SocGen strategist excoriates Osborne over Help to Buy

"He may really deserve to be called a moron".

Albert Edwards, a strategist at Societe Generale with a reputation for pessimism, has released a strategy note excoriating the Chancellor for the Help to Buy scheme, which will subsidise mortgages for buyers of new-build house. Via Business Insider and FT Alphaville, some of the choicest quotes:

George Osborne in his March budget proposed an unusually misguided piece of government interference in the housing market. The measures will see government provide lenders with a guarantee of up to 20 per cent of a mortgage in an attempt to encourage lending to borrowers with small deposits. This means that if a borrower defaults on a loan, the taxpayer will be liable for a proportion of the losses. Numerous critics of George Osborne's scheme range from the IMF to the outgoing Bank of England Governor Mervyn King, who said "We do not want what the US has, which is a government-guaranteed mortgage market, and they are desperately trying to find a way out of that position."

…What makes me genuinely really angry is that burdening our children with more debt (on top of their student loans) to buy ridiculously expensive houses is seen as a solution to the problem of excessively expensive housing. I would have thought the lack of purchasing power should contribute to house prices declining or stagnating (relative to incomes), hence becoming affordable once again…

Why are houses too expensive in the UK? Too much debt. So what is George Osborne's solution for first time buyers unable to afford housing? Why, arrange for a government guaranteed scheme to burden our young people with even more debt! Why don't we call this policy by the name it really is, namely the indentured servitude of our young people…

I don’t think Andrew Bridgen at Fathom Consulting was strong enough when he described George Osborne’s scheme as “reckless”. I believe it truly is a moronic policy that stands head and shoulders above most of the stupid economic policies I have seen implemented during my 30 years in this business. It ranks above some of Alan Greenspan’s very worst blunders. And when so many highly regarded commentators speak out against it, only to be totally ignored by George ‘I know better’ Osborne, he may really deserve to be called a moron.

Hell hath no fury like a strategist scorned.

The debate around Help to Buy appears to be settling, and the consensus coming out of it hews close to Edwards' conclusion: Help to Buy will help people who want to own a new house buy one (including as a second home, although thankfully, even Osborn was warned off extending the scheme to buy-to-let landlords). But it will do so by putting the government balance sheet to work, increasing house prices without meaningfully changing the number of houses being built.

Housing supply, particularly in the South East and London, where the largest effects of the policy will be felt, is constrained by land, planning rules and construction times; overheating demand will do little to solve that.

So prices rise, household debt rises, and government debt rises – off-balance-sheet, of course. The question which remains is whether this is malice or incompetence. Was the plan genuinely, if ineptly, aimed at increasing the quantity of housing? Or was it designed to prop up house prices for another five years, keeping homeowners onside into the next election at the expense of the young and the poor?

Photograph: Getty Images

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

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Leader: The unresolved Eurozone crisis

The continent that once aspired to be a rival superpower to the US is now a byword for decline, and ethnic nationalism and right-wing populism are thriving.

The eurozone crisis was never resolved. It was merely conveniently forgotten. The vote for Brexit, the terrible war in Syria and Donald Trump’s election as US president all distracted from the single currency’s woes. Yet its contradictions endure, a permanent threat to continental European stability and the future cohesion of the European Union.

The resignation of the Italian prime minister Matteo Renzi, following defeat in a constitutional referendum on 4 December, was the moment at which some believed that Europe would be overwhelmed. Among the champions of the No campaign were the anti-euro Five Star Movement (which has led in some recent opinion polls) and the separatist Lega Nord. Opponents of the EU, such as Nigel Farage, hailed the result as a rejection of the single currency.

An Italian exit, if not unthinkable, is far from inevitable, however. The No campaign comprised not only Eurosceptics but pro-Europeans such as the former prime minister Mario Monti and members of Mr Renzi’s liberal-centrist Democratic Party. Few voters treated the referendum as a judgement on the monetary union.

To achieve withdrawal from the euro, the populist Five Star Movement would need first to form a government (no easy task under Italy’s complex multiparty system), then amend the constitution to allow a public vote on Italy’s membership of the currency. Opinion polls continue to show a majority opposed to the return of the lira.

But Europe faces far more immediate dangers. Italy’s fragile banking system has been imperilled by the referendum result and the accompanying fall in investor confidence. In the absence of state aid, the Banca Monte dei Paschi di Siena, the world’s oldest bank, could soon face ruin. Italy’s national debt stands at 132 per cent of GDP, severely limiting its firepower, and its financial sector has amassed $360bn of bad loans. The risk is of a new financial crisis that spreads across the eurozone.

EU leaders’ record to date does not encourage optimism. Seven years after the Greek crisis began, the German government is continuing to advocate the failed path of austerity. On 4 December, Germany’s finance minister, Wolfgang Schäuble, declared that Greece must choose between unpopular “structural reforms” (a euphemism for austerity) or withdrawal from the euro. He insisted that debt relief “would not help” the immiserated country.

Yet the argument that austerity is unsustainable is now heard far beyond the Syriza government. The International Monetary Fund is among those that have demanded “unconditional” debt relief. Under the current bailout terms, Greece’s interest payments on its debt (roughly €330bn) will continually rise, consuming 60 per cent of its budget by 2060. The IMF has rightly proposed an extended repayment period and a fixed interest rate of 1.5 per cent. Faced with German intransigence, it is refusing to provide further funding.

Ever since the European Central Bank president, Mario Draghi, declared in 2012 that he was prepared to do “whatever it takes” to preserve the single currency, EU member states have relied on monetary policy to contain the crisis. This complacent approach could unravel. From the euro’s inception, economists have warned of the dangers of a monetary union that is unmatched by fiscal and political union. The UK, partly for these reasons, wisely rejected membership, but other states have been condemned to stagnation. As Felix Martin writes on page 15, “Italy today is worse off than it was not just in 2007, but in 1997. National output per head has stagnated for 20 years – an astonishing . . . statistic.”

Germany’s refusal to support demand (having benefited from a fixed exchange rate) undermined the principles of European solidarity and shared prosperity. German unemployment has fallen to 4.1 per cent, the lowest level since 1981, but joblessness is at 23.4 per cent in Greece, 19 per cent in Spain and 11.6 per cent in Italy. The youngest have suffered most. Youth unemployment is 46.5 per cent in Greece, 42.6 per cent in Spain and 36.4 per cent in Italy. No social model should tolerate such waste.

“If the euro fails, then Europe fails,” the German chancellor, Angela Merkel, has often asserted. Yet it does not follow that Europe will succeed if the euro survives. The continent that once aspired to be a rival superpower to the US is now a byword for decline, and ethnic nationalism and right-wing populism are thriving. In these circumstances, the surprise has been not voters’ intemperance, but their patience.

This article first appeared in the 08 December 2016 issue of the New Statesman, Brexit to Trump