What can the government do to free up mortgage finance?

government bailoutsWhile much of the attention during the current financial crisis has centred upon the money markets and the lack of liquidity there is one word which sums up the whole issue of the credit crunch, confidence. Confidence in the system, confidence in investments and confidence in governments around the world are all vital elements of any successful financial system. Once the confidence starts to ebb away it is not easy to regain as we are seeing at the moment, but it will turn around at some stage.

The last 18 months have seen many events which few thought they would ever see in their lifetime, events such as the demise of Lehman Brothers, the number of official investment banks in the US reduced to zero, the fall of Bradford and Bingley and the need for HBOS (which includes the UK’s leading mortgage group Halifax) being bailed out by bitter rival Lloyds TSB. While it would be nice to say that the worst is over, this is probably not the case at all with more pain expected in the short to medium term. So what can the government do about the situation?

Background to disaster

In order to see where we need to go to it would be sensible to see where have come from, how big a part the authorities played and exactly why the credit crunch occurred.

While it is easy to throw accusations at those in the City, the so called fat cats, and blame them for the situation we are currently in that would not be the total truth. In the US and the UK we have slowly seen a move towards self regulation in financial markets over the last decade with governments pushing the money men to make their market a central component of the worldwide investment industry. The problems seem to have stemmed from this ever more aggressive move to attract each and every investment company to their market and offer them both traditional and new investment tools.

In the US we saw the rise and rise of the sub-prime market and an ever increasing number of investment bonds which consisted of capital elements of some mortgage agreements, income elements of others – basically allowing investors and investment banks around the world to pick and choose their level of investment risk. In the good times this seemed very much like money for old rope, there was little risk and larger than average investment returns we being made available.

So while the authorities are now sitting back and blaming the money men in the City, these are the very people that they took under their wings and used to bring more foreign investment, more foreign income and more businesses to their shores. But like so many government led schemes the support for the City and the US financial district soon disappeared when votes were at stake and the situation started to worsen.

What can the authorities do next?

The last 18 months have shown how utterly dependent both the UK and US economies are on property and the housing market. The vast majority of our incomes go towards the cost of paying for our homes and when these costs started to creep higher while job security started to weaken, there was a recipe for disaster. But this was not the main reason for the fall because we have been through similar boom and bust scenarios before, but not on the scale we see today.

The problem today is the trust factor in lending money to the money markets, the concern that you may not get it back and the wheels of commerce slowly grinding to a halt. Banks all over the world had over extended themselves with sub-prime investments and they are paying the price. Toxic investments are spreading throughout the community and some companies do not even know how to value the investments!

There is a growing need for money and more money to keep the wheels of commerce grinding, which will then kick start economies and finally see us out of this situation. The governments around the world can reduce interest rates as much as they want but that is not the answer, there is a growing need for a central pool of liquidity to get the money markets moving again and the wheels of business turning a little quicker.

Using the US plan as an example, by exchanging the toxic investments of yesterday for cold hard cash this should see liquidity return to the markets, increase mortgage finance and see a little bit of interest return to the property markets. It does not make a difference if you can borrow money at ten percent or one percent, if the liquidity is not there then the rate of interest is irrelevant.


This economic collapse is like no other seen since the depression of the 1930s and is sure to last for some time yet. The future of the worldwide economy has now been taken out of the hands of consumers and placed firmly in the hands of the developed nations. The need to instil confidence back into the system has never been greater, and while $700 billion may sound like a large bailout, let us not forget that the US authorities have already spent $900 billion in bailouts this year alone.

In many cases the figures in question are irrelevant and it is more the attitude of governments to ensure confidence is injected back into the system which is more vital. The next few months will see the attitude and signals from the likes of the UK and US governments move markets either way in an instant. There is a need to be realistic about the immediate future but also to look further ahead and try to revitalise areas such as mortgage finance.

If mortgage finance is still dead in 12 months time then the fall in property prices in both the UK and the US to date will seem like a small blip.


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