Mortgage policy built on sand

Letter by Richard Wellings in the Evening Standard

When the government took large stakes in Britain’s banks many feared it would lead to political interference in their business activities. Northern Rock’s state-subsidised return to the mortgage market shows these fears were well-founded.

This scheme will do little to reinvigorate mortgage lending or help economic recovery. Indeed other banks are likely to suffer as Northern Rock takes business from them – a classic example of unfair competition.

If the plan encourages more home buyers to take out mortgages in a period of rapidly falling house prices and rising unemployment, we will see more negative equity and more repossessions.

The current crash is the result of too much credit leading to too much bad debt. Attempts to bring about recovery by government arm-twisting to encourage further lending are likely to hamper the adjustment process by which bad debts are liquidated and borrowing reduced to sustainable levels.

Dr Richard Wellings, Deputy Editorial Director, Institute of Economic Affairs