Let me be the first. Yesterday, in his annual budget presentation to the House of Commons, a desperate (there’s another frequently applied adjective) Osborne launched a scheme to socialize a significant portion of the U.K. mortgage market. Taking his cue from Fannie Mae and Freddie Mac, those two great American bastions of state socialism, he said that the U.K. government would enter the mortgage business, lending British homebuyers up to a fifth of the cost of newly-constructed houses and guaranteeing the mortgages of people who are struggling to raise enough cash for a down payment. Hitherto, mortgage finance in the U.K., unlike in the United States, has been exclusively a private-sector business. Now, Osborne, a self-described apostle of Adam Smith and Margaret Thatcher, has decided to change all that.
As you might have already guessed, the reason for this ideological U-turn has nothing to do with Osborne jettisoning his copy of “Wealth of Nations” in favor of Keynes’s “General Theory” or Anthony Crosland’s “The Future of Socialism.” Osborne really is a Thatcherite, albeit one with virtually no personal experience in the private sector. (A year after graduating from Oxford, he joined Conservative Campaign Headquarters. He’s been in politics ever since.) Unlike Saul on the road to Damascus, he didn’t see a blinding light. It’s not as if he’s suddenly recognized that many markets, the housing market among them, fail to work as the free-market textbooks say they should. Instead, it’s almost all about politics and the abject failure of his experiment.
In a new forecast published alongside the budget, the Office of Budget Responsiblity, an independent watchdog that Osborne set up, said that the British economy would hardly expand at all this year, meaning that the Conservative-Liberal coalition will have presided over three successive years of recession or near-recession. With growth stalled, his targets for the public debt comprehensively blown, and an election due in a couple of years, the Chancellor had to do something—anything—to try and revive spending and investment, and the voters’ spirits.
The sensible option would have been to concede that austerity wasn’t working, abandon the pretense, and introduce a significant stimulus program. But if Osborne—Mr. Austerity—had done anything like that, he would have been laughed out of the Commons. So he stuck to his tired rhetoric, about there being “no easy answers to problems built up over many years,” and introduced a budget that was fiscally neutral. Overall, it didn’t add to or detract from the level of demand in the economy. With an eye to the election, Osborne shuffled things about a bit, lifting the income threshold at which people start paying taxes, cutting a penny from the tax on beer, abandoning a rise in the tax on gasoline, and reducing the corporation tax rate. But these giveaways were offset by further cuts in public spending and limits on public-sector pay.
Since austerity is still the order of the day, and continental Europe, Britain’s largest export market, is in recession, there would appear to be little prospect of an economic rebound. The Office of Budget Responsibility is forecasting growth of 1.8 per cent in 2014, but its prediction record is hardly stellar. Every year since it was founded, it has been forced to cut its forecasts. What hope is there left for Osborne and his boss, David Cameron, who, most unwisely, issued a public endorsement of his Chancellor’s austerity measures just a couple of weeks ago? (One of the enduring curiosities of British politics is why Cameron hasn’t dumped Osborne, let him take the blame for the mess, and picked a new Chancellor with new policies. His speech about austerity brought him only derision.)
Evidently, the Chancellor has decided that his best bet is to ramp up the real-estate market—never mind that a big property bubble helped create the current predicament. Still suffering from the after-effects of their last lending binge, Britain’s banks are now markedly reluctant to lend to first-time buyers and people seeking mortgages with low down payments: loan officers have been reverting to the old-fashioned practice of insisting on a deposit of twenty per cent. In the interests of maintaining financial stability, and preventing another boom-bust cycle, that’s just what is needed. But from the perspective of would-be homebuyers and the occupant of 11 Downing Street, it’s a pesky hindrance. Thus the need for a bit of equally old-fashioned state interventionism.
At this stage, it’s not yet clear just how far Osborne will push in the direction of Fannie and Freddie-style monopolization of the mortgage market. The first part of his initiative, the government lending directly to purchasers of new-construction homes, will begin right away. But the mortgage-guarantee scheme, which is potentially more significant, isn’t due to start until next January. According to the Treasury, the British government, unlike Fannie and Freddie, won’t primarily guarantee high-quality home loans with high down payments, which are readily available. Instead, it will concentrate its efforts on riskier mortgages with small down payments: as little as five per cent of the principal. For a small fee, banks that issue these loans will be able to shift almost all of the risk of default onto the government. According to a report in Thursday’s Financial Times, the banks would stand to take just five per cent of the losses above an eighty per cent threshold. If that’s right, it looks like a recipe for saddling the taxpayer with countless bad loans come the next housing bust.
Compared to how Fannie and Freddie work, the Osborne venture goes even further in socializing risks. Until they made the disastrous decision, between 2003 and 2007, to venture into the world of sub-prime mortgages, the two U.S. housing giants had largely stayed away from the riskier end of the housing market. But that’s where the British government will start issuing loans and guarantees. The background briefing on the U.K. Treasury Web site doesn’t confirm the numbers in the F.T. report. It merely says that the government will provide more details about the mortgage-insurance scheme later this year. Until we find out how the scheme will be structured, it’s hard to say if it will even work on its own terms.
But we already know enough to note the great irony: Osborne, the great critic of social engineering and the nanny state, has revealed himself to be a housing socialist. What will his friends at the Heritage Foundation and the American Enterprise Institute have to say about that?
Original Article
Source: newyorker.com
Author: John Cassidy
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