Index

AFFORDABLE HOUSING AND PUBLIC CREDIT

Frank Taylor

The human mind works, and can only work, by information redundancy. Thus those things in the world with which we are most familiar get held closest to our breasts, whilst those things with which we are least familiar are consigned to the outer darkness of suspicion and hostility. 99.95% of all human opinions are prejudices in the truest sense of the word; Given Truths held as gospel on the basis of a mere fraction of the available fact and argument.

Therefore the greater the novelty the more effort it takes to persuade. Political and economic novelties, indeed anything that involves changes in fundamental ideologies, frequently prove to be the most intractable of all.

The Ford Edsel was a project of Robert MacNamara whilst he was president of the Ford Motor Company. Hyped as a world beater, it was a turkey. Many went to the showrooms to kick tyres, slam doors and admire chromium; but few bought. People said it was all because of the shape of the radiator grille. There are many Ford Edsels in the world of political and economic ideas.

Three generations have passed since public credit commanded any sort of widespread debate in the political and economic mainstream. It too has become an Edsel. As Greens know all too well it is one thing to have good ideas, it is quite another to sell those ideas in the political market place.

Public credit has the double disadvantage of being unknown and unfamiliar to the general populace, and of commanding profound hostility amongst many in the economic elite who do know what the term means. As usual such hostility derives from ideology, that complex interweave of vested, academic and political interest; ideology as a psychological ka.

All political innovators face the challenge of how to sell their ideas. How, then, do we sell the idea of public credit?

This can only be achieved through precisely that mechanism which now blocks its progress. ... that of self interest. Unless it were to appeal to such interest most people, even if the fringe who now support it were to get their voice heard loudly, would regard it as at best an abstraction, at worst a menace fraught with risks of economic instability, inflation and government profligacy.

In order to popularise public credit its operation must be linked to positive and immediate benefits. It might be argued that a citizen's income would provide such a benefit. But that argument I deliberately leave aside to look at other ways in which public credit could provide tangible and popular benefit.

These are firstly to provide the finance for a crash programme to reduce carbon emissions by investment in building insulation, green energy and public transport. That, again, I will leave for another time. The second is to provide affordable housing.

Before developing that theme I must voice great caution against the 'big bang' approach to monetary reform. There are several reasons for this.

Firstly a major economy going it alone on such a project might well incur the wrath of the George Soros's of the world and face economic destabilisation. After all Christmas is not popular amongst turkeys and the great finance houses of the world are unlikely to view favourably a substantial reduction in their power and profitability. In truth we don't know what the reaction would be. But it is always a risky business, if not a politically dishonest, to predicate key policies on rigid presuppositions on how powerful third parties, over whom we have no control, might react and whose attitude they may not even presently know themselves. Hence the need for caution if not stealth.

Secondly the sceptics have a point. Monetary reform has never been tried in a modern peacetime economy. Inevitably it would be a huge experiment. Proponents of monetary reform might point to Lincoln's Union, World War II Canada, and the British issue of 1914. These were all wartime expedients. Against that Revolutionary France might provide a warning as to how government issue of currency by fiat can go hideously wrong.

It is precisely because of the experimental nature of monetary reform that caution would be necessary. We cannot be certain as to how debt free money would react in the economy. Problems could well lie in the sheer scale of present debt. Government, corporate and personal debt now command a debt/GDP ratio of a staggering 2:1. Introducing debt free money into such a situation would be like melting a huge glacier. Melt it too quickly and you get floods; too slowly and you get drought.

Reformists may be right in saying that the correct policy would be to issue currency to shadow M4. But it must be remembered how the monetarists came unstuck in the 1980's. Thatcherite theory developed in the 1970's look so neat and clean cut until it came up against the practical problems of deciding what is money and what isn't, and what economic indicators to track. Since then electronic and 'near money' has hugely increased in an age when shareholdings can be cashed within hours or even minutes.

Monetary reform could well encounter similar difficulties. M4 may be correct but then it may be either too restrictive or too liberal. And which would be the primary indicators and in what combination? Inflation? Employment? External trade balance? Productivity? Interest rates? All of which would have to take account of natural leads and lags. The consequences of a policy decision made today might not be seen for 1,2 or 3 years. More reasons for caution.

Lastly we must hold it in mind that such an experiment could not be allowed to fail. Such a failure could be fatal to any prospect of wider monetary reform.

Thus this paper is predicated on the need for a cautious, bit-at-a-time, approach and the need to popularise the principle of public credit during such a period. It envisages an interregnum during which we would begin the process of melting the debt glacier by progressively increased credit restrictions on the one hand whilst progressively injecting public credit on the other.

The absurdly inflated housing market is driven by debt. Whilst housing supply may be a factor is stands to reason that if you pump cheap, long term credit into a non-productive asset whose supply is relatively inelastic, then price will inflate. It is strange how this aspect of the process is never discussed! That so many people think that such a process leads to the creation of real wealth is enough to make the most phlegmatic person want to bang their head hard against the nearest wall.

That so many low paid people, especially public sector workers, are thus priced out of the housing market, is a serious and growing problem. Importantly it is an issue which holds public attention and sympathy. We have an issue which is therefore ripe for a public credit solution.

If we assume caution and a modest beginning to the issue of public credit then a 10 billion per annum (around 1% of GDP) injection into affordable housing for public sector workers would be a good place to start.

Instead of rents tenants would be paying an interest free mortgage. There would only be an administrative charge of at the most 0.5% (probably nearer 0.25%). Every payment made would thus buy equity in a lifeholding in the house. By 'lifeholding' I mean that they would have every right of ownership, occupation and inheritance of any other householder except that the valuation of the house, based on the cost of construction, would be fixed for all time and that such a price could not be exceeded on any subsequent sale. Of course firm provisions would have to be made to outlaw any extraneous payment or consideration on such transactions. The only way in which the price of such properties could be altered would be by statute, for example in the case of a prolonged fall in land prices.

Such a lifeholding system would have huge advantages. It would permit the lower paid to get on the housing ladder and acquire a secure asset which members of their family could inherit. Since large interest payments would be obviated disposable income would increase substantially over time, thus yielding an important redistributive tool.

There would be no risk involved in a lifeholding loan since the house value would be fixed. This would make lifeholdings hugely flexible. Since no extra interest would be involved paying down the mortgage could take place over ten years or forty and payment holidays would be easy to arrange. Equity could be easily transferred on sale from one house to another, effectively little more than public housing 'swaps' are at the moment.

Once such a scheme had bedded in the next step could be to transfer all public sector housing to lifeholdings. We could look forward a growing stock of low cost housing which occupants actually controlled, and in a way which enhanced their disposable incomes, yet would not be subject to the inflationary casino of the open housing market. Within half a century an entire and much enlarged public housing stock could effectively be free of charge to its occupants, and since all debt had been repaid this would have taken place at no net cumulative cost to the public purse.

Frank Taylor

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