The moral hazard of being kind to the indebted

macaque_2

The entire economy has waded in to rescue overborrowed property owners. Anyone living on a fixed income or with a savings account has been subsidising 'the great indebted' for the past 4 years. The rational thing for borrowers is to do is to use this breathing space to pay down their debts. All the evidence suggests they are just not listening.

The 'house prices will rise indefinitely' fallacy has now been replaced with the 'interest rates will stay stay low indefinitely' fallacy.

Come on guys, pay down your debts. Its for your own good (and ours).

Mortgage debt cut by £8.6bn but Bank of England sees little sign of rush by households to reduce debts

http://www.telegraph.co.uk/finance/economics/8984553/Mortgage-debt-cut-by-8.6bn-but-Bank-of-England-sees-little-sign-of-rush-by-households-to-reduce-debts.html

ILW

BoE encouraged the debt fuelled bubble happen by keeping IRs too low. The way to encourage people to pay down debts is to make them more expensive, but they never seem to learn. If we get over this mess it will all happen again in a few years.

julieq

Where does savings income come from exactly Macaque?

globalds

Are people saving more?

I have overpaid for the last 3 years but it would have made more sense for me to have banked the overpayments and taken a better return.

The flip side is that had I banked it I more than likely would have spent some on other things...A new Telly being one ,so better I over pay really.

ILW

julieq wrote: »

Where does savings income come from exactly Macaque?

Partly from the interest charged to borrowers.

julieq

To be honest, it's financially illiterate to pay down mortgage debt when it's cheap, at a time when there's a chance of house price falls and the economic situation is uncertain. It is of course classic bear doctrine, but it makes no sense. You're better off building up cash buffers than pile money into an illiquid asset you believe may fall in value, because even if you own half a house it can still be repossessed and on a forced sale you'll get less back than you've overpaid in, whereas if you have cash you can maintain minimum payments for a considerable period.

It's also a classic bear error to suggest that base rates are low to support the housing markets. It's ridiculous: rates are low in the US and prices are still falling (and before someone tells me that the vogue there is for long fixes, new purchases are at new rates, has had no effect whatsoever because of the oversupply there). Rates are low to stimulate the economy generally and keep people in jobs. Generally unsecured borrowing, for example on credit cards or personal loans, hasn't changed rates substantially, and there's minimal effect on the mortgage rates most people pay because the vogue in 2007 was to fix for a few years, and rates available now are well above BoE base, and so unless you hit lucky and got a low tracker rate you won't have seen particularly good rates (I expect Geneer managed it obviously). Even then it's a bonus rather than a lifesaver.

I did find a study a couple of days ago which indicated that rates were a very low determinant factor in terms of arrears, and (as you'd expect) unemployment and other life changing events such as divorce were a much larger factor. I think it was on the CML website and made interesting reading. It was a study on whether banks price risk into rates, and the conclusions were that they don't, but that that was for sensible reasons including the fact that poor risks tend to self select lower loans, and charging them more increases risk of default rather than decreases it. Lenders aren't interested in moral hazard, they're interested in getting their money back. Well worth looking over anyway.

But even if rates were set to support houseowners, given a roughly 70% owner occupation rate, that would presumably be the right thing to do for the majority? Or are we supposed to be setting economic policy to support a small group of sell to rent parasites who hoped to have their cake and eat it by benefitting from HPI and then hoping to get massive price deflation, and who have been royally thumped?

As for savers, there is no absolute right to benefit from piling up your cash without taking risks with it. At some point someone needs to do something risky with it, which includes lending on mortgages, if you want above inflation returns, you have to participate in growth of something or other. It's arguably much more beneficial that people sitting on cash piles fail to get adequate returns, because if you have a situation where everyone makes easy free money without risk, you hit the thrift paradox head on. Money should be made to work.

And lastly a word on corporations and profit. Profit, by definition, is money beyond the cost of maintaining an operation and tends to get returned to investors (mostly pension funds). It's actually far more beneficial to general society that corporations make profits and grow, than it is that people save money, because that circulates cash and generates returns.

StevieJ

Actually where do the inter generational theft boyos stand on this one? After all the older generation seem to be the ones with bank balances larger than their mortgages?

ILW

What has caused the current global crisis? Cheap credit.
What are the powers that be using to try and solve it? Cheap credit.

Does that not seem a little odd?

julieq

http://www.fsa.gov.uk/pubs/consumer-research/pryce.pdf

FSA site rather than CML, but interesting research nonetheless.

Thrugelmir

ILW wrote: »

What has caused the current global crisis? Cheap credit.
What are the powers that be using to try and solve it? Cheap credit.

Does that not seem a little odd?

Banks leveraging up their balance sheets on an upward trend (since the early 70's). Is the root cause. At the end of 2009 Barclays Bank had a debt to capital reserve ratio of 72:1.

The cost of credit will rise. As the market (the likes of you and I). Demand higher rates of interest to deposit our savings. Wholesale funding is in decline so banks will become ever more dependent on retail funds to finance mortgages and consumer credit.

Sibley

Julieq that was post of the year.