have tried for years to bring the banking sector under control in the UK and we keep on ending up with scandals – PPI and other misselling scandals, LIBOR and foreign exchange rate fixing, helping launder drug and terrorist money…

So let’s try something new!

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.

A new way of looking at economics?

I have been thinking recently.  It is a difficult and sometimes painful process I would prefer to avoid.

I have been thinking about how we measure economies and whether GDP is helpful or not.  One issue with GDP is that everything is measured in terms of finance and that does not always give reliable results.  For example I know I am well off because my house is warmer than the house I grew up in – because of improvements in insulation and heating, not because I have more finance than my parents.

And then I heard something on the news this morning.  As a result of the Ebola crisis, they (I cannot remember who was talking) think that Sierra Leone’s economy will shrink this year, whereas its GDP had been projected to rise by 11%.

Would 11% growth in GDP have been a real measure of the countries economic strength?  We know from frequent news reports that the country does not haGraph of somethingve anything like the health care that we (in an ailing economy which cannot manage 3% GDP growth) take for granted.

So do we really want to compare GDPs or are there better measures available?  Should we care about these financial measures at all, or would it be better to measure happiness (as they do in Bhutan) or what should we measure.

Perhaps we could look at some social measures – education, employment, quality of housing stock, health care – but these might be difficult to quantify.

But if we are going to look at financial measures, we need to get away from GDP.  Economic analysis says that another way of looking at GDP is that most of it comes from  bank lending and government deficits (government borrowing).  See my previous post Steve Keen visits solvent land (2) for more detail on this.

Some may say that this is fine, but recent experience of debt shows us that some, if not a lot of, debt is an illusion – it cannot be repaid and is therefore of no value.  As a result we have written off debts of countries (under the HIPC initiatives);  we have bailed out banks who lent too much to people who could not pay.  So if neither bank borrowing nor government borrowing are secure, GDP, the main economic measure we use, is overstated.

So let’s look for something which better reflects what is important – and the size of our mortgages – personally or as a country – is not the right place to start.

May the force be with you

At long last (they say) the ECB has embarked on Quantitative easing by “printing” over a trillion euros.

So will it work?

The initial signs are that it is doing what it is supposed to do – reduce interest rates on Euro loans.

But Robert Peston, the BBC economics editor is not convinced about the long term benefits. Various countries have already tried this approach (including the US and the UK). Continue reading

But surely it’s too radical

I was struck by two thoughts as I looked through my previous posts:

  1. It’s all a bit complicated – I do not seem to be able to express the technical stuff very easily.
  2. It’s all a bit too radical – no-one is going to go for the idea (see the about page)

I am sorry about the first, but I will work on my posts and see if I can come up with better ways of expressing the ideas

As to the second, I am reading Mark Stevenson’s An pptimists tour of the future“An optimists Tour of the future” and was struck by the big thing in chapter 12 “A little bit of a bloody big amount,” which is that a radical change to farming methods can make a huge difference to the future of farming (in arid countries like Australia), as well as make a big difference to the amount of CO2 in the atmosphere.

The farming idea is both radical and simple.  Instead of current farming methods, try to make cattle behave much more like a roaming herd.  And apparently it works as this talk at the TEDx Dubbo conference (in August 2011) explains.  Here is one slide from his talk:

Tony Lovell comparison

So radical can work.  But it is not easy to implement – sometimes you have to let go of the things you think you know (which is why farmers can see the improvement to neighbours land but do not make the same changes themselves).

 

Steve Keen visits Solvent Land (2)

OK,  I cheated.  I did the easy bit in my post last week.  There is an issue around the ability for governments to run deficits, and this comes in two flavours –

  1. running a deficit to boost an ailing economy (something which is less likely to happen if we make finance simpler by stopping commercial debt) and
  2. running a permanent deficit because it is always good to boost the economy (which is true according to Steve Keen).

I deliberately ducked the much harder questions around what money is and whether we need banks and governments running deficits simply to exist. Continue reading

Steve Keen visits Solvent Land

Following on from Hyman Minsky’s visit to solvent land, I would like Steve KeenDebunking Economics book cover to visit as well.

He is known for Debunking Economics and predicting that there would be a financial crisis when so many of the world’s economists were basking in a prolonged period of growth and (as Gordon Brown put it) the “end of boom and bust.”

But what would he see in solvent land?

In his most recent posts about world economies, Steve Keen seems to have been concentrating on two things:

  1. The correct response to a downturn is for a government to run a deficit to provide a boost to the economy.  This is in stark contrast to the way in which the EU has required Greece to respond to its Euro crisis by severe austerity measures.  See his blog post on 23 June 2014.
  2. Governments should always run deficits (and not surpluses) or they will stifle economic growth (a lecture in Vienna which last a little over an hour)

These two requirements seem to say that solvent land which has no commercial debt, will not work.  A government cannot run a deficit in solvent land because it, like everyone else, cannot borrow money commercially and therefore is not able to run a deficit.

But let’s stop to think for a moment:

  1. “The correct response to a downturn is to run a deficit.”  This means you only need deficits if you have hit a downturn.  But a main reason for removing commercial debt is to avoid the cycle of debt expansion which leads to a downturn in the economy.  Minsky put forward his “theory of financial instability” which says something like (my synopsis of part of the process) –

    during the good years everyone gets used to growth and profits and expects it to go on.  So the financial institutions come up with more ways of lending money to fuel the growth we are all experiencing.

     

    Then something (possibly minor) goes wrong and we realise that assets are overpriced (because it was too easy to borrow to buy them) and we realise we are in debt and we are in a financial crisis because even if we sold the assets we bought when they were overpriced we would still be in debt.

    So if we do not have debt, we do not have something built-into the economy which will lead to boom and bust.  And if we do not have a downturn, we do not need governments to run deficits to be able to get us through them.

  2.  And so we come to the second problem, that “governments should always run deficits”, or stifle growth.  Whilst Steve Keen’s graphs are convincing, is this a price worth paying for an economic system which:
    • does not automatically lead us into recession;
    • safeguards the poorest in society from the most expensive lending;
    • avoids governments borrowing so much that they lose the ability to pay for basic services such as education and health

    Even when we have said all that, Steve Keen’s own analysis back in May 2014 (in a talk which lasts around 15 minutes) suggests that governments should avoid running permanent surpluses as this is what will stifle growth.  His “balanced government spending” scenario does not look so bad to me.

    And if we are really living in solvent land, governments will need to have doubloons in the vault (because they can only spend what they have already received in taxes).  This also means that they could build up a surplus over time which could be spent when the economy is not as strong.  In other words we would be asking governments to “save for a rainy day” rather than “borrow in the hope we will be able to afford it in the future.”

Minsky visits Solvent Land

I have now started to work my way through Book coverMinsky’s papers in “Can “It” Happen Again?: Essays on Instability and Finance” and I began to wonder what Minsky would make of “Solvent Land” – a world without debt.

If he could visit this wonderful place, would he see different economic rules at work? Continue reading