24 october 2011, no deleveraging at home

The big force behind the tea party movement in america is the perception that through government action thrifty and sensible americans are paying for the reckless overstretch of others, "do we really want to subsidise the losers' mortgages ?" ranted rick santelli, "this is america ! How many of you people want to pay for your neighbour's mortgage that has an extra bathroom and can't pay their bills ?". That's moral hazard of the personal kind, with a policy also echoed in europe. Now, they're at it again, as obama announces more government loans for homeowners whose mortgages are rather too high. Like quantative easing, the basic rationale for this seems to be stimulus, i.e. how can we get people borrowing and spending more again. The high priest of the policy, lawrence summers, says that us house-owners losses have reduced their wealth by over $7,000bn in the last 5 years, which obviously knocks confidence and reduces their spending. As I've said before though, this can't go on, and not because I've much sympathy for tea partiers, but because the time is never, ever going to be right to deleverage: but here we are, and it isn't going to feel great, especially for house buyers that gambled on ever-increasing prices. A hard lesson for all, that there's no such thing as a one-way bet.