De-leveraging climate temp. & mortgage debt

11th October, 2008.

I have had an extraordinary day today, at an event in Bristol organised by the Schumacher SocietyFritz Schumacher – of Small is Beautiful fame – died in 1977, and the Society was formed just thirty years ago, in 1978.  Today’s event was hosted by Diana Schumacher and Jonathon Porritt.  I was honoured to share a platform with Bill McKibben the great leader of the Green movement in the United States, and brilliant strategist behind the 350 campaign.

I majored on the financial crisis, and links between the Credit Crunch, the Peak Oil Crunch and the Climate Crunch – and our proposed strategy for dealing with all three – The Green New Deal. Bill majored on the climate, and gave a powerful and moving lecture. (DVDs available from the Schumacher Society). We were both pressed by the energetic and committed participants to talk in more detail about actual steps to ‘the new future’. But we both were more concerned to put out the financial and climate ‘fires’ raging today – before we got down to building the new future. The delegates would not have it…..Tell us how to build the New Jerusalem they clamoured……

I had many inspiring encounters; but was especially taken by an encounter with James Bruges, author of The Big Earth Book.  He suggested that just as in the Anglo-American economies the availability of credit expanded as the house-price inflation bubble expanded, so debt repayments should contract as house-price values deflate. This is an entirely logical and fair approach, and one way in which to de-leverage the debts taken on by home-owners.

In Germany, it is not possible to obtain a mortgage linked to the current value of a property. Instead the mortgage must be linked to the average value of the property over a period of years (30 years??).  As a result, credit did not act as a pump, blowing up the value of property overall. And rising values did not automatically inflate the amount of credit in the system.

In the UK the opposite happened. As credit pumped up property prices, so the availability of credit (mortgages) was expanded to match the rising values of property, creating the vicious cycle that is now unwinding to such destructive effect. If that unwinding could be managed by forcing the banks to share in the loss suffered by homeowners on the de-valuation of the property, then some justice will have been done and people may not be evicted from their homes.

The Green New Deal group is inviting comment and debate on our report, and we plan to revise and improve our document in light of those comments. James Burges’s idea is bound to find its way in there……

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3 comments to De-leveraging climate temp. & mortgage debt

  • James Burges has an interesting idea. If the debt repayments follow the current price of house, it

    follows that the “capital” to repay varies with the current price too, right? Otherwise it would take longer and longer to repay the entire loan.

    Some problems/questions:

    * Wouldn’t the reverse also be true? When house prices rise, wouldn’t that mean that the debt repayments

    (and “capital” or loan value) go up? This might not be too popular. It would make it possible to buy at a reasonable price and then get “pushed

    out” of the market by speculators!!

    * How will this affect the current price of houses?

    * How could this be introduced now. What

    about those who already sold for a loss? What about those who bought in 10 years ago and have already a managable mortgage – should they be given

    an even more managable one? Perhaps those who bought 10 years ago would be given a less manageable debt repayment (as the current price would still

    be above what they paid).

    * What about those who have already paid off their home? They will miss out on rewards of your proposal..

    *

    What about those who didn’t buy into the boom and saved … they don’t seem to benefit from your proposal.

    * Why should there be a special

    rule for houses? What about other assets like shares? You can ask all the same questions about that.

    Please remember that we are not _all_

    debtors. There’s the poor, pensioners/retirees and savers.

    We want to be able to pay a fair price for a house and not be routed by high

    debt repayments. We do not want to reward the fools at the expense of the prudent.

  • James Bruges

    I hope Ann will take the idea of mortgage-reduction forward. But to add my inexpert view on Stephen Shaw’s points:

    Yes, it is

    the ‘capital’ that should be reduced, which would result in reduced repayments. It should be a downward-only process until a stable and sensible

    level of house prices is reached. Then other measures such as the German system mentioned by Ann could take over.

    The only practical

    approach would be for the price-related reduction to apply to all outstanding mortgages. The ‘unfairness’ issues referred to by Shaw are as nothing

    compared to the unfairness of bankers’ remuneration or their exploitation of competitive house-price rises. As Shaw points out this measure does

    not help the poorest sectors with no mortgage. But it is part of the approach to more fundamental reform.

    Shaw mentions the parallel with

    shareholding. I find it incomprehensible that we allow shareholders, with no relationship to an enterprise other than using their holding for

    gambling purposes, to, in effect, own the enterprise. Enterprise has become ‘a bubble on a whirlpool of speculation’ (Keynes).

    The real

    crises today are global warming, oil peak, exhaustion of resources and destruction of species and biodiversity. These are all driven by a growth

    economy. The present crisis gives us the opportunity to move to stability, which cannot be based on bank account money created through loans that

    attract interest – an economy that, by definition, grows.

    The government should acknowledge that the £500bn it will inject into the banking

    system is official money, like the coins and notes it prints. It is not taxpayers’ money and there is no need for it to be borrowed on the market.

    It is simply created by government. It will remedy a shortage of bank account money so will not be a cause of inflation. This is how money should

    come into being; and it should be a criminal offence for anyone other than the state to print money, whether criminals forging banknotes or banks

    creating it on computers. The banks’ role should be restricted to operating the money transfer system and making savers’ deposits available to

    borrowers.

    Official money of this sort can be spent into circulation by the government, it does not put people into debt and it does not

    attract interest, therefore it allows for a stable or even a reducing economy.

  • ann

    James and Steven, thank you for these helpful comments….and James in particular for the comment on the money now being

    found to bail out the banks….It is not being borrowed on the markets, as you say, nor has it been raised from taxpayers. The BoE is having some

    difficulty, as I understand it, to explain its origins.

    I am hoping to set up a campaign to ‘save homes/job/pensions’…and this proposal

    will be one of the solutions to the chaotic de-leveraging now taking place in the housing market. Ann

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