Saturday, September 27, 2008

What about bringing back mortgage tax relief ?

Just had a thought whilst shaving this morning, what about mortgage tax relief ?

The problem is that too many people are defaulting on their mortgages. Currently all the plans seem to bail our the banks at the expense of the people.

What if mortgage tax relief, say on a set amount of the mortgage (as used to be the case ) was used to keep mortgages affordable - stop the defaulting and keep the banks safe ?

I realise there were market distortion reasons for getting rid of it, but if we're going to have to distort the market anyway ?

PS Perhaps Bradford and Bingley will be different to Northern Rock, as we now know the government will stand behind small northern banks. This fact may be enough to prevent to queues outside branches that killed of Northern Rock.

Update: This idea has just been backed by Guido here.


IanPJ said...

Why should I as a taxpayer subsidise someone else's lifestyle choice.

No, better to scrap income tax altogether, then tax relief of any kind would be unnecessary.

Man in a Shed said...

Ianpj - I don't like subsidising anyone else poor choices either. ( I blogged a while ago about Gordon Brown giving everyone a second mortgage ).

But if something has to be done to prevent a general banking collapse followed by an economic collapse then I like least these answers that seem to bail out the banks who created the mess ( along with a financially illiterate population ).

By the way I watched last weeks Panorama was was just depressed by the complete failure of the BBC to put together a documentary that is anything other than a emoting session.

IanPJ said...

It is my contention that we should not bail out banks, full stop.

They are a business after all just like any other, and if mis-management or poor business models take them to the edge, then they should be allowed to fall.

I am quite sure that other financial institutions would appear to fill the gaps left, but to use taxpayer money to do this is IMO quite wrong.

I now have given up on the BBC completely, finding it very hard to watch almost anything, be it play, documentary, sit-com or news that does not carry in some way the 'on message' government view on every subject.

Man in a Shed said...

The problem is not so much the banks senior managers or shareholders losing money, but the depositors.

Many banks are effectively a legal confidence trick - they don't have the money to pay their depositors back, as they've lent it out. ( Interestingly HSBC are an exception here ).

This is why governments back deposits (at least private ones) - in the hope their bluff is never called.

This is why I withdrew the vast amount of my companies assets from HBOS, as I'll lose them if they go down (which they still might ).

So we have a situatation where tax payers defacto guarantee banks.

Or rather we all guarentee the banks and its our money that's being lost right now.

The politics that follows is a game of pass the parcel before the public twig what is going on.

IanPJ said...

Many banks are effectively a legal confidence trick - they don't have the money to pay their depositors back, as they've lent it out. ( Interestingly HSBC are an exception here ).

You are right and wrong here.

Like most people you believe that Banks only lend out what they get in in deposits. Wrong. What they do when you take out a loan or mortgage is create a debt, with a guarantee of income.

They then leverage that debt, by going to the market and borrowing against it, not once, not twice, but in the case of the B&B for instance 180 times.

If you would like to see how that works, I can recommend a video on the LPUK website called 'Money as Debt'.
(its about 3/4 way down the page)

Everyone should know how the Banks use Fractional Reserve Banking (FRB) and have taken us all, and will continue to take us all for mugs into the future, unless we move to change it.

ps HSBC uses exactly the same system.

Man in a Shed said...

I'll have a look at your link a bit latter ( trying to get some work done this afternoon - as I work for myself ).

My comment on HSBC is based upon last weeks Panorama report ( which I thought was a woefully pathetic documentary in general ).

The Great Simpleton said...

I've been thinking about this post over the weekend and have to agree with Ian. Not only would the Government be using my money to bail out the people who got themselves in to trouble, they create an additional moral hazard for the future. people will extend themselves further and further, knowing that in the end they will be bailed out.

Yes it will be painful but people have to know that they are responible for their own actions.

Having said that I feel a little guilty as I benefitted from MIRAS from 1977 to when it was abolished.

As to Ian's comments in FRB, that in and of itself isn't the problem. The problem was that nobody knew the extent of dodgy loans so that capital adequacy ratios were far too low.