100%

There is quite a bit of noise on the blogosphere about the return of 100%+ mortgages. This is no bad thing.

The free market position is that such deals are between the provider and the individual. The provider judges risk against ability to pay. If one has been in a stable job for some time and the repayments are less than 50% of income then it's a pretty safe bet regardless of the lending threshold. LPUK does not support government intervention dictating what banks may lend and to whom, nor does it support government pressurising banks to offer mortgage products which counter banks own risk models. Banks lend on these grounds at their own risk and should not be bailed out on an individual basis as a result of bad investments.

However, at this point, I must reiterate some of the things I said yesterday. What we saw last year was exceptional circumstances due to the adoption of international rules on accounting standards. The credit crunch is a consequence of government mitigating risk from the equation. In the United States, under the Community Reinvestment Act, there was a direct compulsion to provide disproportionately risky mortgages which spawned a market for disposal of bad assets.

Many UK banks were owners of these bad assets which made up some of their balance sheets. In the UK the rules regarding capital adequacy and Mark to Market (EU rules) lead banks to believe that their asset worth was higher than the reality and made loans up to that value. Subsequently they loaned out more than they were worth. When it was discovered that CDO bundles were phony they were prevented by law from lending leading to a freeze in inter-bank lending, from which all subsequent economic problems flowed. The bailout was an emergency measure to restore capital adequacy to prevent a total collapse of the banking system on which so much depends.

While Austrian School economics does apply, the perversion of the banking system via various transnational regulatory mechanisms is unprecedented and at no time in history have banking systems been so intimately intertwined with other business systems. Not least ATM's, PAYE, BACS payroll etc. The consequences of a cascade failure are too dreadful to comprehend and the crisis was not necessarily the result of malinvestments since many of the C rated assets were still performing. This was a failure of regulation. Whether or not a collapse would have been a consequence was simply not a debate any Western economy had the luxury of affording itself at the time. It was a gamble and one of the few instances where doing something was preferable to doing nothing.

It is a reasonable assumption that LPUK does not support this bailout, not least because there is zero transparency as to who gets the money and why and because it gives government licence to dictate lending policy or at least gives government undue leverage. This is not an unreasonable objection. I have deep reservations myself in that government is incapable of managing a crisis without affording itself more control and the long term effects of further intervention could well be more problematic to say the least. Extracting government from private affairs once it is involved is never easy.

As those who questioned the Iraq war demanded an exit strategy we also demand an exit strategy from the Banks. It is not the business of government to intervene in banks or run them since it is singularly incapable of running a the proverbial brewery piss-up.

I can therefore say with certainty that LPUK would demand that the FSA be abolished and all control of fiscal regulation be returned to the UK under a single regulatory authority. My own view is that Mark to Model be instigated at the first opportunity, after which all direct government intervention in banks should cease and a a timetable for withdrawal be presented to parliament, followed by an enquiry which the government has so far denied us.