Pages are often updated.
See LATEST UPDATES daily
CLICK HERE TO SHOUT
14,500 page views in a year and a day.
Who is Edward Ingram? Check out some cuttings.
Savings and debt are two sides of the same coin. To make savings safe, first make it safe to borrow.
MY CAMPAIGN
The world has no safe place for savings and retirement funds. We can change that and we can bring significantly greater financial stability to the whole economy in the process. This is where you will find out how.
Experience has shown that whilst the economics of this may be fascinating, there is no way to explain it convincingly until the economists concerned have read and understood the mathematics.
If you can understand A = B + C + D and you know that equilateral triangles have two equal sides then you can probably understand the mathematics.
MATHEMATICS PAPER CONTENT
TO READ THAT PLEASE CLICK HERE
AS FOR THE ECONOMICS - WHEN YOU UNDERSTAND THE MATHEMATICS PLEASE RESUME HERE OR GO TO THE LINKS PAGE OF THE ABOVE BLOG.
There is not as much safety in property values, or in borrowing, as there ought to be. We can change that, and add significantly to the financial stability of the whole economy. This is where you will find out how.
All of those details can be found on the next two pages of this Blog.
----------------------------
If these things are sorted out, YOU will be so happy because then your personal and family and business finances will be safe for the first time in history, and the confidence that it will provide, together with a little management of the mortgage and bond markets as explained herein might restart economic growth, without the need for a stimulus; and preserve it into the future. There is no need to keep interest rates low if these proposed new savings and debt structures are put in place.
FLYING BLIND is admitted by our policy-makers, including our best academics. It is generally recognised that the world's economies are in need of a reform, and they also admit that they have no clear idea of what needs to be done. They SAY that they are FLYING BLIND To them, financial stability is elusive. They are looking in the wrong direction - at more regulations and more intervention but at the same time, Dr. Claudio Borio from the Bank of International Settlements has some really good observations to make about what is going wrong: asset price inflation for one thing is the pre-cursor to the majority of 'accidental' financial crises going back centuries. That includes 1929 and 2008.
That asset pricing inflation is caused by incorrect pricing of mortgages and bonds - and incorrect pricing of currencies does nothing to help.
Yet there is a solution, and out of pure self interest, here is how you can help to provide that solution. The solution is not to be found at the Austrian School nor any other school, and not in the textbooks, but in a restructuring of our debts, savings, bonds, intervention methods, and exchange rate mechanisms, so that YOU will feel financially safe, at last.
WARNING TO TOP ECONOMISTS
I have to give our top economists a word of warning here. Some of you have switched off your ears and eyes on the flimsiest of pretexts - some word that you did not like or which seemed unfamiliar. Yes, it is true that GDP can be manipulated. If that is being done then it needs to be fixed, or we need to create a more appropriate index for use for the preservation of wealth. Preservation of wealth is cost free.
And it is true that wealth is best measured as a quantity of saved income rather than saved purchasing power. The spreadsheets demonstrate this clearly by showing that when less income is repaid than was borrowed, (interest added is less than the rate at which incomes are rising) then the borrower gets to spend the income borrowed plus the income that was not needed to repay the debt.
Since incomes are a driver of spending and of the value of other forms of investment such as property and equities, we need a level playing field for savings, enabling the preservation of savings (lent) wealth, at no wealth cost to borrowers. Take out the wealth risk and borrowing is less risky and it is cheaper - for people, for governments, and for businesses. It also removes most of the wealth effect, so the business cycle will calm down. A safe foundation for an economy is then built upon which a recovery plan can be made with little need for any stimulus.
Yes it is true that the mis-pricing makes the advanced economies, where inflation is low, into the most vulnerable - yet one of you switched off when told that was so. Now Claudio Borio from the Bank of International Settlements has observed the same thing. So why did you switch off your eyes and ears? You assumed that I was stupid and that professors and bankers who have done peer reviews are not thinking straight. Don't be conceited. I can give several other examples.
