Former rate-setter Adam Posen warns of danger of Help to Buy property bubble

Bank needs to dampen impact of Chancellor’s scheme ,

Ben Chu
Friday 24 January 2014 03:36 GMT

Adam Posen, a former member of the Bank of England’s Monetary Policy Committee, has urged the Bank to “dampen” George Osborne’s Help to Buy scheme, saying it is in danger of creating a new property bubble.

Under the scheme, the Government offers first-time buyers an equity loan and also guarantees 15 per cent of other mortgages.

Speaking to The Independent at the World Economic Forum in Davos, Mr Posen said: “In an ideal world I’d get rid of it except this equity piece which is sort of useful. But it’s not for the Bank of England to say so what they’d be doing is trying to dampen it down by raising LTVs [loan-to-value requirements], looking more critically at the mortgage market, asking for capital provisions, just generally trying to tighten it.”

On the UK’s commercial banks, Mr Posen said he was “shocked” by a speech made by Mark Carney last October, in which the Bank of England Governor suggested the UK could cope with a financial sector whose assets were 900 per cent of GDP if the regulatory system was sufficiently robust.

“Ireland, Iceland and Switzerland all tell you that having [bank assets] too many times GDP is a mistake,”

Mr Posen also slammed the European Central Bank for its handling of the eurozone economy, which has been warned this month by the International Monetary Fund to be wary of the “ogre” of deflation.

“The fact is that they are neglecting what they were put in place to do, which is to provide price stability and support financial stability and they’re just letting that go,” he said, recommending that the central bank engage in asset purchases to support demand and also to urge the write down of debts in periphery nations such as Italy and Greece.

“They keep making the excuse saying we can’t interfere, we can’t overstep. But they didn’t have any problem overstepping a few years ago to talk about domestic politics in Italy or Greece. So I’m not happy with them.”

Mr Posen, who is an acknowledged expert on the Japanese economy, was more complimentary about policy in Tokyo, describing himself as a “big fan” of the reform measures being pushed through by prime minister Shinzo Abe.

However, he warned that if Japan is ultimately to pull out of its two-decade long stagnation successfully companies needed to put up workers’ wages in order to boost consumption.

“There is no question that nominal incomes will go up some. Even the most recalcitrant companies are saying we’ll do more Christmas bonus, guaranteed overtime. But the question is how many of them do actual salary increases rather than just guaranteed bonuses. That to me is the big variable we’re all waiting on now,” he said.

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