Tag: I

Good economics serves efficiency and fairness.  Good politics serves the survival of the incumbent government.  Sometimes all these considerations point in the same direction.  Sometimes they don’t.  Yesterday, in the UK, they did not.

The UK government yesterday announced that they were introducing retroactive mortgage payment insurance protection free of charge to qualifying residential mortgage borrowers; the cost of the insurance to be born, in as yet unknown proportions, between the tax payer and the mortgage lenders.

This policy is a typical example of ‘insider protection’ at the expense of outsiders and newcomers.  Rent control is another example of the same phenomenon.  ‘Employment protection’, aka as ‘protection of the jobs of those who have jobs at the expense of those without jobs and looking for jobs’ is another prominent example, especially popular in some continental European countries.

The details of the UK programme for a partial mortgage interest holiday, for up to 2 years, for households where there is a major loss of income (due, say, to a family member losing his or her job)  are unclear.  It may apply only to mortgages below £400,000.00.  You may not be eligible if you have savings in excess of £16,000.00 – a nice example of how a policy proposal in one policy area – reducing repossessions of homes, and the fear of repossession of homes – creates perverse incentives in another – inducing households to save more during the high-earning years of the household life-cycle.  The Chancellor of the Exchequer, Alistair Darling, may not be a manic micro-tinkerer like his predecessor, Gordon Brown, whose left hand had no idea of the (unintended) incentive effects of what his right hand was doing, but he can create Brownian distortions and disincentives with the best of them.

Why is this temporary mortgage interest holiday a bad idea?

Maverecon: Willem Buiter

Willem Buiter's blog ran until December 2009. This blog is no longer active but it remains open as an archive.

Professor of European Political Economy, London School of Economics and Political Science; former chief economist of the EBRD, former external member of the MPC; adviser to international organisations, governments, central banks and private financial institutions.

Willem Buiter's website

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