BACK TO MAIN TEXT
In this regard we need two new structures:
1. BONDS
For Bonds we need an index link to GDP or to aggregate incomes or to average incomes. This will be the cheapest way for a government, a business, or a mortgage lender to preserve the wealth that they are using, borrowing over a fixed period; it will safeguard the fraction of GDP that people earned and decided to lend to the bond issuers. Removing wealth risk reduces borrowing costs. The market price of those bonds will then be more closely priced to everything else in the economy. Safeguarding that wealth that was borrowed costs the users of the funds no wealth. It costs NOTHING - no wealth (no income, no share of GDP)gets transferred from the lender to the borrower for the borrower to spend.
Returning the wealth (the income or share of GDP) that has been borrowed costs no wealth or income.
Economists have not understood that wealth is not purchasing power alone. There is another definition. Readers can see a number of examples in which it is shown how wealth moves from the lender to the borrower id that wealth invested is linked to the prices index. Some examples are given here at the Ingram school blog.
The reason why it is cheaper is because it takes away the wealth risk from both sides - the lender (your savings) and the borrower, whose ability to repay will not deteriorate as inflation rates, deflation rates, or interest rates change. It correctly prices the investment and the debt.
A GDP of such borrowing will still be a GDP a decade later and if the economy is in trouble then the borrowing government (or home buyer or business) will not be handicapped by fixed borrowing costs while revenues or incomes are falling. Both income and costs will be reducing at the same time. For a government, borrowing more, when needed to meet rising social security costs, will not be very costly or dangerous.
Some in treasury departments who are used to offering fixed interest bonds worry that investors want a higher cash flow than just the 1% interest or similar that people need to encourage them to buy these bonds; but then they can easily offer more cash flow by repaying some of the capital just like a home buyer does. This is an ideal investment for some annuities too. The cash outflow (repayments of capital and interest) can be funded by making new offerings of bonds.
Then there is the whole savings and investment industry which is geared to using fixed interest bonds. Do you really think that the end users are happy to use these when they are not given any insurance against the wealth risk? When i was a financial adviser I apologized to my clients because I could find no safe place for their retirement funds.
Yes, it needs an educational effort. Have a look at my IMPLEMENTATION page. And there are the NEW FINANCIAL PRODUCTS RESULTING to see.
2. MORTGAGES AND BUSINESS LOANS The other thing we need to notice is that the price of mortgage repayments and business loans do not behave like anything else. The pricing of new and existing mortgages and loans have their own ways of pricing the repayment cost. They are not natural ways. Linking to nominal interest rates is NOT creating any link to the price element of the interest rate. That link gives a wrong pricing. Rents rise when incomes rise, and so do most other things. So borrowing costs - they have rules all of their own. They simply do not fit in. They change multiple times faster than all other prices except maybe wrongly priced bonds and rightly priced equities. They create an unacceptable level of risk. But unlike equities a secured loan is an investment that is not supposed to carry much risk.
The alternative way of pricing mortgages can be found at the Ingram School with a lot of illustrations and examples. The just added 8th May 2013 Annex to Chapter 5 gives some simple sketches that make it rather clear.
HOW THINGS HAVE CHANGED This wrong pricing did not matter too much a century ago when few people borrowed to buy homes. It did not matter much in nations where interest rates were high and not a lot could be lent. Economies can be likened to a ballroom full of dancers. When all of the dancers are pricing things in to the same music (aggregate demand) all is well. But when some dancers dance to a different tune and fix prices differently, using nominal interest rates and fixed interest rates, and when they crash as a result of doing that, the dance can go on if most dancers are not involved. But when half of them are dancing to their own music, having borrowed or lent huge amounts in total, and when they crash down, the whole dance becomes a shambles.
So we need a new mortgage model which dances to the same tune; and that is what we can have. The new model is so much safer in every kind of environment and it does so much less damage to the economy that it needs to be introduced as soon as possible.
The correct way to price debt is in a way that links the repayments to incomes. Incomes drive aggregate demand. But the cost has to be higher at first and lower as time passes. That does not need to destroy the link to incomes. If incomes are not rising then the cost of the repayments will fall every year. If incomes are rising fast then the payments will rise slowly.
