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.