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
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
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.
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
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.
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%
As far as I'm concerned, I'm borrowing at 3% and "lending" at 4.5%,
As far as the new tax is concerned - tough!
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.
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.
They could balance it by reducing tax on interest received and double
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...
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
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 tits (I'm sure it's just an ill-fitting
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?
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.
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.