The interest rate will find its own level, such that the rate at which it transfers wealth from the borrower to the lender becomes the price. The price is NOT the nominal rate of interest. And it is NOT the real interest rate. It is the marginal rate above Average Earnings Growth (AEG% p.a.). It could also be the marginal rate above the rate of growth of GDP. If you cannot believe this then look at my spreadsheets. They prove this is so.
That is not in your text books. Which is correct? My spreadsheets or your text books?
The Ingram Lending and Saving (ILS) Model prices debt correctly. The mathematics of lending and the science of interest rate risk management can be found at the Ingram School of Economics. Click the link. There are some amazing peer reviews on the final page of that website.
When this marginal (true) rate of interest is used as the price of the interest rate everything falls into place. The rate of return on savings / growth rate becomes comparable to the rate of growth of incomes, like property, like goods and services (all else being equal including no increased supply or efficiency. It becomes aligned to the rate at which profits increase, rentals, property, everything lines up in an orderly fashion.
ESCAPE FROM THE Low Inflation / Interest Trap Furthermore, both of these new debt structures can be used instead of low interest rates to support the inflated asset prices of property and bonds. The incorrect pricing of mortgages and bonds can be continued but if that wrong pricing is allowed to adjust in an orderly fashion, allowing rising incomes to catch up with the over-priced properties, then the new mortgage model can be used to enable the economy to recover even as interest rates rise back to their usual norms.
This is explained on some of the pages of this blog.
QE is aimed at doing the same thing but property and bond prices will not, cannot, cope when it stops.
Bonds that will preserve wealth by indexation to GDP, include in their benefits the real rate of economic growth which is necessary to preserve the share of the GDP that people earned as income - their share of GDP is preserved for them to spend. None of that wealth is given to, or shared with, another party. GDP-linked Bonds are worth a great deal more than an index-linked to prices bond and they are free of the sometimes horrendous wealth risk attached to fixed interest bonds. So borrowing will be cheaper, say 1% marginal interest above the index, compared to what some governments have paid at times (9% in the case of the USA in the 1980s and similar amounts in Europe today). See FIG 4 on this page.
HOW TO MANAGE THE RECOVERY Index-linked Bonds are worth more because they do not lose value during inflation. So governments can buy back the inflated and unsafe fixed interest bonds that they are currently servicing at a discount to their inflated market value if they offer index-linked bonds as payment. That might cut the national debt. It will certainly make for a clearer financial plan for the government's budget going forward. And if they can just print money to do that, well that is better than throwing it away. At least it cuts taxes so that we all get a share.
As just explained, the new ILS Mortgage Model can be introduced to prop up the inflated mortgages that are being issued and which are propping up house prices. The Hybrid ILS Model looks like just an add-on to existing mortgages, and is used by borrowers when interest rates increase, so as to prevent their repayment costs from running out of control.
The mathematics and theory involved has been developed over several years of research and the outcome has shown it to be the safest mortgage model ever invented. The mathematics can be read at the Ingram School of Economics online but not all of the work has yet been included.
The ILS Mortgage Model can also be offered in other forms. The straight ILS Mortgage is like paying rent, except that after some years rentals will overtake the cost of the mortgage.
If economic conditions are good, with rentals generally rising, then the ILS borrower will get smaller increases and maybe none at all.
If economic conditions generally are tough, rentals may stand still or they may even fall, but the ILS mortgage payments will fall and fall faster. See the illustration in the Interview with Boris Agranovich.
This adaptability can only be achieved if, when the mortgage is first offered, it is not too large; but it need not be too small either, even if nominal interest rates are high due to inflation. In other words, low interest rates or high inflated interest rates so not alter the amount that can be lent and they do not create property price bubbles.
