When a government proposes to intervene in private enterprise, there is one question it should ask before anything else happens:
"What is the market failure?"
Broadly speaking, there are two ways you can justify intervention by the state.
The first is where there is no market at all (the missing market problem). In such a case, sometimes the state is able to create one.
The second is when there is a market, but it is failing. In other words, it is not allocating resources as efficiently as we would like.
If the state can, by intervention, achieve a more efficient allocation than what is happening anyway, then you can begin to make a case for stepping in.
The government’s new housing policies, announced this morning, fail to satisfy either of the above criteria.
Here’s what the government has announced:
- A stamp duty holiday. For the next year, buyers of houses worth less than £175,000 will be exempt. At present the threshold is £125,000. The Treasury estimates the measure will cost it £600 million (more on that below)
- The government will give money to some households at risk of falling behind on the mortgage. In return, it will take an equity stake in the properties. To me, this sounds suspiciously like they’re nationalising the housing stock by stealth
- The government, in conjunction with property developers, will offer five-year interest-free loans to some first-time buyers
Today, we have yet more government tinkering. More devices by which to ignore the fundamental reality: house prices are falling — and repossessions rising — because fewer people can afford to own a house.
Not only that, but the proposals make even less sense, economically-speaking, than the much-derided Home Information Packs (HIPs). Yeah, the HIPs are a joke. A political gimmick aimed at correcting a problem that wasn’t even there (estate agent Douglas and Gordon reports that of the 7,000 applicants it’s handled since HIPs were introduced, only 16 have asked to see one).
But at least you could conceive of an economic justification for HIPs — namely correcting a perceived informational asymmetry in the housing market. You can see what they were trying to do. I can’t think of any such justification for the measures announced today. The government’s motives are purely political.
All told, the measures announced today will cost £1.6 billion. It’s a lot of money to spend on futile attempts to save a doomed politician. Especially when you consider this could make our economic situation even worse than it would be if we simply let the market do its job.
Colleague Bill Bonner had an interesting take on this at this morning’s meeting:
"From a purely economic point of view, what’s wrong with people losing their homes?" he asks. "You have a guy who owns a house and he can’t afford to pay for it. So his house gets repossessed and it goes to the bank. The bank sells it for a lower price. The new buyer will either be a second guy who can afford the house at the new price, or a landlord who can rent the house. And he’ll rent it to the first guy, or someone very like him. You still have the house and the original guy. Only he’s renting (which he can afford) rather than owning (which he can’t)."
That, it seems, is what the market is trying to bring about. But the government’s trying to stop it, because what the market’s trying to do will lead to bad headlines.
Sadly, though, those headlines are gonna happen anyway. More on that below...
Energy strategy "more important than pandering to green organisations"
"I’ve found that rare breed," says Garry White, editor of Smart Commodities. "A politician who is doing the right thing."
Garry is referring to John Hutton, a government minister. Hutton has taken a stand against those who, says Garry, "have already cost us vital time and damaged our prosperity".
These are the people whom Garry calls ‘the environmentals’.
"They have delayed our new energy strategy in the courts and at places like Kingsnorth power station. We can’t let them win," he says.
Yesterday Garry got some good news. Not only that, but he won a bet with his colleagues in the office (though it seems to mean more to him than it did to the rest of us).
Find out why Britain’s energy strategy could, at last, be getting back on track.
The pound gets smashed. And this is only the beginning...
There comes a point with every government when a show of strength only serves to highlight weakness. When attempts to reassure serve only to spread panic. We are living through one of those times.
As we wrote yesterday, Alistair Darling’s bearish comments at the weekend would only serve to further undermine confidence in UK plc. And so it proved — the pound was smashed. It hit an all-time low yesterday against the euro.
Now the government machine is spitting out ‘Save The Economy’ policies left, right and centre. But they’ll do no good. They only serve to underline how desperate things have become. It no longer matters whether the politicians portray themselves as optimists or pessimists. The tide will keep coming in anyway.
The state is trying to stand in the way of economic reality. It is putting up levees in the form of loans, hand-outs and tax breaks. But, sooner or later, the storm will wash over them.
We’ll still have to pay for these futile defences, though. Today the Treasury has sacrificed £600 million in lost stamp duty. Later this week there’ll be an announcement on what to do about fuel prices. What else will the Treasury need to budget for as reality bites harder?
An increase in public borrowing looks a certainty. And this is a key reason why I believe the pound will continue to hit new "all-time lows".
The pound, much like the housing market, is seeking a new level. Especially against the euro, a very young currency. We don’t know precisely where that level is, but we can be confident that it’s below where we are now.
It’s time to protect your investments. To hedge against sterling’s demise. This afternoon, I will continue working on a report of mine that will show you how to do just that. I expect to have it ready before the end of the week. So stay tuned!
Until tomorrow
Ben Traynor
Editor
Selected articles:
Theo Casey on the investment that could benefit from Alistair Darling’s weekend outburst.
Garry White on why Britain’s energy strategy could be back on track
The Daily Reckoning — Getting in Line for a Bailout
Aiy! We arrived in London this morning, greeted by a dark sky, rain and wind. Ah, the summer... we hardly knew ye...
What a delightful summer it was! (More below...)
The weather never actually turned summery — until the last two days — but it was still a marvellous respite from the workaday world of September — July.
We went back to the workaday world yesterday — taking the train up to Paris for an editorial meeting with our new French financial magazine. We are taking a risk with the publication — giving it an English title: MoneyWeek. French may be the language of Proust, but English is the language of money.
You can read the Daily Reckoning in full here.
P.S. If you enjoyed this article you can find out more about our free email, The Right Side by clicking here.
