Wednesday, November 14, 2018
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Permanent, Built-In Bailout


It seems that bitter lessons have been learnt from the 2008 Global Economic Crisis; governments and corporations are moving to consolidate their access to public funds for future crises and better manage the public perception of it. One small but clear sign of this is the ‘Help to Buy’ scheme established by the UK government.

Benevolent and Magnanimous

Ostensibly benevolent and magnanimous, a perception about the scheme reinforced by its title and energetically publicised in the thoroughly uncritical media, the Scheme offers assistance to would-be first-home buyers who are struggling to raise a deposit, helping them onto that fast-receding bottom rung of the housing ladder before it disappears out of their reach forever.

According to the government’s Mortgage Guarantee Scheme a buyer with only a 5% deposit raised is able to buy a home with a 95% loan thanks to this magnanimous offer.

Mortgage Guarantee Scheme

The linchpin of the scheme is, of course, the government’s guarantee of the upper £30k of the loan. How thoroughly benevolent! How exceedingly magnanimous!


There is a general view that interest rates increase with the level of risk and in practical terms, most of us have found, even if we don’t circulate daily in the world of finance, that an 80% loan costs less, in terms of interest rate, than a 95% loan; it’s all about the cost of risk – so I’m told.

However, despite the government’s guarantee to the lender of the next £30k, effectively securing the entire loan at the marginal-risk of an 80% loan, the lender is of course, at liberty to charge the interest rate they would normally charge on a 95% loan. No benefit to the borrower here.

Gleeful and grateful, the borrower might feel relief at finally being out of that hopeless race of seeing an annual £5000 savings erased by the £30,000 average rise in house prices in their area and the benefit may be real if house prices continue to rise and not suddenly fall, triggering the all-too-familiar negative equity trap. It’s a gamble, with a lot of risk, certainly more risk than that of the lender with their 95% mortgage, fully recoverable if house prices drop by 20% and the borrower defaults.

Less obvious to the buyer and perhaps more to the point, by being in the market, buying a house at a price otherwise not affordable without the ‘help’ of the government, the buyer contributes to artificially sustaining the continued rise in house prices that plagues the hopes of other would-be home buyers. It’s a vicious cycle of speculation that profits only the banks, harvesting the premium interest of 95% loans while enjoying the luxury of 80% property security sustained at taxpayer expense by a government guarantee; effectively belayed at every round of the climbing speculation.

Institutionalised Bailout

Thanks to this scheme banks will no longer need to package up loans to fraudulently hide the risk in order to sell them on to trust funds, pension funds and other sucker-investors, incurring the risk of another slap on the wrist or a round of finger wagging. By this scheme, all of the high risk will be bought by the government routinely, as a legally-binding, built-in feature of every high-risk housing loan. Wonderful!

When the next housing market collapse arrives and with it economic downturn, first-home owners will start walking away from their government’s benevolence either finding that option preferable to paying higher-than-rent payments in order to cling on to their deposit, or simply unable to pay. In every case the lender will foreclose, evict and sell then put their hand out, backed by a legal entitlement, to the government.

My reading of this is that it is an institutionalised, built-in bailout. While suffering the nonsense of educated, working-class people who obfuscate the self-evident, corruption involved as simply government incompetence I pause to reflect on that classic novel The Ragged-Trousered Philanthropists. Unsurprising, therefore and probably to be expected is the audacity of this corruption in that it brazenly institutionalises the very thing that is the foremost cause of public anger that has pervaded the western capitalist system for over a decade.

Socialism is not a Dirty Word

One small but clear sign of the effort to institutionalise bailout is the ‘Help to Buy’ scheme established by the UK government, I dare say there are others.

Real help from the government, truly Benevolent and Magnanimous, but more significantly, reflective of some integrity in the Political System with a responsible and genuine concern for the stability of Western Society would be realised by applying proper taxation to the Corporate sector and using the revenues to stabilise the housing market, thereby forcing investment to seek their returns in truly productive activities, rather than by creaming off the earnings of home buyers by speculation from a point of advantage in the manipulated fluctuations of average house prices. Socialism is not a Dirty Word – look it up.

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