Opinion: How the government can spend billions on stimulus without borrowing a penny more

In his defence of his dexterously lethargic approach to managing the economy, George Osborne portrays his detractors as Icarus-like figures forgoing prudence to pursue fantastical growth amidst the sunny uplands forever just beyond the next horizon.

The Chancellor would contrast himself as a wise head trying to counsel Icarus towards caution, as Daedulus did in the Greek myth.

But if Icarus was wrought low by over-reaching himself and flying too close to the sun, Daedulus’s demise came when he couldn’t escape from a labyrinth of his own creation. Osborne is risking this outcome.

I described the Chancellor’s economic management as dexterously lethargic above because he, like a moody teenager, is going to great effort to avoid doing anything very much at all.

Scheme’s such as the Funding for Lending (I outline the detractions here) are an attempt by the chancellor to play Daedalus.

Inheriting an economic mess made from an unsustainable housing market model, Osborne is determined to construct a Labyrinth to guide him back to growth fuelled by house prices, avoiding the path of least resistance, borrowing more money, which he decries as an Icarus like attempt to fly towards the sunny uplands of growth without firm foundations underneath.

In the Greek fable, a route out of the labyrinth was found by virtue of a ball of string. This article proposes a ball of string from which the coalition can spread its wings and go for growth whilst leaving a clear pathway back to economic stability.

The Treasury collected a dividend of £2.1 billion from the asset which the media refer to as the ‘bad bank’ bit of Northern Rock.

This is a peculiar, but valuable asset on the government’s books. On the state accounts it is valued at £42Billion. The peculiarity comes form the fact that this ‘bad bank’ takes on no new business, the principal aim is to ensure the company ceases to exist within twenty years as those mortgages issued by Northern Rock before 2007, are redeemed.

An annual return of £2.1 billion on capital employed of £42 billion compares favourably, and with 90% of the mortgages held by the company paid up to date, it’s not as unstable an investment as the term “bad bank” should indicate.

The reason the government nationalized Northern Rock and other financial institutions was to end the credit crunch and allow the “toxic” assets to exit the banking sector. But at no point was it the government’s aim to keep those assets in state control. The point was to ‘repair’ the balance sheets and wind down the insolvent institutions, we now understand what the value of those assets actually is, the government would no longer be selling them into a market racked by the uncertainties of 2007, when it was impossible to even price these assets let alone sell them.

So there shouldn’t be a negative systematic impact on the banking sector from these assets entering the market.

Coalition critics urge more borrowing for investment, others urge caution, a best of both worlds solution would be to sell the asset and use the money for a stimulus.

The buyer would likely receive a discount on the £42Billion, but still the amount raised would be a game changer for coalition capital expenditure plans.

A traditional argument against this course of action has been that the government’s ability to borrow cheaply makes it more prudent to retain ownership of fixed assets and use the revenue generated from them to pay the interest on the borrowed money.

But the peculiarity of the “Bad Bank” as an asset makes it sensible for the government to sell.

Because it won’t exist as a revenue generator in twenty years, the government cannot rely on the income from it to repay the money we borrow now. The other factor to consider is that with interest rates likely to rise in the coming twenty-four months, the proportion of those mortgages which remain paid up to date is likely to fall.

The ‘bad bank’ may never be worth as much again as it is today, the government should sell at the top of the market and use the money to build houses.

There is no doubt there would be a buyer for this sort of asset, RBS sold off parcels of loans it classed as ‘bad’.

Whether you are an Icarus daring to dream of flight to the sun, or Daedalus, counselling caution, raising money through selling the ‘bad bank’ should have something for you to favour.

* David Thorpe was the Liberal Democrat Prospective Parliamentary Candidate for East Ham in the 2015 General Election

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14 Comments

  • Maria Pretzler 31st May '13 - 6:29pm

    Might be worth noting that Daedalus flew off with Icarus, and keeping cautious, actually managed to get away….
    The labyrinth was safely left in Crete to house the Minotaur…

  • Some good out of the box thinking, Dave. A £40 billion long-term reinvestment of sale proceeds in housing would certainly be significant and rental returns could replace the income stream from dividends.

  • david thorpe 1st Jun '13 - 9:26am

    thanks for the comments all-Joe-there would also be a stream of tax returned from whcihever private firm gets the dividens…

    @Peter-sorry I was trying to use the greek references to illustrate a dilemma-if you frget they exist I hope the idea becems clearer?

