So how about this for an idea? Let’s engage in a big debt write-off. Homeowners with severe negative equity are allowed to write off some of their mortgage. Governments with huge debts… well let’s just forgive. Okay it has already happened in Greece. But what about Japan or the UK?
What’s the difference? What’s the difference between a debt write-off, and a bank levy? A debt write-off will mean creditors will lose money. A bank levy will mean savers will lose money. Savings fund credit ergo it may be the same thing. Critics of QE need to bear this in mind. It just goes to show that there is a flip side to QE. Ros Altmann, former head at Saga, didn’t waste an opportunity last year to explain how awful QE is; how it is destroying pensioners’ income. But maybe the ultimate alternative to QE is a Cypriot style bank rescue.
Even if deposit insurance is left intact and governments do not find a way to tax all money lying in banks, but merely focus instead on larger bank deposits when they go for their tax and grab raid, the consequences of such a strategy are far reaching. Maybe if we hadn’t had QE in the US and UK, the UK and much of indebted Europe would be looking down the barrel of a Cypriot style fiscal gun. To misquote Monty Python misquoting Oscar Wilde, there is one thing worse than QE, and that is no QE. At least that may be the case circa 2013.
Okay, you may argue that governments are still grabbing our money; that the UK public are still, in a quite subtle way, suffering the same fate as those in Cyprus are suffering. It is just that in Cyprus money is grabbed in one, pretty dramatic, fell swoop. In the UK, money is being eroded by inflation.
Actually, I don’t buy that argument. If the government wants inflation to erode the true value of debt, what it really needs is wage inflation. If we have wage inflation tax receipts will rise. At the moment we are having the wrong type of inflation. Okay, if prices rise indefinitely, regardless of what happens to wages, then government debt to GDP will fall. But my point is that if prices rise without a corresponding rise in wages, tax receipts to GDP will fall.
The UK position is not really comparable to the one being suffered in Cyprus. QE will only be a back door attempt to inflate debt away if it leads to higher wages. And if that happened at least workers won’t be that concerned – although savers will be none too happy. The trouble is that the Bank of England, and indeed the UK government, seems totally impotent when it comes to creating wage inflation.
Ms Altmann can wax as lyrically as she likes about the evils of QE. I have this sneaky feeling that things would be worse without it.
I think part of the problem today is that there is a disconnection between savers and what their saving does. There is no inalienable reason why savings should generate a rate of interest. Savings should only enjoy a return if it the money is used to create wealth.
And now returning to the idea of debt write-off: what about the UK property market? The UK has become obsessed with rising house prices. But how can it be a good thing when the cost of buying a home rises? We need cheaper homes, not more expensive ones. The problem here is the price of land. At current prices, the cost of homes is easily enough to make very healthy profits for builders, except for the fact that the price of land erodes into profits.
The problem of lack of supply can be partially overcome by less onerous planning regulations and via a land tax.
The snag is that no governments want to see house prices fall. There is good reason for such reticence, because such a collapse would guarantee election defeat, and also create huge levels of negative equity, which might suffocate the economy.
That is why some kind of debt write-off may be required. It is perhaps the only way the UK economy could see the necessary fall in house prices, without sparking off an economic depression.
In South Korea they have come up with something called Kookmin Hangbok Giguem, or national happy fund. It is a fund designed to help homeowners to default, by buying up the bad debts from banks which would occur as a consequence of those defaults . See this piece in the Chinese ‘People’s Daily’: S. Korea to launch credit recovery fund for debtors
In Iceland, legislation has enabled many homeowners with negative equity to write-off much of their debt.
In the US, a different fix is applied. If you own a home and suffer from negative equity, the deficit is not your responsibility; it is that of your bank. You can hand your home to the bank, walk away, and start again.
These are radical ideas. But the UK has a problem that is almost impossible to fix. It needs lower house prices. It can’t afford the negative equity crisis that would follow if it got what it needed.
What do you think?
These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees
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