Hitting the pause button for two years….

The British government has today announced that a taxpayer guarantee for around £1bn will be made available to banks, so that repossessions of properties whose mortgages are in arrears can be postponed for a 2 year period. There are some restrictions around who is eligible for this help, but there is a real danger with populist knee-jerk policies like these. Some points to note

1. Nothing comes for free. If these debts are guaranteed by the taxpayer, then the debt is just shifted to later period, and we are assuming everything will be back to normal in 2 years’ time and the government will be in a position to repay the debt. If say the recession deepens, then more people will end up unemployed; this will be a double whammy as tax revenues will decrease and the number of people relying on this scheme to keep their houses will increase. Probably the only way out of this will then be to increase the money supply, which can result in inflation. In this scenario probably everyone will keep their houses, but end up unable to afford anything else.

2. There is a reason why the house prices are falling. As pretty much everyone knows nowadays, the market was overheated, and this is the natural way of markets adjusting themselves according to the demand. Artificially propping up the market only results in delaying the inevitable. What is supposed to happen now will eventually happen when such plans run out their courses (or the government realises they can’t afford to guarantee those loans anymore)

3. Human brain is a clever little thing. When it realises it has done something wrong, and the price it has to pay for it, it will develop a natural aversion to that activity. It will think twice before making the same mistake again. By making sure mistakes go unnoticed (let alone punished) we are removing the incentive for people to be careful with their finances.

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From the article I have linked above, I noticed this little snippet:

Currently, those on benefits have their mortgage interest payments covered for two years if their mortgage is below £200,000.

So let me get this straight. Let’s take a non-home-owning taxpayer. She is paying the mortgage of someone whose income is also partially/fully provided by this taxpayer. I tried to figure out the logic behind this deal, but my head hurts real bad now.

~ by kajthurai on December 3, 2008.