  • Michael Parsons 1st Jun '13 - 11:50am

    How would the government use the money to build houses? If it gave it directly or as guarantees to banks, they would re-start their old game of inflating house prices by their lending (as they are starting to do again, I think) so as to make money by trading securitised bonds again; if they lent directly to buyers who could afford the houses except the well-off or desperate?

    But perhaps at last we are edging towards a sounder policy: direct intervention to build houses and also making funds available to councils for that as well. Since the State can (and does – cf. QE) create money as it wishes it has no need to borrow, does it? The difference is instead of allowing the money it creates to be appropriated for bets on paper price changes, it would be used for real direct investment: and why just houses? Don’t we need power-stations, coalmines (for clean-burn), railway construction, flood prevention, roads? Research into thorium power, new drugs, free education, apprenticeships? Our own national-run unsubverted SWIFT system, a revived national Giro? Why so timid|?

  • For what its worth why does the bank of england not spend its QE on direct house building and cut out the middle man. Far more use than the process up to now and would actually generate real job which are needed, create real homes whoch are needed and stop us from heading towards another house price bubble which we dont need, the bank could earn some real return on these. Even more interesting what is to stop the Bank of England from writing off the debts of £375 bn totally?

  • david thorpe 1st Jun '13 - 2:56pm

    @ tony it may well be that the BofE writes the debts off but that would have to be recorded as a lossto that sum in their accounts-and Im not sure they can do that

    as for the other bit-its not the debt that will push up rates its the fact that they stop buying any more bonds that will push up rates

    also the bank iof england cant be a house builder-why should it-the government can though-

  • david thorpe 1st Jun '13 - 3:19pm

    @ micheal

    the government should build council houses-thus taking people off the waiting lists-this also means the governments bill for housing benefit-where they pay to private landlords the rents of people on the waiting list-goes down-making the house building programme closer to self financing-whilst at the same time-driving private rents down as supply increases

  • @David this feels a bit like the emperor has no clothes. I don’t know whether this has to be recorded as a loss or not but so what it’s not real money it is created money. Who says the bank of England cannot be a house builder or perhaps to be more clear a house owner having comissioned the building of 100,000 houses or more. The current situation is fairly unprecedented so why stick to precedent

  • david thorpe 1st Jun '13 - 6:15pm

    @ tony

    the bank files accounts like other institutions-and at present it has listed in those accounts the assets to the value of the gilts it holds-it cant just dissapear

  • @david and where did those assets come from? they were created out of thin air at the click of a mouse or rather the money to buy them was? technically that should not be possible either! but there they are and removing them would not make the world implode in my opinion. I still beleive the Bof E could put money into housebuilding but of course a downward trend in house prices would have political consequences even if (and I beleive it is ) it was the best thing in the long run for the country as a whole (and I speak as a house owner)

  • david thorpe 1st Jun '13 - 9:31pm

    the money to buy them was created out of thin air-but it exists on the Bnak of Englands books-also what the bought with the money was gilts-which exist the same as property Im not sure how they could be vanished in a way which wouldnt cause other holders of gilts to panic-

    I actualyl agree with you that house building should commence-but the bank of england have enough to do without becoming a property company

  • david thorpe 1st Jun '13 - 10:12pm

    @ michael parsons

    the government doersnt creat money-the bank of engalnd does-and creating too much of it is massively inflaitonary….

  • Michael Parsons 2nd Jun '13 - 10:28am

    @ david thorpe

    That’s like saying it is not the engine that makes a car go but the wheels!
    As to inflation, it depends what the destination of the money is: put into the creation if real (not financial) assets it provokes growth. At the same time the currently unlimited power of the bank system to inflate the money supply that results would need to be brought back under control, as it always was in the past by the numerous methods available to the State. And the promotion of savings bonds, disintermediation of lending by arrangements for direct contact between lenders and borrowers thus by-passing the wretched bankers, and exchange and import controls carefully planned to localise the demand for and so the benefits of the expansion programme need to be implemented by a system of transparency. There is little point in getting ourselves into foreign balance of payments difficulties by buying houses and power stations from abroad, for example, except as a carefully controlled training process for our own industry; a point carefully avoided by the present calls for spending on infrastructure, you will note:.promoted as they often are by those who profiteer from global transport and cheap labour systems, not to mention corrupt kick-backs that cushion an MP’ working day!

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