The economy
Glister of liquid gold
Jock Bruce-Gardyne
Ten years ago, not long after the demise of the Heath Government, I was up- braided by one of its erstwhile members for the way in which I had badgered it for what had seemed to me its excessively permis- sive attitude to monetary expansion. 'Don't you understand', he challenged me, that since we weren't allowed to contem- Plate a rise in mortgages there was no way We could keep money growth in check?' Well, times have changed. Then the mortgage rate was way below inflation. Now it's way above it — and threatening to rise again. And it's all the fault of the Government. Or so the building societies would have us believe. First the Govern- ment sells Jaguar, and all the building society depositors cash in to join the queue for shares. Then it comes up with a National Savings issue — the 28th — of never-to-be-repeated generosity, and the building societies' depositors make a beeline for that. And waiting in the wings Is the British Telecom flotation to make another massive killing amongst the societies' clientele. Even the goverment- aPpointed Registrar has done his bit to Push the cost of mortgages, by frog- !narching the New Cross Building Society into the arms of the Woolwich, thereby Inducing the Leeds to launch its new Offering of 'liquid gold' in a bid to hold its Place in the societies' pecking order ahead of the Woolwich. Nor does it necessarily end there. How much 'liquid gold' can the clearers watch with equanimity? At the beginning of the 1980s they surged into housing finance in the hope that this would help them broaden their trawl of retail deposits. It didn't, and they withdrew in good order. "0. w the building societies are piling in With well-advertised inducements for the retail depositors the clearers do have on their books — and this at a time when the beastly Government is about to drag them into the composite rate system. We have here the makings of a vicious spiral. Yet I doubt whether ministers have really grown case-hardened to rises in the mortgage rate with the passage of the Years. They are still uncomfortably re- flected in the cost of living index, and hence nee raise inflation expectations. They still hit the middle classes in their pockets and hence their political allegiance. And ifeY still pinch consumer spending — even there's precious little evidence of that as Yet. So if they are apparently not to be avoided maybe it is because we are learn- ing the hard way that there's no such thing as a free lunch.
No doubt we can blame the cussedness of things beyond the Government's control — the strength of the dollar and of US interest rates, and continuing uncertainties about the outcome of the miners' strike up to a point. But it is also true that while bargain offers from the Department of National Savings take some of the pressure of funding the government deficit off the gilts market, they do encourage the build- ing societies to reciprocate in kind, and there is a limit to their ability to show generosity to depositors without taking it out of their mortgage borrowers.
The same is true of the sales of state- owned businesses. The Chancellor regular- ly insists that these are properly treated as reductions in the need to borrow, and in bookkeeping terms this may be true. But the money used to purchase them must come from somewhere, and for the most part it does come from institutions which would otherwise have been buying gilts, or (and this must be particularly true of the forthcoming sale of British Telecom, when all the stops are out to tap the savings of the private citizen) from building society deposits. Hence of all the cogent reasons for moving assets to the private sector the Treasury's yearning for the money proceeds remains the least impressive.
But when all that has been said there remains an underlying imbalance in the pressures on the building societies. In part this is of the nature of the beast: depositors can come and go, whereas mortgagees cannot. But we compound this natural imbalance. The maverick Clive Thornton, before he departed to run (briefly) the Mirror, used to win no brownie points among his fellow general managers by suggesting that they might think twice about putting up their mortgage interest
rates if the local authorities and the DHSS were to announce that they would only pick up the tabs for mortgage interest due from households they were sustaining up to a cut-off rate. That is one side of the coin: the other, of course, is tax relief. A jump in the cost of borrowed money is much less likely to scare away customers when they can set it against their liabilities to the taxman — as the generalised tax relief on all forms of interest has proved so graphi- cally in recent years across the Atlantic.
Since there is no likelihood of the Government opting for 'truth in borrow- ing' by taking mortgage interest relief away — let alone ordering the DHSS to 'cap' the mortgage rate that they would honour — it looks as though we shall have to live with expensive mortgages. At least it can no longer be said that the building societies are taking their depositors for a ride as they used to do with rates of interest way below the rate at which their capital was being eroded. And while less exorbitant real interest rates would no doubt be nice for all sorts of reasons the plight of home owners watching the value of their assets steadily appreciating has never seemed the most compelling of them. Still, the Treas- ury might do well to be giving thought to the case for devising some more flexible instruments to add to the arsenal of National Savings, since the conventional issues do appear provocative to the build- ing societies when interest rates soften, as they have since the 28th was put on sale.
And now that the 28th issue has finally been withdrawn, the societies in their turn might be wise to pause before they all follow this week's example from the Anglia to reflect that even in the existing fiscal environment the appetite for the cash they have to offer is not inexhaustible regardless of its price. Indeed it looks as though a smidgen of consumer resistance is already t?eing encountered.
All the more would this be true if, as the optimists are telling us, interest rates are
genuinely on the turn at last. If only the car-workers of Detroit will do the decent thing and strike — so the argument goes—
then that should be enough to cool the American economy without going through the traumas of inflationary boom-and-bust next year. And after all, even the dreaded Henry Kaufman now reckons that the Federal Reserve is doing its damnedest to bear down on US money market rates.
There have been too many false dawns to permit premature excitement, though. The alarums of the summer should be sufficient warning to our own authorities not to try to jump the gun. Let's see whether the Fed succeeds in its en- deavours: and whether, if it does, the dollar begins to ease at last. A precipitate move on base rates by the Bank of England which scared the daylights out of the currency markets and forced another abrupt somersault would, as Lady Brack- nell would have put it, begin to look like carelessness. There'd be no holding the building societies then.
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