Intriguing new ideas about how to deal with the credit crisis are coming thick and fast. Never mind printing money – we’re now seeing real radicalism in the pages of our newspapers.
Last week, we saw calls in The Times to tax savings to force people to spend or invest, rather than just sit on their money. And elsewhere, two former Bank of England economists suggested that the Government buy the homes of those about to suffer repossession and rent them back to them.
The fact that these ideas are being taken seriously shows just how scared everyone is. Let’s take a closer look at why they’re both nonsense…
What we need is stability
Stability is a much under-rated quality. Yet stability – or a lack of it – is what lies at the heart of our economic problems today.
What people really want – what they need – to encourage them to plan for the long-term, is stability. They need to have faith that they can hold onto their jobs, and that they can establish long-term plans that won’t suddenly be thrown into disarray by changes in the law, or experiments by policy makers.
The more secure people feel, the greater their scope to take educated risks, and think about the long term. That increases the chance that they’ll use their money wisely, and invest in quality, wealth-producing assets.
The less stable the economic environment, the harder it is for people to plan for the long term. In times of economic turmoil, the natural desire is to have a larger-than-usual pool of liquid assets that can be drawn on in case of emergencies. But this is just sensible. If you are in danger of losing your job, you should have an emergency stash to tide you over. There’s no point on putting money into a pension if you can’t pay your mortgage today.
Government intervention and rule changing leads to more problems
But economic turmoil passes. And as the turmoil passes, and unemployment falls, and once-expensive assets become cheap, people start to feel more confident again, and they start to reinvest.
So what can Government add to this? The answer is, in the main, more instability. Even during the good times, for example, the more the Government interferes in the tax system, the more likely it is that investments will be made based on what yields the best tax advantages, which then starves genuinely solid investments of the money they need. One driving force behind the property boom, for example, has been the beneficial tax regime for landlords, and also a loss of faith in stocks, partly driven by Gordon Brown’s £5bn-a-year pension raid.
Even this sort of interference doesn’t have to be a problem if the Government doesn’t interfere very often. People and companies can always make the best of a bad system and find ways to work around it.
But if the Government keeps changing the rules, so that it becomes impossible to plan from year to year, let alone for decades ahead, that’s when you get real problems. People feel paralysed, and a desire for easy access to their money increases. The most important thing becomes the return of your capital, not the return on it.
That’s why ideas about printing money, taxing savings, and bailing out troubled homeowners will only make things worse.
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Punishing savers is not the way to help the economy
Take the idea of taxing savings, as proposed by Anatole Kaletsky in last Thursday’s Times. Let’s ignore any of the moral difficulties with this idea, because it just confuses things. The key point is that it wouldn’t work. It completely misunderstands the psychology behind saving. The more you try to prevent people from saving, the more effort they will put into finding ways to do so.
If you tax declared savings, then be prepared for a massive rise in the sale of mattresses, safes, and safety deposit boxes. And even those who don’t attempt to evade the tax are likely to pay it rather than spend their money. If people feel their savings are under attack, then they will simply cut back even further, in order to try to stay ahead. And it’s not just non-doms who can take flight from repressive governments – if the state starts confiscating our savings as well, then be prepared for a big rise in emigration.
Savers will only spend when they feel they have built up a big enough cushion to shield themselves from disaster. The more you try to prevent that, the harder they feel the need to save.
Worse still, you are creating the ultimate in “moral hazard”. By punishing people who have prudently saved up in case of hard times, you are effectively rendering saving worthless in the future. This is also the problem with the idea, proposed by Shamik Dhar and Danny Gabay at Fathom Financial Consulting, that the Government (ie the present and/or future taxpayer) should spend £50bn (over five years) to buy homes from people on the verge of repossession, and rent them back to them.
The Government would “eventually have the option of retaining the property or selling it back to the private sector, possibly offering first refusal to the former owner,” reports The Telegraph.
Again, this is wrong. The people who refused to buy houses in recent years and saved their money instead, are the smart money, like it or not. Those are the people who had the foresight to look beyond the latest trumped-up house price data and realise that the situation was unsustainable. They realised that there was a very real chance that they would end up being unable to afford their mortgage, or that at some point in the future they would be able to buy more cheaply.
Now they face being taxed so that people who bought at the worst possible time (which is why they face repossession now) can have the Government become their temporary landlord. To add insult to injury, they may well be allowed to buy their homes back at a later date.
I have nothing but sympathy for people facing repossession. But I also have sympathy for people who sensibly didn’t buy and are now being penalised for it.
There’s no easy fix for our economy
Bailing out the banks was the right decision, though we can all argue about the details of how it was done. Allowing savers to see ‘risk-free’ savings utterly wiped out, and cash machines run dry, would have been disastrous.
But these moves go well beyond that. We’re not talking about the system imploding here – we’re talking about some people losing their homes, or their jobs, in which case they can fall back on our existing, and perfectly adequate welfare system.
There is no easy fix for our economy. But the quickest way out is to let asset prices naturally decline to the point where the people with money – the savers, in other words – think they are so cheap that they don’t care what the papers say, they’ll snap them up anyway. For that, we need to a) stop trying to prop asset prices up artificially; and b) allow savers to reach the point where they feel happy about increasing their risk appetite beyond cash deposits. That won’t happen if we keep trying to steal their savings.
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