That said, we need to be able to offer more just now so as to support inflated property prices and to allow the economy to recover. This means that the rate at which the payments cost can ease will be reduced. This means that it will be a bit hard on borrowers but the hardship will be felt more in the sustained high cost of their repayments than in any uncertainty about the cost-to income of the payments going forward. That is, even if incomes are falling or if interest rates are rising, their costs will be safe. And they will not have falling property prices to worry about.
The illustration given in the interview with Boris Agranovich, shows payments falling and the mortgage being repaid on time while incomes are standing still. As just stated, lenders cannot make things orderly like that if they lend more when interest rates are low - if they mis-price their product. And with the new mortgage model they can still lend as much when interest rates and inflation rates are high. The shape of the sketch below does not change a lot just because incomes are rising fast or falling. It remains very similar. So property values can be safe and stable. Everyone will be safe - no need for arrears problems or property price crash and collateral problems. No need for large deposits. With stable property prices and land costs, builders can plan far ahead and improve their efficiency. People will get more homes and better value.
MORE ON PLANNING ECONOMIC RECOVERY
The sketch at right shows a typical ILS Defined Cost Mortgage repayment schedule, although if the model is the variable rate ILS model instead, then the downwards slope in the payments will be variable.
The 21% of income line is about what rentals might cost for the same property.
The sketch does not change shape if there is a boom nor if there is a bust. Whatever the rate at which aggregate demand in the economy is changing, high inflation, low inflation, or deflation, this mortgage model and the amount that it can lend remains about the same.
There is a proviso - that the cost (the price) of money remains above the low level that primes inflation, and below the level that would swamp lenders with money they would not be able to lend. This keeps the price of money much more stable than we are used to seeing. And if for any reason the price gets distorted and moves far outside of those two boundaries, lenders can be sure that this will unwind and probably overshoot in the opposite direction, as it has done in the past. So they can average that out and stay stable with their repayments pricing. Check out the mathematics and the back testing that has been done (this to be added later).
If too much is lent the slope downwards becomes less steep and there is a risk of Payments Fatigue and a risk that some people whose incomes are not doing so well may want to drop out. At least that will not be a huge crisis for the lending or savings industry. As with rent payers, they will move on when they choose to do so.
If money is cheap like it is now, the downwards slope will be steeper or more can be lent at the same slope.
We can use these facts to lend more and support property values just now, whilst that is needed to prevent the banking industry from collapsing under the weight of falling property values and rising interest rates - which is their prime concern just now. We do not need low interest rates to protect these banks or those borrowers and home buyers. We do not need to distort everything that way. We can manage the system so as to allow incomes and property prices to return to their normal price / income ratios over time without devaluing property. We can allow incomes to catch up and close that over-priced property value gap.
So if we do that we can all go back to work and get paid. Economies that have balance and security of finances do well. Economies that are out of balance and need some help to get moving can also recover without the need for a stimulus. If you and I feel safer we may spend 1% more. If on average everyone spends 1% more then GDP can rise by 1% and thousands of jobs will be created. We get into a Growth Spiral.
A CHANCE TO HELP To vote for a government commission of enquiry into these solutions please visit this SHOUT site. If you are a banker or other expert you can write to the SHOUT editor at the address given on that page. Your letter will be published if it is clear, short, and well argued. If you just say you support what you have read and want the commission of enquiry, add in your level of expertise. A central banker or a famous economist will get front row position. If your letter is based upon false premises then you will get a reply from the editor and a chance to correct the mistake. If you can prove anything that we have written is wrong or inaccurate, we will make changes.
COMMISSION OF ENQUIRY
The details for the proposed commission of enquiry can be found right here on pages 1 to 10 in this website, where the background can be read on page 1 and where some details of the commission of enquiry already carried out can be found.
Support in written testimonials from bankers, actuaries, and an economist, can be found here on this site in the next two pages after this Home Page.
See LATEST UPDATES daily
CLICK HERE TO SHOUT
14,500 page views in a year and a day.
Who is Edward Ingram? Check out some cuttings.
