Present Bad Interferences To Correct Past Bad Interferences

I know that not everyone is on board with this, but it really is true that most of our economic messes are caused by governments interfering in things they don’t understand competently enough, and by rival politicians (either in the same party, or in opposition) trying to fix the bad interventions with other bad interventions that both exacerbate the original messes, and create new messes at the same time. 

To use a DIY analogy, Dave decides to drill a hole in the wall to put up a picture, but goes through an electric cable, causes a short circuit and starts a small fire; Jenny tries to put it out, but leaves damaged walls that Frank comes round to replaster and paint afresh. In doing so, Frank bashes into a pipe, and floods the downstairs kitchen; whereupon Pete the plumber rushes to the scene, but slips and crashes through the French doors. Monica the glasier comes rushing to the rescue to fix the glass, but cuts her finger and bleeds all over the floor, meaning Charlie has to come and replace the living room carpet, where in fitting it, the hammer flies out of his hand and cracks the floor tiles by the woodburner, and so on.

This is what politicians do to our economy. And all the time, the public are just egging on these mess creators to interfere with different messes. Even when they are not making a big mess, they habitually make small messes and pass them off as tidying up jobs. The example hitting the headlines this week is that in trying to gain popularity by promising borrowers billions of pounds to help them though the mortgage crisis, the opposition parties are merely giving one group of people a helping hand at the expense of other groups. If you fund the mortgage help by increasing the money supply, you make the problem bigger, not smaller. And if you fund it through taxing banks, the increased costs will be passed on to other customers of the bank. 

On the other hand, subsidising the mortgage would have a similar kind of distortionary effect, whereby demand for mortgages increases, and with not enough supply to keep up with demand, the price of property would go up even more. This meddling creates the law of unintended consequence of targeted benefits for one group at the expense of others, to which politicians are either oblivious or indifferent. It’s a kind of pass the explosive parcel fallacy.

And then we get the ingenious idea for rival meddling from Shadow Chancellor Rachel Reeves:

1. Borrowers will be able to switch to interest-only

2. Borrowers will be able to increase mortgage length

3. Borrowers can undo No.s 1&2

4. Six months before lender can start a repossession

5. FCA to advise credit ratings should be unaffected

I’ve always thought of Reeves as being quite dim, but this policy would take us beyond the dim into the downright ethically and economically hazardous. The first four are further examples of the pass the explosive parcel fallacy I mentioned, which is a sub-group of the law of unintended consequences. But number 5 is a completely ignoble form of meddling that distorts the picture beyond what anyone should hope or expect. Were the FCA to start advising under a political mandate that credit ratings should be unaffected by mortgage switches, it would have a terrible effect on the utility of credit ratings, and on mortgage rates more widely. 

Under ordinary circumstances, transparency is important, because if prospective lenders can gauge risks accurately from credit agencies, the lending and the perceived risk of defaulting are fairly well tailored for the transaction. But, if under Labour’s guidance, lenders can no longer trust credit ratings in the same way, they will have to be more risk averse with their loans – which means many prospective borrowers will be unable to get loans for mortgages, and many others will get loans but be forced to pay even higher interest rates.

All these political bright ideas I mentioned above are just the latest in a line of bad interferences designed to clean up the mess created from previous bad interferences, and so it goes on.