Mortgages and the art of illusion

For all the money the government has spent on quantitative easing and all the money savers have lost due to the low base rate, the only thing we seem to have gained is time, with inflation as a by-product. Any other achievement in the mortgage industry is an illusion

John Murray
John Murray

With the recent Project Merlin, there was an attempt to create the illusion that bank bashing would come to an end – it’s still something of a national past-time – in return for an increase in lending to small businesses, capital requirements and liquidity permitting, more disclosure on top pay and more moderation on big bonuses.

But on the day that chancellor George Osborne was calling for an end to recriminations against the banks, business minister Vince Cable was reminding us that the Independent Banking Review was still in progress and that the era of bank bashing was by no means over.

It’s obvious that whatever conclusions that review will come to, Cable has already prejudged the issue. In his view, some banks are too big to fail so they’ll have to be broken up, whatever the price and whatever the cost to the economy.

Politicians are, of course, grand masters of illusion and, as with Vince Cable and former Prime Minister Gordon Brown, self-delusion can also be a big problem.
Cable, for instance, seems to be still wedded to a general election manifesto conceived by a political party that never thought it would have a seat in government, while examples of Brown’s self-delusion are legion.

Anyhow, the recapitalisation of the banks brought about the need for the quantitive easing programme, which pumped billions of pounds back into the economy, while the Bank of England had to come up with its Special Liquidity Scheme for lenders that had problems refinancing in an illiquid market.

And all this happened at a time when new rules on capital and liquidity were forcing banks and building societies to deleverage their balance sheets and so fuel a mortgage famine. At one time, the fear of the quantitive easing programme was that it would be inflationary.

Now that profits on government gilts are falling, Henderson Global Investors is warning that the scheme could well go into the red, perhaps proving that quantitive easing isn’t the answer to the problem that money doesn’t grow on trees but another example of how economic and political alchemy can turn hot air into fool’s gold.

To compound our problems, the mortgage industry is fast approaching the time when it will have to refinance the £300bn it borrowed under the Special Liquidity Scheme. But there’s been little or no improvement in the appetite of the financial markets for such inter-bank lending.

Thus it would seem that for all the money the government has spent and for all the money that savers have lost as a result of the base rate remaining at 0.5% for nearly two years, the only thing that’s been bought is time, with perhaps inflation as an unwanted by-product. Any other achievement within our sector is an illusion.

Thanks to Brown’s economic and regulatory legacy, we have seen a mortgage market shrink from gross lending of £362bn in 2007 to about £136bn last year.
That’s not only bad news for aspiring home buyers but also insufficient to encourage new-build, while population growth and changes in our demographics indicate an impending housing crisis.

True, the Financial Services Authority might argue that Joe Average has never been better protected than under its watch but, at the age of 63, I can look back to when at 22 I bought my first home with the aid of mortgage.

My wife and I knew we had to scrimp and save and make do. At the end of each month there was precious little money left in the kitty but without a regulatory body to impose prohibitive capital requirements on mortgage lenders willing and able to give a helping hand to young first-time buyers, the decision to risk borrowing a large sum of money on variable terms over 25 years was ours.

I wasn’t financially excluded by an unaccountable statutory body from becoming a home owner based on the assumptions of arrogant bureaucrats who deemed that we were too stupid or too feckless to undertake such a commitment.

Or perhaps I’m under a delusion – those same arrogant bureaucrats aren’t protecting ordinary people from the remote possibility of financial ruin but the lenders themselves from lending to people who don’t enjoy the same job security and terms and conditions of employment as they do in Canary Wharf. In other words, they are simply protecting