-----------------------------
This is ground breaking research that will create a new era of economic prosperity and financial stability. It starts by finding that debt is incorrectly priced and that this creates the major part of the problems that we are faced with. Savings and debt are two sides of the same coin. To make savings safe, first make it safe to borrow.
MY CAMPAIGN
The world has no safe place for savings and retirement funds. We can change that and we can bring significantly greater financial stability to the whole economy in the process. This is where you will find out how.
Experience has shown that whilst the economics of this may be fascinating, there is no way to explain it convincingly until the economists concerned have read and understood the mathematics.
If you can understand A = B + C + D and you know that equilateral triangles have two equal sides then you can probably understand the mathematics.
MATHEMATICS PAPER CONTENT
Simplifying the Economic Model - An introduction written by Edward Ingram and assisted by Graham D Hollick a past President of the International Union for Housing Finance.
MATHS 1 - General Equations for Debt Management - A dazzlingly simple piece of mathematics with implications as big for finance as e = mc2 is for science.
The proof and the Risk Management Chart is given in the second part of this page. Take your time - the page is long.
The proof and the Risk Management Chart is given in the second part of this page. Take your time - the page is long.
MATHS 2 - Practical applications and comment on the first similar mortgage model created for Turkey - based on Edward's original (unrefined) theory published in 1974. (See press cuttings if interested).
TO READ THAT PLEASE CLICK HERE
THE ECONOMICS
AS FOR THE ECONOMICS - WHEN YOU UNDERSTAND THE MATHEMATICS PLEASE RESUME HERE OR GO TO THE LINKS PAGE OF THE ABOVE BLOG.
There is not as much safety in property values, or in borrowing, as there ought to be. We can change that, and add significantly to the financial stability of the whole economy. This is where you will find out how.
INCORRECT PRICING
Let me introduce readers to my ground breaking research and the people that support a top level governmental enquiry into my findings -including Graham Hollick, past President of the International Union for Housing Finance, Professor Makina, lecturer in Banking, Finance and Risk Management, Andrew Pampallis, ex head of Banking at the University of Johannesburg, an email from Roger Bevan FIA, a Fellow of the Institute of Actuaries, and an email from an Actuarial Analyst who says that these new structures can help to resolve various financial crises, and that the arguments put forward are academically sound. Then there is John Robertson who took part in a senior level peer review and concluded that the Ingram Lending and Savings (ILS) Model resolved and explained why mortgages have become increasingly a source of macro-economic instability, but no one has sought to explain that until now.
All of those details can be found on the next two pages of this Blog.
Writing the papers to academic standards is a mammoth task to which I am not geared, but when it comes to making presentations to live audiences and to peer review groups such as we want to see set up at international or government level, that kind of process runs very smoothly and it is quick.
----------------------------
I am busy drafting my book on the causes and cure of
financial instability - something that our central
bankers are not able to do or to understand because they are using binoculars and microscopes trained on the wrong things. In fact they say that they are flying blind.
My subject is called Macro-economic Design.
Financial / economic instability comes from unsafe wealth and unsafe
borrowing, both of which are using incorrect pricing.
The instability generated in house prices and wealth
generally multiplies / re-enforces the
downwards spiral when property prices and bond values inflate and then collapse as a direct result.
Keeping interest rates low does not alter the mis-pricing of
mortgage finances, government debt, or anything else that, being wrongly priced, injects instability
into the economy.
To make the economy recover relatively quickly, it is
necessary to put the mis-pricing methodology right and to do so at a controlled rate so that neither rising
interest rates nor rising incomes / inflation do not destroy the wealth whose collapse caused the problem in
the first place.
Thereafter there should be no more crises of a similar
nature.
This book will give almost all of the information that financial
service providers and their regulators will need to redesign their unsafe to
them as well as to everyone else, Financial Products and Services, and thus provide them with a
better assured and more sustainable business in an economic environment which
will generate riches and wealth at a faster pace than ever before.
Most of the book has already been written - right here - and the many linked Web pages.
