Saving is bad. That’s the basic reasoning behind global governments’ attempts to spend their way out of the economic crisis. The ‘paradox of thrift’ suggests that if everyone saves at once, it can be deadly for an economy – falling consumption means even lower growth. But if Gordon Brown truly believes that raising spending is the key to economic recovery, he has an odd way of showing it.
Northern Rock, our national bank, is being pushed back into the mortgage market, and others may follow suit. All the pundits are asking – will this revive the property market? Most are sensible enough to realise it won’t. But to me the more pertinent question is – why?
Why do we need more mortgage lending? How will this help the wider economy? Falling house prices in themselves don’t matter. Negative equity isn’t a problem as long as you can keep up with your bills. With interest rates this low, few mortgage holders will experience ‘payment shock’ when their current deals end – for many, payments will fall. Those who end up losing their homes will either be victims of unemployment, or landlords who can’t find tenants amid the property glut. That’s unfortunate for the individuals concerned, but higher mortgage lending and lower loan rates can’t help with that at all. Raising activity in the housing market is easy – prices just need to fall to a point where the bargains are irresistible. The market is already taking care of that – if you try to delay the process, then you just string the recovery out. So throwing public money at the housing market is a huge waste.
But more than that, it’s making things worse. As pensions expert Ros Altmann points out, the government’s attempts to put a floor under overpriced homes by slashing rates are taking money away from the one group most likely to spend right now: pensioners. While younger people are burdened with debts they are desperate to pay off in case they lose their jobs, retired people have no jobs to lose. For many, life is now a matter of enjoying what little income their capital can generate. And if there’s any left over, wealthier retirees often use the money to help their offspring.
So if you want to increase spending, get more cash into pensioners’ pockets. Yet with rates near zero, pensioners’ income is being slashed. And now they and other savers are being forced to dip into their capital. In January, a record £2.3bn was pulled out of bank accounts, according to the British Banking Association. That in turn could scupper any attempts to put a floor under the housing market, because, as Melanie Bien from Savills points out, “how can the banks lend out money if they’re not encouraging savers to put money in the bank in the first place”? Maybe thrift isn’t such a dangerous thing after all.