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March 21, 2013

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Botzarelli

Were the scheme to be effective in supporting a higher volume of house sale transactions there would also be a rise in the level of SDLT receipts to the government. That would be beneficial to the government even if there were to be continued house price falls (and a higher volume of transactions would more likely lead to rising prices until developers built more).

foosion

Another way to look at it is that the government should engage in deficit spending for the usual Keynesian reasons, but refuses to do so for political reasons.

Instead, of borrowing and spending directly, it acts indirectly. It guarantees some household debt, which leads to increased spending and the usual Keynesian benefits.

Andrew

Chris this seems like a very long post to state the obvious fact that if a property debt boom can be restoked then the deficit could be reduced.

I believe the word is "duh".

I would have thought the pertinent questions are: will it work, and is it a good idea? Particularly given that that's largely how we got into this mess.

Always quantity over quality with you economists.

chris

@ Andrew - it might be obvious to you and me, but it didn't seem so to Mr Lilico, hence my post.
To answer your questions: yes, and no.

Andrew

Thank you Chris - how depressing.

Is it then your professional advice that I should finally gear up and buy a house?

PS - I'm not sure my admiration of your generous work always shines through in my comments! I hope you realise that even my most ignorant and disrespectful contributions are provoked by your stimulating thoughts.

aragon

Inflating House prices is a Ponzi scheme.

"it might have to pay several billions if those guarantees are exercised."

Not if (it might), but when (they will)!

"the government's off-balance sheet debt has risen"

Out of sight out of mind ?

The reason large deposits are required is the cushion the risk of a price correction in the over inflated housing market (5x income).

The banks expect to exercise the guarentees!

When the correction occurs the losses will be realised (Mortgages are for 25 years).

Of course George Osbourne, may get lucky and not be in power when this happens.

Any reduction in the deficit is small and temporary, with a much larger loss to be realised in the future.

But then smoke and mirrors is the currency of politics.


Andrew

Wouldn't it have been simpler to say that if you reexpand private sector debt with a property bubble then public sector debt must contract, other things being equal?

The reason it's a bad idea is that *combined* private and public debt is too large.

George Carty

What can be done to reduce the combined total of public and private debt (ie our national debt owed to foreigners), other than to tax the hell out of imports from China and other low-wage countries? (Which is something that the EU would not let us do...)

Andrew

@George - Some combination of:

reducing its size relative to income, by increasing income (whether we employ a more protectionist set of tariffs or not).

defaulting by not paying - e.g. let people be repossessed, bank recognize losses and the housing market clear. - dezombification.

defaulting by inflating the currency.

Andrew

@George - it is not just debt owed to foreigners that is the problem. We owe too much to ourselves too.

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