The moral hazard of being kind to the indebted

PaulF81

silvercar wrote: »

Limited to £200k, only interest only, any extra is credited to mortgage, rate is currently 3.63% and there is a 13 week delay before payment starts. an only claim for 2 years.

Long enough to get your house on the market and avoid a firesale though all the same. The 13 week delay is recognised by the banks and although you will miss payments, the 13 weeks grace is widely accepted by the banks. 3.63% is still 1.14% over what I am paying anyhow, so as I said, net beneficiary.

globalds

So lest see if I have this right ?

If everyone took the savings there making on debt repayment and started spending, it would energise the system creating a risk of inflation and the government would hike up interest rates as the system would appear strong enough to support it.

Where as if we all behave illogically and pay off our debts early, we reduce the money supply, therefore leaving the government with only one option which is to keep rates unbelievably low.

illogical as it appears it does seem to serve me by overpaying ?

julieq

globalds wrote: »

So lest see if I have this right ?

If everyone took the savings there making on debt repayment and started spending, it would energise the system creating a risk of inflation and the government would hike up interest rates as the system would appear strong enough to support it.

Where as if we all behave illogically and pay off our debts early, we reduce the money supply, therefore leaving the government with only one option which is to keep rates unbelievably low.

illogical as it appears it does seem to serve me by overpaying ?

It's called the thrift paradox.

You've taken the idea to extremes - it's a false dichotomy to set one outcome as high inflation and one as low rates forever, because there are many points in between, including growth with moderate inflation, but basically that's it, yes. If you pull money out of the economy by saving it you throttle growth.

PaulF81

The BOE are more keen to target money supply than inflation in the future anyhow. Merv more or less admitted their error in the run up to the credit crunch was not targetting 10-15% annual increases in money supply and being distracted by the inflation target set out by Gordon Brown.

Thrugelmir

PaulF81 wrote: »

The BOE are more keen to target money supply than inflation in the future anyhow. Merv more or less admitted their error in the run up to the credit crunch was not targetting 10-15% annual increases in money supply and being distracted by the inflation target set out by Gordon Brown.

The concern is now that there is a broad contraction in the money supply. Hence the need for QE to maintain liquidity.

hallmark

julieq wrote: »

To be honest, it's financially illiterate to pay down mortgage debt when it's cheap

Utter cobblers, it's perfectly sensible. You'll tend to find that people who do the above spend their lives not in debt & requiring bailouts.

julieq wrote: »

It's also a classic bear error to suggest that base rates are low to support the housing markets.

More garbage, base rates are low PRECISELY to support the housing markets & only someone with heavy VI would be so ludicrous as to suggest anything else.

julieq wrote: »

Or are we supposed to be setting economic policy to support a small group of sell to rent parasites

How exactly are the STR-ers parasites? A parasite is someone or thing who lives off someone else?

Actually don't bother to answer, I've read enuff of your hysterical crap for 2012.

StevieJ

That was well thought out Hallmark.

Wookster

hallmark wrote: »

Utter cobblers, it's perfectly sensible. You'll tend to find that people who do the above spend their lives not in debt & requiring bailouts.

What JulieQ has also utterly failed to do is consider that people's circumstances are different and for some people, paying down debt will make economic sense, but for others it may not.

StevieJ

Wookster wrote: »

What JulieQ has also utterly failed to do is consider that people's circumstances are different and for some people, paying down debt will make economic sense, but for others it may not.

I agree, the golden rule should be allocating your excess funds where it achieves the best return, eg paying down a mortgage may enable someone to access a lower mortgage rate because of the reduced LTV. On the other hand Mac was also utterly failing as I pointed out earlier in the thread.

Since banks are borrowing at 0.1% and lending at 4-10% your suggestion is clearly nonsense.

Generali

julieq wrote: »

It's called the thrift paradox.

You've taken the idea to extremes - it's a false dichotomy to set one outcome as high inflation and one as low rates forever, because there are many points in between, including growth with moderate inflation, but basically that's it, yes. If you pull money out of the economy by saving it you throttle growth.

The Germans and Chinese get around this by exporting their excess production. As they are about to find out, this isn't without its own problems.