Friday, March 16, 2012

Hard-to-believe news from GB

Two headlines from Great Britain caught my eye this week:
It was quite hard to believe that either one is true, but both seem to be seriously planned by authorities in GB. The 100-year bond is of course a very nice way for the government to finance itself and maintain deficits for a long time. But what kind of morons would buy them at very low rates? Unless we are going to have very low inflation or even deflation for the next 100 years those papers will be worth a tiny fraction of their value when they are due. And meanwhile you are lucky if you are even compensated for the inflation itself.

The "NewBuy" scheme on the other hand shows that nothing has been learned from the subprime crisis. It's not exactly "NINJA" scheme ("No Income No Job or Asset" -  and you still get a mortgage), but it's certainly creating risks to the system. If you only have to put down 5% and government is going to guarantee the rest you may loose interest in servicing the debt if the housing market collapses 10%, which is not a big correction. Like in U.S. people may walk away and let the banks (or in this case the goverment) handle the remaining mess.

The scheme seems to be based on expectation that the house prices go only to one direction: up. This assumption combined with granting loans too loosely caused the subprime crisis in U.S. Combine a house market price correction with economic downturn (job losses) and you get a disaster.

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