The Bank of England’s proposed restrictions on mortgage and loan debt will hit young people the hardest, says John Redwood.

Debt is a young person’s game. In most free enterprise societies older people own most of the wealth. Young people borrow to get started as homeowners and business people. This happens naturally, as it takes time to save, to accumulate assets, to buy a home and to benefit from it going up in value. Most of us start out with no assets, receive no inheritance, and have to save for our old age as we work and earn. Even those who can draw on the bank of Mum and Dad usually need to borrow commercially as well to fulfil their ambitions.

It is the job of the banking system to lend the money older people save and deposit to their collective children and grandchildren who need it to buy homes, cars and other expensive assets, and to businesses who need it to increase capacity and to supply new goods and services.

Today the Bank of England is arguing that there is too much mortgage and car loan debt in our country, and this needs to be controlled. They are instructing the commercial banks to lend less. It is difficult to understand why.

The commercial banks now have much more cash and capital by way of reserves than they had during the banking crisis of the last decade. They are also more profitable again. These buffers can take care of any bad debts they do incur. Employment is expanding. As people get jobs so they can afford to borrow to buy a car or a home. The banks should be allowed to meet their aspirations. The invention of the three year car loan/lease allowed many more people to have a new car. The banks would be able to foreclose on the vehicle if someone fails to make the payments, so there is reasonable security.

Of course, banks need to examine each loan application. The individual has to demonstrate they have the income claimed and show they are likely to keep a job. The bank lending money does need to make a judgement that the person concerned will not behave irresponsibly. Most people do take their debt obligations seriously.

Current levels of mortgage and car loans would only be unsustainable if the Bank decided once again as it has in the past to withdraw liquidity from the markets too quickly and push up interest rates too far too fast. It assures us this time it does not wish to do that. There is already considerable protection against rate rises, as many have chosen to take out fixed rate loans. In that case it should allow more young people to borrow to buy a home or a car. More mortgage and car loan debt when the economy is growing and more people have jobs is not something to worry about. Over the coming days, I will describe how the Bank and government could do something that would make a real difference to reduce total UK debt that does not require squeezing the young.

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John Redwood MP
John Redwood MP
John Redwood is the Member of Parliament for Wokingham in Berkshire. He was formerly Secretary of State for Wales in Prime Minister John Major's Cabinet. He is currently Co-Chairman of the Conservative Party's Policy Review Group on Economic Competitiveness.
  • Andrew Mitchell

    Well where do the banks get the cash from? Redwood is right, people usually older people, put their savings into banks, the banks give them interest on that money, and they in turn then lend that money out to people in the form of mortgages or business loans things like that, the rates they give savers is always lower than the rate they charge those who borrow, so let’s say they give the investors 3% on their cash, and charge those borrowing 7% this means they would make an average of 4% when all done, obviously they have costs etc so they probably make about 2.5% or there about, ok?

  • Andrew Mitchell

    Can someone, anyone, give me a single example of Mark Carney getting something right? The man has some record, to date every single prediction that he’s made regarding the economy, he’s been wrong every time, this is the main reason Rees Mogg isn’t in love with the guy, Mogg views his interventions regarding Brexit as bang wrong and is over stepping his mark, I like JRM think he should concentrate on trying to get his figures right, the man is in charge of the Bank or England after all, rather than voicing his opinions regarding Brexit, keep in mind that his opinions on Brexit were just as good as his predictions on the economy, he was in total agreement (his words) with George Osborne statement that “a vote to leave the EU will mean the Housing market will crash, the stock market will crash, inward investment would dry up, unemployment would rise by 500,000 in the weeks after a leave vote going onto 3 million in the coming months, international businesses would leave the UK and UK based firms would go bust, and if a leave vote is successful then an emergency budget would be held in the days after a leave vote, all this doom and gloom Carney said would happen, and he added a bonus prediction he said was based on conversations he had with other Banks, and thus he knew that if a leave vote was successful then within days we would see many banks move out of the UK, all pure undiluted crap! The man is a disgrace and shite at his job!

  • noix

    It is unfortunate the John Redwood seems to subscribe to the myth of savers money being lent to borrowers. The truth is that a very small proportion of the money lent is covered in reserves. It is the banks that create money by lending, not the government prior to ‘quantitative easing’.

  • Nockian

    The economy is growing as a result of a cheap money bubble and a government racking up £100 bn a year of deficit/interest on a £1.9 t debt. Our economy isn’t even growing very much considering the present debt both public and private; productivity is static and wage growth poor.

    The banking system and markets are no longer functional in the accepted sense of markets. Instead the central banks have loaded up their balance sheets and the growth has been in assets prices with buybacks, mergers and tech sector unicorn IPOs. The central banks are acting as central planners attempting to pull every monetary string in order to keep the Ponzi scheme going.

    Car loans have been stretched to 7 years and there appears to be no application too risky to refuse-it’s the same old sub prime debt all over again, but now it’s on an asset that loses value rapidly, in a market saturated with vehicle sales/supply. We can guess where this might lead as used cars start piling up on dealers forecourts to be refinanced again by those who can’t quite stretch to something new. A vehicle that is depreciating and beginning to require expensive parts, but who’s owner is barely able to keep up the payments is going to begin thinking about their options- one being to just let the ‘won’t pay we take it away’ squad claim it back. A lot of finance rolled in to derivatives suddenly begins looking fragile and we have a new crash that snaps the carefully tended strings of the central bank.

  • ale bro

    how come in this era of low interest rates, graduates pay 6.5% on their student loans, but homeowners pay less than 3% on their property borrowings? clearly students are being milked like cash cows, and property owners are subsidised by the BoE.

  • MrVeryAngry

    …The commercial banks now have much more cash and capital by way of reserves than they had during the banking crisis of the last decade. …. Really?

    Not everyone thinks so..http://www.cobdencentre.org/2017/07/are-bank-capital-requirements-really-ten-times-higher-than-before-the-crisis/

    Mind you. It’s not really relevant as banks just create money out of thin air to make loans. And Carney is a cheer leader for that, which some consider, a fraud.

  • Inoff the Red

    All part of the Carney Remainiac strategy….to cause as much unnecessary hardship and blame it on Brexit, to make peoples lives as miserable as possible so that when Corbyn appears and makes promises he cannot keep, he attracts voters.

  • SonofBoudica

    The combination of cheap borrowing with pressure on housing from mass immigration is driving up house prices well beyond the ability of young people to save for a decent deposit. The ultra low savings rates are deterring people from saving, cutting income for older people and cutting tax receipts on that interest. Only a madman keeps on trying a failed policy the way Carney does.

  • thumper_the_rabbit

    You mean Carney doesn’t know what he’s doing? I’m shocked, I tell you, shocked.

  • Jolly Radical

    Indeed.
    The left-wing media obsession with the apparent evil of PCP car loan/lease arrangements is irrational in economic terms: the funds involved are barely a few thousand pounds per individual, and the car exists as immediate security in case of default. Rather, there is a definite whiff of “First the rebellious plebs voted Leave . . . now they have the audacity to drive around in brand new cars which they can actually afford! It shouldn’t be permitted!”

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