Policy merry-go-round on either side of the Atlantic

Last week, we saw on either side of the Atlantic two starkly contrasting responses to post-credit crunch financial policy. In the US, President Obama firmly rejected the politics of old. Never again would the US taxpayer be first be in line to cover the cost of failing mortgages or underwrite loans the market considers too risky. Instead, he wants to see the private sector take on more of the risk as he winds down the two mortgage giants, Fannie Mae and Freddie Mac.

Obama blamed the recklessness of both borrowers and lenders for the housing bubble and subsequent crash. He stated that “we’ve got to turn the page on this kind of bubble-and-bust mentality that helped to create this mess in the first place” and “we’ve got to build a housing system that is durable and fair and rewards responsibility for generations to come”.

But the failed policy of 1990s ‘irrational exuberance’ won’t be an orphan for long. Because this side of the Atlantic, Chancellor George Osborne is busy picking it up, dusting it off and is ready to give it a new home. The Government’s Help to Buy scheme – which is precisely what President Obama is running from – underwrites a proportion of the mortgage, thus ensuring the state takes on some of the risk.

It is no wonder, therefore, that this policy has been slammed by the IMF, OECD and the IoD who have recently called it ‘mad’. Many commentators – including, most recently, the ratings agency, Fitch – have stated it will only serve to push up prices and shore up banks’ balances. Only today, yet another story on rising house prices breaks with Help to Buy one of the key components.

Furthermore, as my colleague has discussed on this blog, the Help to Buy mortgage guarantee would bring the average local home within reach of the average double income household in only 16% of the country”.

The contrast, therefore, is stark. The US is moving away from underwriting mortgage guarantees as a result of getting its fingers burnt in 2007. The risk the government undertook – which increased in risky behaviour of private lenders during the boom – meant it beared the brunt of the crash when the bubble burst.

The UK Government either hasn’t learnt this lesson or has chosen to ignore it in favour of rising prices for the political cycle and to shore up banks’ balance sheets as many are part-owned by the tax payer. While it is true that there is some thinking about how to pass on the underwritten liabilities to the private sector in 2016, the real problem the UK faces is the lack of supply of housing.

If the government wants to help people to become homeowners, it will need to focus on building more homes that are affordable to people in low and middle income groups across the country, instead of simply inflating prices for a short term gain.