Base rate now 4.75%

i agree with Holmes that they could leave interest rates at 1% and there would still be a housing crash. just the peak would be even higher and the trough even lower.

Fairy Nuff. The problem with raising rates until a credit bubble is burst is that once people have the bit between their teeth in getting rich on The Magic Money Tree, the rate it takes to discourage them will be so high as to destroy other parts of the economy. It might mean a smaller debt deflation, since it should reduce the ultimate amount of debt incurred, but this is traded against undermining possibly sound investments, which won't exactly improve conditions in the inevitable recession.

That said, without leaving rates to find their own level in free markets of sound money, it's only a guess where the neutral level of interest rates lies. Could be that they're merely raising rates from artificially low levels.

Hopefully the result will be a crisis which reinstitutes sound money and government getting out of the whole business. I'm just not enough of an optimist to believe it'll happen.

FoFP

I keep reading things like this - we need a high interest rate to curb consumer debt and the housing market, but business needs lower interest rates. Surely the obvious answer from any government with balls is to tax all consumer credit (including mortgages).

If the wider economy benefits from an interest rate of 3%, but a 6% rate is needed to curb consumer debt, then having interest rates at 3% with a 3% tax on consumer credit would have exactly the same effect on the consumer in debt as upping interest rates to 6%. But businesses wouldn't suffer. And the government would be able to lower other taxes.

I'm sure there's flaw, but can't think what it is other than perhaps political. The government could give control of the "consumer credit tax" to the BOE so they don't get the blame when it goes up. To a consumer in debt it doesn't make any difference whether the tax goes up or the interest rate goes up, it has the same effect on him.

(see below)

It may be a good idea but It's not so much lack of balls as lack of predisposition to political suicide and in any case there are other ways of cooling the housing market (which seems more than anything else to be responsible for the credit explosion).

How can you hand over the power to tax to an agency other than that which has the power to spend...i.e. the government?

"Andy Pandy" wrote

OK, so I'd set up a business to "buy" people's houses for them. I'd borrow at 3%, "rent" the house back to the person wanting it at (say) 4.5% (we both "win"), with a suitable contract to give them a right to buy & all other benefits of ownership.

As far as they are concerned, it's just like they bought but with a 4.5% "mortgage". As far as I'm concerned, I'm borrowing at 3% and "lending" at 4.5%, risk-free. As far as the new tax is concerned - tough!

I'm sure such dodges could be legislated for, in much the same way as IHT dodges are now.

I'm sure that tax would be quickly circumvented. For example, how could you prevent people borrowing money in the name of their business and using it to finance the purchase of a house? With such a large difference in borrowing costs for business or consumer purposes you'd never be able to close all the loopholes to prevent widespread abuse.

Chris

How do you now? If someone were to do that now they'd be paying their mortgage interest out of pre-tax income, so there is a big incentive to use that dodge now, if it were possible.

I'm sure there'd be abuse, but I can't see any reason it would be any more widespread than other tax dodges.

It *is* possible.

They could balance it by reducing tax on interest received and double the effect.

The flaw is that again, they're interfering with efficient markets by distorting the price of credit. There's no inherent reason why a businessman investing in plant should get a cheaper loan than me investing in new Hawkwind albums. The economy after all, is here to satisfy our wants. Biasing the price would eventually hust lead to business malinestment, which isn't any better than people malinvesting in property or Hawkwind CD's.

Well yes, any government that tried this might well be out before you could say "Tulip tax".

When the housing bust comes, hands up anyone who thinks Gordon Brown won't get the blame...

FoFP

Yes, and we'd end up with an even more ridiculously complex tax system than we already have. If it was *radically* simplified I suspect there would be more money saved on its administration than would be lost to people using loopholes.

I don't think this is any more correct than saying the Tulip Bubble happened because someone brought tulips from Turkey. Bubbles happen because people are greedy, and it seems that every third generation or so loses almost all fear of credit. If a that point there's Something agaisnt which you can take credit, and recent experience leads people to believe it will always rise in price, the mechanism is there. Then all it takes is loosening of credit against the guaranteed rise in price and the mass availability of credit itself makes it possible for the prophecy to be fulfilled. The general reluctance of ost people to watch their neighbours get rich for little or no effort then brings in the folks who are otherwise skeptical and then you have the mass participation that's the last necessary ingredient.

It's a mighty thing to behold, and we should certainly congratulate ourselves on creating the largest (in terms of debt to GDP and proportion of the population particiating) credit bubble in history. Even the South Seas Bubble probably only involved about a third of the population.

Can you say "TV Licence"?

Also, the Regent in France *sold* the power to tax to John Law during the Mississippi Bubble.

FoFP

I can't take issue with any of that so I'm not sure what "I don't think this is any more correct", above, refers to.

Actually, i've a speech impediment but I don't think the TV licence goes into the state coffers. In addition to which the BBCs charter is reviewed frequently by parliament - their autonomy is illusory.

Yes, I seem to remember reading that many aspects of the tax system were privatised in Europe but a very long time ago. I doubt 'government for the people' meant much then. (admittedly it doesn't have quite the ring of truth today either). But in any case, I wasn't talking about privatising any aspect of the tax system but of the treasury releasing control of the decision of what, where and how much to tax even when such a tax is raised purely for the state. Gordon Brown is more likely to grow t*ts (I'm sure it's just an ill-fitting jacket...)

I was referring to "... cooling the housing market (which seems more than anything else to be responsible for the credit explosion)" inasmuch as I'm saying that it's not the housing market per se that's to blame. It could have been anything. It's just that when the third generation came round again, housing happened to be the main asset class on which credit is extendd to ordinary peons, and which they were most prepared to believe could go up indefinitely. If we were all borrowing to finance ever rising car prices, we'd be discussing cars instead. The actual token doesn't matter (hell, it was once tulip bulbs, and as recently as

1985 in China, a Spider Lilly bulb bubble way outdid the tulip bulbs one in terms of price reached), it's the process that's the key.

Of course, if a couple of generations refuse to buy housing on credit afterwards, it'll gut the banking and building industries, but it would be just as bad if it were the banking and car industries in their place.

That was my point. It's a tax on TV's which the takings are spent other than by the governent.

Of course when such rights have been devolved into rivate hands, it was usually in a deal to bail out the state from massive debt. Effectively the state sells the future revenue stream of the tax in question for money now to cover its debts or outgoings. Some US states have effectively done this with the Tobacco bonds (selling the future compensation payments from the tobacco industry). It could be argued that the collapse of a credit bubble might leave the government with large enough debts (from bailing out the banks for example, as has happened in Japan) that it could be persuaded by, say, Rupert Murdoch that it ought to sell him the right to levy the TV licence and regulate the BBC. If it were that, or being unable to make welfare payments, which do suppose Brown would choose?

FoFP

Option 3: The printing press.

I'm happy with this - as you say (and I have said) this time it's house prices.

Sure, but I initially responded to a suggestion that a tax raised /for/ the state coffers might voluntarily - and not under emergency conditions such as you describe below - be placed outside the control of the state.

Interesting question, but I think the OP was proposing pre-apocalyptic credit-regulation measures.

But why should businesses get 3%? What's the differences between runners of businesses, and shareholders, wanting a nicer future, and the man in the street wanting a nicer house in the next street, or indeed a house in the street he currently pays rent to a businessman for?

If it is a company, then tax on 25% of the value of the loan, plus tax & NI on the interest on the loan.

If it is a sole trader / partnership, then the loan isn't for business purposes, so it is not allowable as an expense for tax purposes.

What that man said. ;-)

Alex.