Great Mortgage Windfall

Dominic Lawson had an interesting arcticle in the Sunday Times the other week - on the possibility of a second credit crunch.

But the part of his argument that really caught my attention is the point he made about the great benefit that low interest rates have brought to people paying a mortgage - particularly a large  mortgage which could be worth several thousand pounds a year to the typical large mortgage payer.

Not a penny of which is earned of course - the great mortgage windfall has simply fallen out of the sky, metaphorically speaking, and into the laps of people with a mortgage to service.

While their work colleagues - their friends and neighbours - have lost out relatively speaking, if they pay rent, for example, or if they are retired and now live on their savings and/or pensions - which are fast being eaten away by the effects of inflation.

Now I greatly admire Dominic Lawson for his honesty is highlighting the issue as one of those who have benefited from the Government's policy of ultra low interest rates - unlike senior politicians, of all parties, who have remained silent - perhaps because they fear stirring up a hornets' nest.

Yet stirring things up would be a very good idea.

Since this great tax free windfall is one of the great dividing lines in society today - much more significant than effect of the 'so-called' bedroom tax, for example.

But as there is no organised lobby group to speak on behalf of the people who lose out from low interest rates - the issue commands far less attention than a boring UKIP press conference which gets disrupted by a noisy student rabble in an Edinburgh pub.

The trade unions ignore the issue as well when raising their predictable pay demands - yet union members paying mortgages have benefited enormously over the past four or five years - compared to members who live in a rented property. 

Sometimes I think the world has gone mad and on this occasion I have all the evidence I need to prove my point - with a little help from Dominic Lawson and the Sunday Times.    

Coming soon: Credit Crunch 2 - by Dominic Lawson

Britain’s QE policy (criticised as “the last resort of desperate governments” by George Osborne as shadow chancellor, before he decided to support it when he got to No 11) had two principal stated objectives. One was that the Bank of England wanted to fend off a deflationary spiral — although its concern that we might follow the Japanese example seemed alarmist, even at the time.

The second was that the cash injected into the blood supply of the banks, like an intravenous monetary high, would find its way into real lending to British companies large and small. This seems not to have happened on anything like the scale expected, with the money instead funnelling more obviously into bankers’ bonuses and, of course, the asset base of the banks themselves.

A more cynical interpretation — advanced over the past few years by this column — is that the two unspoken motives were to restore the balance sheets of nationalised banks that the government hoped to sell and to find a way of financing the state’s own enormous expenditure. Of course there have been winners other than the rescued bankers. As Ros Altmann, the former pensions adviser to Tony Blair at No 10, points out, they are principally those of us who have big mortgages — especially now the government has taken the dodgy decision to underwrite home loans.

Speaking personally: whoopee! Yet Altmann’s list of losers is a long one: all savers; pensioners and especially those who have recently retired on savagely reduced annuities; those who have managed to get by without large mortgages.

Bizarrely, given the government’s own slogans, the people who have lost most are those who have “worked hard and done the right thing”, while the biggest winners are precisely the sort of people it spends much of the rest of the time stigmatising: financial engineers rather than those who “make things”.

In the end, all that matters in an economy is what new things it is able to produce and how efficiently it does that. If the real assets remain unimproved either by investment or by advances in productivity, and all that happens is that their monetary value on the markets increases in nominal local currency terms, this is merely the classic recipe for a financial bubble.

It is fashionable to say that the inflationary threat is negligible at about 3% per annum; but 10 years of that sees the real value of £100 falling to below £75 — which is something to bear in mind when you read bouncy pieces about marginal growth in the nominal value of the gross domestic product.

So, no, we are not out of the woods: and bears are prowling.