Preventing Repossession

Sarah Teather MP has said that the government should do more to protect families from repossession (LibDems). Some caution is necessary. This doesn't seem to be a specific policy proposal. But the idea seems to be to tighten up the law to make it harder for lenders to repossess homes (there's a lot of reading between the lines here). This is probably cheap in terms of public money but someone will have to bear the cost of any eventual policy. Banks are a convenient scapegoat.

There are two problems with a purely legal solution. Repossession is generally a last resort anyway, particularly in a depressed property market. In which case, the policy doesn't amount to much more than formalising existing practice. In other words, it's a populist gimmick.

Assuming though that it does genuinely dissuade lenders from repossessing homes, this still carries a cost. Principally, it makes mortgages less secure from the lenders perspective. It is harder and more costly for them to get their capital back. Arguably, it is desirable for banks to exercise more prudence about who they lend money to, but it is naïve to think that these costs won't be passed on to the beleaguered home-owners. Credit will become more difficult and more expensive to access. They will find it harder to refinance their mortgages. They will eventually find it harder to sell their houses as buyers find financing more expensive.

So either there is no real value to such a policy or the cost will ultimately be borne by the people the policy is intended to protect.

This is not to say that the government shouldn't be protecting some home-owners. The important thing though seems to be to allow people to remain in their homes, not necessarily to remain the owners of them. We should use public money (we're borrowing enough of it) to buy up the houses and bring them into public ownership. Any equity the delinquent borrower had built up could be wiped out - but that is as it should be - and the lender may have to write off some of the value of the debt - but they lent unwisely in the first place. The ex-owner would then continue to live in the property and pay rent to the government.

It would have to be financed with public borrowing, but that borrowing would be secured against tangible assets, moreover which are bought at a trough in the market. The government's obligation to the lessors could be capped, say at five years, after which they would have to either buy the property back, move or see the property pass to a private letting company. This would allow the principal (and potentially some return) to be recovered in a reasonably short term.

Andrew Rawnsley in the Observer

Andrew Rawnsley has written a rather good op-ed in the Observer about the need to invest fiscal stimulus in public works rather than trying to pump it through consumer spending.

Steinbrück Reductio

Peer Steinbrück, Germany's finance minister, has received uncharacteristic attention in the British press for his claim that Gordon Brown has been "crass" in abandoning fiscal prudence (BBC). In the UK, the Tories have been entirely characteristic in jumping on the bandwagon.

I suspect that Gordon Brown is not too far off the mark when he claims that this is just "internal German politics". However, Mr. Steinbrück's criticism probably has more to do with Eurozone politics. At the moment the Euro is balanced on the Franco-German fulcrum of President Sarkozy's newly minted Keynesianism and Chancellor Merkel's fiscal restraint. The decline of sterling probably weighs heavily on the minds of Germans worrying what happens if that axis tilts too far Sarkozy's way. It's also worth observing that Germany currently has substantially higher level of public debt than the UK, even if it is currently running a surplus and paying that down.

Mr. Steinbrück is wrong (as are the Tories). A dramatic loosening of fiscal policy is required to stimulate the economy. But he is right, as Vince Cable has pointed out, that a VAT cut is a very poor way of implementing that loosening.

I've harped on about this before but it is not enough to run up a public deficit. Government spending to stimulate the economy should always be an investment in the future. Running up liabilities on the public balance sheet must be offset by creating public assets. If this isn't done, the custodians of the public purse are storing up a heavy tax burden to weigh down any recovery later on. As concerning is the fact that the Labour government is using the stimulus to postpone reckoning with some pretty serious structural problems in the British economy - an over-reliance on cheap credit and on the financial services sector. This, rather than the mere fact of the fiscal stimulus, is what is bringing the pound down and concerning German fiscal hawks.

Protectionism revisited

Before the hiatus for NaNoWriMo I intimated that I was in two minds about the virtues of protectionism. Now that I've had some time to think about it I think I've unpacked the dilemma a bit. Euro-sceptics be warned, this post assumes a rather European perspective. This choice is due to the facts on the ground. The removal of trade barriers across Europe means that it would difficult to implement any sort of protectionist policy on a smaller scale.

The problem is that here (at present) in Europe there are tough standards around labour conditions. These standards do not apply more widely across the world. The 'need' for protectionism comes from the need to maintain the competitiveness of European labour against countries that derive an advantage from not recognising those standards. They can produce goods more cheaply by (from a European perspective) mistreating their workers. Protectionism is one solution to the problem of how we safeguard European jobs and European labour standards at the same time.

But if we stood up for those rights for all workers across the world than no country would enjoy a competitive advantage over European workers who do enjoy those rights. So we should be legislating to bolster those rights for all workers and introducing tariffs where those rights are not recognised and honoured – both to eliminate the competitive advantage to not doing so and to incentivise doing so. To frame it a slightly different way, the present situation is one where we do not enforce labour standards for workers outside of Europe. This means that to remain competitive either European jobs must be exported or Europe must import the laxer labour standards of the developing world. Neither is politically palatable. What we should be doing is exporting our own labour standards. We can do that by using tariffs to create a competitive advantage to adopting them.

Such a scheme would need a broad base of support from developing markets to legitimise it, otherwise it would not escape the charge of European protectionism. But it should be politically saleable. It is not a naïve protectionism – the tariffs would apply equally to European products and non-European. Developing economies, including much of Latin America, China, to an extent India, are governed by parties employing left-leaning rhetoric. An economic treaty 'for the workers' would be something they may find harder to argue against than previous laissez-faire free trade treaties (which have had a corrosive effect on labour standards by exporting jobs to those countries with the weakest standards). The purpose is not to generate revenue from the tariffs so they could be channeled back into development aid for emerging economies to motivate them to come on board.

The price is that it would be inflationary. It increases the costs of producing just about anything. And it increases the spending power of the working classes. In the long run, there is a limit to that inflationary potential but in the short-term it will create economic tumult. Recalibrating an economy is never painless. But the end result hopefully will be that Europe has a more diversified economy and a more equitable distribution of wealth.

Apologies for the hiatus

Apologies for the (over a) month long hiatus. I've been wrestling with NaNoWriMo for the last month. No I didn't make it.

I'm currently back in the UK and flicking through the press here. More content to follow soon.