FLYING BLIND is admitted by our policy-makers, including our best academics. It is generally recognised that the world's economies are in need of a reform, and they also admit that they have no clear idea of what needs to be done. They SAY that they are FLYING BLIND To them, financial stability is elusive. They are looking in the wrong direction - at more regulations and more intervention but at the same time, Dr. Claudio Borio from the Bank of International Settlements has some really good observations to make about what is going wrong: asset price inflation for one thing is the pre-cursor to the majority of 'accidental' financial crises going back centuries. That includes 1929 and 2008.
That asset pricing inflation is caused by incorrect pricing of mortgages and bonds - and incorrect pricing of currencies does nothing to help.
Yet there is a solution, and out of pure self interest, here is how you can help to provide that solution. The solution is not to be found at the Austrian School nor any other school, and not in the textbooks, but in a restructuring of our debts, savings, bonds, intervention methods, and exchange rate mechanisms, so that YOU will feel financially safe, at last.
WARNING TO TOP ECONOMISTS
I have to give our top economists a word of warning here. Some of you have switched off your ears and eyes on the flimsiest of pretexts - some word that you did not like or which seemed unfamiliar. Yes, it is true that GDP can be manipulated. If that is being done then it needs to be fixed, or we need to create a more appropriate index for use for the preservation of wealth. Preservation of wealth is cost free.
And it is true that wealth is best measured as a quantity of saved income rather than saved purchasing power. The spreadsheets demonstrate this clearly by showing that when less income is repaid than was borrowed, (interest added is less than the rate at which incomes are rising) then the borrower gets to spend the income borrowed plus the income that was not needed to repay the debt.
Since incomes are a driver of spending and of the value of other forms of investment such as property and equities, we need a level playing field for savings, enabling the preservation of savings (lent) wealth, at no wealth cost to borrowers. Take out the wealth risk and borrowing is less risky and it is cheaper - for people, for governments, and for businesses. It also removes most of the wealth effect, so the business cycle will calm down. A safe foundation for an economy is then built upon which a recovery plan can be made with little need for any stimulus.
Yes it is true that the mis-pricing makes the advanced economies, where inflation is low, into the most vulnerable - yet one of you switched off when told that was so. Now Claudio Borio from the Bank of International Settlements has observed the same thing. So why did you switch off your eyes and ears? You assumed that I was stupid and that professors and bankers who have done peer reviews are not thinking straight. Don't be conceited. I can give several other examples.
BACK TO MAIN TEXT
In this regard we need two new structures:
1. BONDS
For Bonds we need an index link to GDP or to aggregate incomes or to average incomes. This will be the cheapest way for a government, a business, or a mortgage lender to preserve the wealth that they are using, borrowing over a fixed period; it will safeguard the fraction of GDP that people earned and decided to lend to the bond issuers. Removing wealth risk reduces borrowing costs. The market price of those bonds will then be more closely priced to everything else in the economy. Safeguarding that wealth that was borrowed costs the users of the funds no wealth. It costs NOTHING - no wealth (no income, no share of GDP)gets transferred from the lender to the borrower for the borrower to spend.
Returning the wealth (the income or share of GDP) that has been borrowed costs no wealth or income.
Economists have not understood that wealth is not purchasing power alone. There is another definition. Readers can see a number of examples in which it is shown how wealth moves from the lender to the borrower id that wealth invested is linked to the prices index. Some examples are given here at the Ingram school blog.
The reason why it is cheaper is because it takes away the wealth risk from both sides - the lender (your savings) and the borrower, whose ability to repay will not deteriorate as inflation rates, deflation rates, or interest rates change. It correctly prices the investment and the debt.
A GDP of such borrowing will still be a GDP a decade later and if the economy is in trouble then the borrowing government (or home buyer or business) will not be handicapped by fixed borrowing costs while revenues or incomes are falling. Both income and costs will be reducing at the same time. For a government, borrowing more, when needed to meet rising social security costs, will not be very costly or dangerous.
