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.

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!

And how about some significant debt relief

According to the Jubilee Debt Campaign,

Sierra Leone, Guinea and Liberia are together spending millions of dollars on debt payments while trying to fight Ebola. This US proposal to cancel $100m of debt via the IMF is a good start, but more is needed. The three countries owe $3.6 billion in foreign debts in total.

US urges debt relief

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

More on solvent land

Treasure chestIn my last post I introduced the idea of solvent land.  This is a place where you cannot borrow.  The economy uses dough which you carry in your wallet or purseand doubloons which are looked after in vaults by vault-mindersPlastic doubloons allow people to move money from their vault to someone else’s vault using electronic systems which can also be used for example by employers to pay employees and customers to pay suppliers.

Governments will also use doubloons which can come in lots of different varieties.  So there could be dollar-doubloons and euro-doubloons and sterling-doubloons; even scottish-doubloons.  Continue reading

Its not rocket science

space rocket

A little while ago I tried to understand quantum mechanics and realised that atomic physicists talk in a different language.  There are fermions and bosons and all sorts of other exotic names for the different types of particles.  And when we talk about particles we are really talking about waves.  Except not all of the time, because sometimes… (this is where I stop talking about things I don’t really understand)

And I wondered if that could be a problem in what I am proposing. Continue reading

Debt 101

Aside

I am worried.

One of the blogs I watch is published by Steve Keen and he has recently (at the beginning of the month) published a three blogs looking at whether governments should run surpluses or not.  This was in response to a proposition from the Australian National Commission of Audit that the government should “live within its means.”

His three blogs are:

Should governments run budget surpluses?

Should Governments run Deficits? a Minsky Model?

Should governments run permanent surpluses? (2)

His conclusion (based on some numbers using his modelling software) is that running budget surpluses takes money out of an economy and effectively reduces growth.

On the other hand running a balanced economy (no surplus or deficit) will see public debt reducing.  But running a deficit has higher growth.

So is a deficit economy a good idea?

It matters because if we remove the possibility of debt (commercial lending) from an economy, then it must follow that a government cannot run a deficit – because it cannot borrow.

Or is lower growth a price worth paying for the advantages of taking debt out of the system?

 

Hello

As the first post on this new blog, I thought I would try and set out what I am trying to do.

I have been worrying about debt (personal debt problems and the global debt crisis) for a number of years and wanted to see if there was something that could be done about it.  I even tried reading a few economics texts.

As a result I started to think that debt was a bad idea.  Whilst I am not opposed to the idea of debt in principle, we just dont seem to be able to handle it.  And then it becomes a problem and the problem becomes a crisis.

So can we live without debt?

I have started writing  a paper which tries to address the issues that a debt-free society would face.  I am not clever enough to have all the answers and some of my answers may not be practical.

So that is why I am starting this blog – can you help by helping me look at the issue and whether we can change the world!