Thursday, 15 January 2009

Taxpayer loans to people who want new cars: Labour's latest bail-out wheeze

When I find myself in agreement with both Friends of the Earth and the Church of England I know that something truly bizarre is happening.

And bizarre is the nicest word I can find for the Government’s plan to lend taxpayers money to private citizens so that they can buy new cars.

Apparently, the British borrow a staggering £20 billion a year to finance the purchase of new cars. And with credit drying up and sales down 36.8% on the previous year, motorcar manufacturers have been left with thousands of unsold (some might say “unwanted”) cars.

Step forward Lord Mandleson, scourge of savers and friend of the spendthrift.

The Times reports that car-buyers are to receive loans from the taxpayer: finance companies linked to the auto industry will be given access to the Bank of England’s special liquidity scheme so that they can continue to offer loans.

It is bad enough that the government intends to underwrite mortgages at a time when the assets underpinning them are falling in value. At least a house will continue to have some value; few houses will not cover the majority of a person’s mortgage. Cars, by comparison, are not assets but consumption goods, and lose value from the moment they roll off the forecourt. What is more, the collapse in new car sales has been shadowed by a parallel collapse in the sale of second hand cars that has pushed down the price of used cars and so will hasten the depreciation of the value of new cars.

Where is this madness to end?! Will the government soon be offering interest free credit at Dixons? How long before one can sign up for an HM Treasury credit card (26.5% APR and balance transfers of up to the sum of your mortgage, interest free until the next financial year).

The fact that Britons were borrowing £20 billion a year to finance the purchase of new cars is not an admirable state of affairs to which we should be aspiring, but a symptom of the extent to which the UK had become a buy-now-pay-later culture. As the government held down interest rates so as to stoke an unsustainable boom, saving became unattractive while borrowing was made all-too-easy. The result was that economic growth and personal consumption were based on unsound foundations. The dangerous credit bubble that was created has now burst, throwing millions out of work and causing the economy to shrink by over 2% in just six months, and we cannot avoid these tragic consequences by trying to recreate the failed system.

The solution to the current crisis, and the way to avoid returning to boom and bust, is not to pour millions of pounds worth of taxpayers’ money into the hands of people who want to buy a new car. That the car manufacturers mistook inflationary demand for real demand is a tragedy, and reality will hit shareholders and employees hard. But restoring the credit flow will only push them back into fantasy, while depriving the taxpayers of the money that they would otherwise spend on other things, saving or creating other jobs. If the only way to maintain a car industry at the size it operated in 2007 is for consumers to borrow £20 billion a year, then the car industry will have to contract.

There is a recession on. People are right not to buy new cars. If the need to replace their cars, the second hand showrooms are full of good cars at great prices. If they really must buy new, they should be willing to pay the market rate of interest – which in these uncertain times is suitably high. For the government to deny this is unbelievably stupid. But then, what did I expect?


dreamingspire said...

Your argument about maintaining the car industry at the 2007 size is fallacious: they know that it has to shrink. But today's problem is the stock of unsold cars - that is what has to be shifted this year.

Tom Papworth said...

The solution to "today's problem" is to allow the prices to fall to the market rate. Using taxpayer money to provide easy loans is a subsidy to car manufacturers at the expense of taxpayers.

If the aim was not to protect car manufacturing jobs (at the expense of other jobs, though that is never admitted) then the government could simply allow manufacturing to contract knowing that in due course the cars will sell.

dreamingspire said...

Motives of government you must realise are mixed: avoiding a crash in employment now, retaining skilled organisations, fighting off a depression and deflation, holding on to votes, preparing for the reduced economy to come... Honda's decision to go for a 4 month production shutdown rather than making people redundant now (and then hoping to be able to take them on again once the stock of cars has been run down) is a private sector equivalent. Of course car prices have dropped and will drop further - and manufacturers have to adjust to that. So we see some immediate actions that true free marketeers abhor, but that's life and government.

not an economist said...

The worry is that all these measures, however reckless we may think they are, are quite likely to have a (very) short term favourable effect - another mini boom if you like. And once the politicans catch sight of that they will be emboldened and go even further.

In the States Paul Krugamn is already decrying Obama's and Congress' draft stimulus plans on the grounds that they may not be enough to revive the economy. Hence even now he is making excuses to cover his own back if his own policy proposals (which the stimulus plans largey reflect even if he had no direct involvement) don't work once implemented.

A while back I used to naively think that Labour created, and were still in power to respond to, this crisis. Hence for once we would see their/Keynesian policy recommendation be implemented and founder on economuic reality. Thus Keynesians would now keep quiet as they realised how wrong they were. Alas no. Self delusion and a refusal to accept the evidence of their own eyes seem set to obstruct any return to common sense.

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