US politicians need to grow up before growth is shut down
2 October 2013 1:46am
IT is time for Americans to decide: do they want to be a social democracy, Eurozone style, with high levels of tax and public spending, or do they want to be a small state society, with low taxes and low levels of public spending?
The partial government shutdown and the political warfare between Barack Obama and Congressional Republicans is merely a reflection of the country’s longstanding inability to make that choice, its deep ideological divisions and the flaws of its political system.
The rest of the world cannot choose for them, but we will suffer some of the consequences of their hesitation if it spirals out of control over the next few weeks. So far, the markets have shrugged off the partial shutdown. Credit spreads actually narrowed as the market staged a modest rally, the very opposite of what one might have expected. Investors think a deal will be struck sooner than later and that the debt ceiling, due to be reached in a couple of weeks’ time, will be extended, preventing a default.
Another consideration is that tapering is now more likely to be delayed, yet again: so even though 800,000 government employees have been sent home on unpaid leave, and their salaries aren’t being paid, investors believe that the negative hit from this will be more than outweighed by the prospect of yet more cheap money.
Yet I’m not that sanguine. What if the stalemate continues? What if there is a default? What if reason doesn’t prevail?
We need some grown-up behaviour from US politicians, and fast.
NONSENSE ON STILTS
One final word on Help to Buy, an idiotic policy if ever there were one. The chancellor seems to benchmark where the market should be on the wrong time period. Instead of comparing with the early 2000s, when conditions were more sensible and prices cheaper, he often harks back, when it comes to credit availability, to the boom days. In 2007, a record 44 per cent of mortgage products permitted loan to values of 95 per cent or higher, far too high a proportion; by 2010, just 1.2 per cent did, far too low a proportion.
This fact helps to explain (but doesn’t justify) the chancellor’s obsession with a policy to boost prices in an over-valued and under-supplied market: he wants to rescue people trapped by high debts accrued at the height of the previous bubble. There are two ways out of this conundrum: the American way, which was mass defaults and the writing off of a lot of the debt; or the British way, a combination of reflating the bubble, tolerating high inflation in the hope that debt is eventually eroded away and turning a blind eye to zombie borrowers and so called mortgage prisoners.
As the old Financial Services Authority put it in last year’s mortgage review, as a result of lenders’ post-crisis tightening, by March 2012 up to 45 per cent of those borrowers who had taken out a mortgage since 2005 had become mortgage prisoners – people who have a mortgage but either are in negative equity, don’t earn enough or don’t have sufficient savings to move to a different mortgage provider. Many cannot sell their homes because they wouldn’t be able to raise the funds to buy another.
This figure may be even higher for former first-time buyers – the FSA estimated that 55 per cent could be mortgage prisoners and that these borrowers “may not be able to remortgage for a better deal or move house.” Sadly, Osborne’s attempt at rescuing this group will merely end up fuelling even greater over-valuation in the housing market. It also delays the inevitable day of reckoning: when interest rates finally go up after the election, house prices will start to fall.
When that happens, Osborne’s hopes of a budget surplus will, tragically, vanish in yet another black hole of his own making.
Follow me on Twitter: @allisterheath
In other news
Tesla increased production and sales of its electric cars in the first three months of 2015 as Elon Musk's company [Read more]
The 2015 General Election has been consistently described as one of the closest we've ever seen, with polls showing [Read more]
With the fallout from the biggest boxing "fight of the century" still unfolding, another bout between two of the [Read more]
It feels like everything has been building up to the one day when the country casts its vote. [Read more]
We may be hours away from finding out who's going to run the country for the next five years - but how much do [Read more]
Uber is aiming to make it easier for its drivers to buy their own cars by teaming up with peer-to-peer (P2P) lender [Read more]
A historic west London pub which was demolished by over-zealous developers without permission will have to be [Read more]
We're on the edge of what has been repeatedly referred to as the most unpredictable election in living memory. [Read more]
What happens if you spray unsuspecting spiders with graphene, the world's strongest artificial material? They [Read more]
The British trader accused of causing the U.S. 2010 flash crash cannot pay his £5m bail because U.S. authorities [Read more]
Fragments of a failed Russian spacecraft are expected to fall to Earth later this week, according to space agency [Read more]
With just one day left of campaigning, the polls indicate there's little between the main parties, which suggests the [Read more]
It's not hard to tell the difference between Skype and Sky. One's a Microsoft-owned text, voice and video messaging [Read more]
Growth in the building sector fell to its slowest pace in almost two years in April, according to an influential [Read more]
In the aftermath of the subprime mortgage crisis, you'd have thought lenders had learned their lessons - but perhaps [Read more]
Sales at discounters Aldi and Lidl grew 15 per cent and 10 per cent respectively in the past year, data published [Read more]
The last data released before the polls open tomorrow has shown services growth hit an eight-month high, potentially [Read more]
If you share a heartbeat and there's no one at the other end to feel it, has that heartbeat been shared at all? [Read more]
We all know staying on top of emails is a challenge, and that's without the added pressure of coming up with a [Read more]
Londoners spend 12 hours a day online, a new study suggests - three hours more than the average UK resident. [Read more]
Network Rail has confirmed there will be delays into and out of London Waterloo station until "at least 9.30am" [Read more]