ILS FOR MINISTERS OF FINANCE, AND CENTRAL BANKS

YOU AND YOUR TEAM SHOULD READ ALL PREVIOUS PAGES FIRST.

ALSO READ THE LOW INFLATION TRAP PAGE.

IngramSure (UK) Ltd is a consultancy with considerable expertise in these matters and can be contacted through Edward Ingram by email here.

One of the most problematic decisions to be made by central banks is 'where and why' to set the interest rate next month. 

If the interest rate is raised too fast, the housing sector will tremble and so may the whole economy. Confidence is fragile and once it starts to crumble, a recession looms as spending and confidence both join forces to create a vicious circle and a downwards spiral.

The reason why the very large housing sector is so sensitive to interest rates is because when the nominal interest rate is moved, the size of mortgages changes, inflating or deflating the collateral security and inflating or deflating wealth, and that inflates or deflates confidence. To understand all this thoroughly you should study every page of my two blogs. But do not rely on that alone: especially, read the page on Why no NDA?

At the same time, the traditional Mortgage model can divert a lot of money out of spending in the economy even when the true interest rate is not changing. This means that during an economic recovery, when AEG% p.a. is rising, if the nominal interest rate is not rising then the true interest rate is falling; or if nominal interest rates are rising, this is causing a negative feedback by hiking mortgage servicing costs, threatening wealth stored in properties, and slowing the recovery.

In summary, the currently favoured mortgage model has an inbuilt bias towards low AEG% p.a. and slow economic growth. If the economy recovers, property prices may tumble and confidence may drop, slowing the recovery or maybe reversing it because confidence has a spiral effect o spending and confidence (both) – either upwards or downwards.

What would happen with ILS Mortgages and with the new banking regulations in force, (see earlier pages and especially read NEW GUIDELINES FOR REGULATORS on the sister Blog), will be that as the economy recovers the central bank will be free to raise interest rates to keep pace with AEG% p.a. plus or minus its usual true interest rate margin, (see Glossary), without unbalancing either spending, or wealth, in the economy.

In fact, a small lag in raising the interest rate will accelerate the recovery, and when the true interest rate catches up, there will be a slight, but noticeable, adjustment in the true interest rate in the housing finance sector, which favours savings and disfavours borrowing.

TAXATION

What you should ask the tax department to do is to not tax any AEG% interest, because that would be a tax on wealth and not a tax on income. That tax element can cause interest rates and borrowing costs to rise.

At the same time, they should not be giving tax relief on AEG% interest either because that is a gift of wealth to borrowers who would not need that kind of help anyway if my ideas on mortgage and debt structures are adopted.

I have explained this again on another page somewhere - looking for that just now!