George Osborne’s plans for government-backed credit will be a terrible mistake
TODAY is Budget day and I fear the chancellor is about to announce some really bad proposals to offer extra credit to house-buyers, small business owners and school-leavers. These are based on ideas spawned from the financial crisis’s original sin: the fallacy that what ails the economy is too much free-market capitalism, rather than too little.
The coalition’s first bad idea is imported from America: create a sort of mini Fannie Mae and Freddie Mac, the US mortgage giants that needed massive bailouts in 2008. David Cameron and George Osborne plan to use taxpayers’ heft to guarantee mortgages for 100,000 people buying a newly-built home.
The government’s second bad idea also involves hiring out the government’s credit rating. Cameron wants to allow banks to use government guarantees to lend money to small businesses at lower interest rates than normal.
The third bad idea comes from entrepreneurs. Richard Branson and others want the government to let school-leavers borrow money from government sources just as students do, not to go to school but to start companies.
What do these ideas have in common? They would all thwart the signals that free markets are sending to the public. Yet people – and policymakers – should listen to these signals, as they could help direct policy.
Take house prices. Young people can’t afford to buy a home because prices are too high. Prices must come down. Government-subsidised lending, however, will only keep prices too high. More money for homes means higher demand.
Proponents of subsidised lending for house-buying argue that it’s not fair to make couples wait to purchase homes. Middle class workers lose out to wealthier workers, who can rely on their parents for deposits. Meanwhile, the middle class is stuck forking over rent to buy-to-let investors, who continue to purchase property.
Yet government subsidy doesn’t alleviate either of these problems. No, it’s not fair that some people are rich and others are not. Life is not fair. Yet condemning young people to a lifetime of mortgage debt – while richer people can pay more in cash – doesn’t make life more fair.
Likewise, buy-to-let investors continue to pour money into housing because there is too much easy cash in the financial system, and too few good investments. Investors keep buying houses because they are desperate for a return. Adding more easy cash to the system, via government-subsidised lending, doesn’t solve the problem.
Nor does government-lending to small businesses fix what ails these companies. Small companies aren’t borrowing because people aren’t spending as much. Consumers aren’t consuming goods and services, which hurts not only shops but the vendors that supply the shops.
Why aren’t people consuming as much? Part of the pullback was inevitable. People spent too much before the crisis, thanks to borrowed money, and they had to cut back. But the government exacerbated this problem, too, via its 2.5 percentage point hike in VAT in 2011.
It’s absurd for the coalition to take money from people’s pockets that otherwise would have gone to small business – and hand back some of that money to small business, via the banks, fifteen months later.
Lending money to school-leavers would be similarly short-sighted. Banks don’t make unsecured loans to young people with no experience for a good reason: the risk of failure is high.
Government-subsidised loans to young entrepreneurs would be nearly impossible to discharge in bankruptcy. Government would relegate more young people to permanent indebtedness as the price of a bad idea.
People who want to start businesses should do so the old-fashioned way: scrounge cash any way they can, from washing cars to child-minding, until they can produce a little bit of what they want to sell. If it sells, plough the profits back in.
Why does the coalition government think that people are in favour of wilfully ignoring helpful information that the market wants to give them: that is, that house prices are too high, that businesses are suffering from the VAT hike, and that unsecured lending to unproven businesses is a risky gambit?
Simple. The government thinks people think that free markets are broken, and thus that the information they provide should be disregarded.
It wasn’t free markets that broke in 2008. The banks broke. The banks broke largely because their investors had assumed for years that, in the case of trouble, the government would step in with a rescue – and they were right.
This isn’t capitalism; it’s benefits scrounging.
The answer to broken banks is not to break more things, but to fix the banks. The only way to do that is to get the government out of the business of supporting failed banks, now and forever – even if it means selling off stakes in RBS and Lloyds at a loss.
Voters seem to get this. People don’t want to tinker with capitalism, but to apply capitalism to finance. The coalition wants to apply what the previous government did with finance – suspend capitalism – to the rest of the economy.
Nicole Gelinas is a contributing editor to the Manhattan Institute’s City Journal in New York.