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Tory conference debt Bradford and Bingley Rogoff

Osborne’s debt plan will come at a huge cost

And so another bank goes bust and lands us, the taxpayer, with the bill. Bradford and Bingley is to be nationalised and broken up, the good bits given to other private institutions like the Spanish bank Santander, the bad bits taken on by the state. That’s another £41 billion of bad mortgages to add to the Northern Rock inventory of public restitution. Watch the Bradford and Bingley boss Steve Crawshaw, who earned a piddling £1.1 million last year, fly off in his golden parachute. Where is my shotgun?

Where is this going to end? Don’t ask: you will only be told nonsense by the government, and the regulators, and the Bank of England, just as they have told us lies about this whole insolvency crisis. They are desperate men facing the wrath of history. When the Financial Services Agency says a bank is a “well-capitalised and sound business” you just know it is time to rush for the exits.

What brought Bradford and Bingley down was its toxic mortgage book based largely on buy-to-let, liar loans and other rubbish. With house prices falling no bank worth its name wants to touch them. Except, of course, the bank of you and me – the government. Since the nationalisation of Northern Rock, the government has taken on a colossal exposure to these ‘distressed assets’ – around a hundred and fifty billion so far – in addition to the Bank of England liquidity loans. As house prices continue to fall, as they must , these assets will continue to fall in value.

The government is now responsible for the second biggest inventory of dodgy mortgages on the planet, after the US government, which now has the dubious privilege of owning giant mortgage banks, Fannie and Freddie. Many repossessions will follow and the government is going to have to push them through against adverse publicity. This creates a huge conflict of interest. The government will now do everything in its power to try to boost the falling housing market to try to preserve the value of all the rubbish they have taken on to the public books.

There are already rumours that the Bank of England will cut interest rates by half a percent later this week. It was of course low interest rates that created the housing bubble in the first place. This will push inflation through the ceiling – which is exactly where the government now wants it to be. Inflation will reduce the headline value of the loans, and will effectively force savers, taxpayers and shoppers to pay for the mess created by the irresponsible banks. Actually ,the price will ultimately be paid by our children and grandchildren as they meet the cost of the debt mountain created by Generation Greed, ie us.

Which brings us neatly to the Tory conference in Birmingham. George Osborne, the shadow chancellor will today promise a final solution to the debt problem, or the “Age of Irresponsibility” as he’ll call it. “We need a totally different approach that will tackle the causes of bubbles before they emerge” he said yesterday. There is to be a new independent Office For Budget Responsibility which will keep control of public borrowing and “bring Britain into the black”, while the Bank of England will be charged with controlling private debt.

This exercise in shutting the door after the horse has bolted may be risible coming from a party whose policies of financial deregulation led to the horse bolting in the first place. But it’s not all wrong. However, it is almost impossible to imagine the Tories actually facing the political cost of tacling the debt society their banking friends have created because. David Cameron has already said that the bankers aren’t to blame which doesn’t exactly inspire confidence.

One of Osborne’s new “responsibility” regulators will be the former chief economist at the IMF, Professor Kenneth Rogoff. This guy is no pushover, and in articles in the Financial Times has been calling for an increase in interest rates and a two year recession to clear the rubbish out of the system and allow a new banking system to emerge based on saving rather than debt. Now there’s an election manifesto for you!

Rogoff’s logic is impeccable. It has been low interest rates and inflation that has been the engine of the debt society. For most of this decade, central bank interest rates have been below the rate of inflation, which means that people have been fools to save, as anyone who has a bank account knows. This is why people put their money in houses. There was also a tax incentive to do so because houses, unlike other investments, are free of capital gains tax. Buy-to-let was encouraged by yet another tax break: allowing amateur landlords to set their mortgage interest against any profits. This was a financial no-brainer – you simply had to put as much money as possible into property.

To stop this happening again, these tax incentives will have to be scrapped. Mortgages will have to become very much more expensive and interest rates will have to rise to make saving worthwhile. Not a great vote winner. I can’t see any government taking this action, especially now it is the biggest holder of negative equity mortgages in the land. B &B and Northern Rock will help push UK public borrowing up to something around £100bn in 2010. Is Cameron going to push through the cuts necessary to get that “back into the black”? If so, he can forget about tax cuts – it would require the biggest income tax hike in fiscal history.

Are the Tories, who mostly have their own hedge funds, really going to face down their friends in the City? Most of the British banking system is insolvent as a result of irresponsible bank lending. There are hundreds of billions in duff mortgage-related assets which have to be written down for the market to function again. But the banks simply aren’t prepared to do this because it will reveal the full horror of their leveraged debt, often thirty to one, and drive them out of business. The bankers, as we saw in America, will do anything to save themselves. They will reach deep into our pockets to seize as much public money as they can before they finally go under, taking the public finances with them.

George Osborne is correct in identifying the problem as one of public and private indebtedness. But if he listens to Professor Rogoff, it won’t be a US style banking bailout; it will be a long and deep recession. If the polls are right the Tories will be in charge of this mess just when the bills are hitting the mat in 2010. Margaret Thatcher, in very different circumstances, had the bottle to face up to hard choices. I wonder if David Cameron has?

About @iainmacwhirter

I'm a columnist for the Herald. Author of "Road to Referendum" and "Disunited Kingdom". Was a BBC TV and radio presenter for 25 years - "Westminster Live" and "Holyrood Live" mainly. Spent time as columnist for The Observer, Guardian, New Statesman. Former Rector of Edinburgh University. Live in Edinburgh and spend a lot of time in the French Pyrenees. Will that do?


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