Some in treasury departments who are used to offering fixed interest bonds worry that investors want a higher cash flow than just the 1% interest or similar that people need to encourage them to buy these bonds; but then they can easily offer more cash flow by repaying some of the capital just like a home buyer does. This is an ideal investment for some annuities too. The cash outflow (repayments of capital and interest) can be funded by making new offerings of bonds.
Then there is the whole savings and investment industry which is geared to using fixed interest bonds. Do you really think that the end users are happy to use these when they are not given any insurance against the wealth risk? When i was a financial adviser I apologized to my clients because I could find no safe place for their retirement funds.
Yes, it needs an educational effort. Have a look at my IMPLEMENTATION page. And there are the NEW FINANCIAL PRODUCTS RESULTING to see.
2. MORTGAGES AND BUSINESS LOANS The other thing we need to notice is that the price of mortgage repayments and business loans do not behave like anything else. The pricing of new and existing mortgages and loans have their own ways of pricing the repayment cost. They are not natural ways. Linking to nominal interest rates is NOT creating any link to the price element of the interest rate. That link gives a wrong pricing. Rents rise when incomes rise, and so do most other things. So borrowing costs - they have rules all of their own. They simply do not fit in. They change multiple times faster than all other prices except maybe wrongly priced bonds and rightly priced equities. They create an unacceptable level of risk. But unlike equities a secured loan is an investment that is not supposed to carry much risk.
The alternative way of pricing mortgages can be found at the Ingram School with a lot of illustrations and examples. The just added 8th May 2013 Annex to Chapter 5 gives some simple sketches that make it rather clear.
HOW THINGS HAVE CHANGED This wrong pricing did not matter too much a century ago when few people borrowed to buy homes. It did not matter much in nations where interest rates were high and not a lot could be lent. Economies can be likened to a ballroom full of dancers. When all of the dancers are pricing things in to the same music (aggregate demand) all is well. But when some dancers dance to a different tune and fix prices differently, using nominal interest rates and fixed interest rates, and when they crash as a result of doing that, the dance can go on if most dancers are not involved. But when half of them are dancing to their own music, having borrowed or lent huge amounts in total, and when they crash down, the whole dance becomes a shambles.
So we need a new mortgage model which dances to the same tune; and that is what we can have. The new model is so much safer in every kind of environment and it does so much less damage to the economy that it needs to be introduced as soon as possible.
The correct way to price debt is in a way that links the repayments to incomes. Incomes drive aggregate demand. But the cost has to be higher at first and lower as time passes. That does not need to destroy the link to incomes. If incomes are not rising then the cost of the repayments will fall every year. If incomes are rising fast then the payments will rise slowly.
The interest rate will find its own level, such that the rate at which it transfers wealth from the borrower to the lender becomes the price. The price is NOT the nominal rate of interest. And it is NOT the real interest rate. It is the marginal rate above Average Earnings Growth (AEG% p.a.). It could also be the marginal rate above the rate of growth of GDP. If you cannot believe this then look at my spreadsheets. They prove this is so.
That is not in your text books. Which is correct? My spreadsheets or your text books?
The Ingram Lending and Saving (ILS) Model prices debt correctly. The mathematics of lending and the science of interest rate risk management can be found at the Ingram School of Economics. Click the link. There are some amazing peer reviews on the final page of that website.
When this marginal (true) rate of interest is used as the price of the interest rate everything falls into place. The rate of return on savings / growth rate becomes comparable to the rate of growth of incomes, like property, like goods and services (all else being equal including no increased supply or efficiency. It becomes aligned to the rate at which profits increase, rentals, property, everything lines up in an orderly fashion.
ESCAPE FROM THE Low Inflation / Interest Trap Furthermore, both of these new debt structures can be used instead of low interest rates to support the inflated asset prices of property and bonds. The incorrect pricing of mortgages and bonds can be continued but if that wrong pricing is allowed to adjust in an orderly fashion, allowing rising incomes to catch up with the over-priced properties, then the new mortgage model can be used to enable the economy to recover even as interest rates rise back to their usual norms.
This is explained on some of the pages of this blog.
QE is aimed at doing the same thing but property and bond prices will not, cannot, cope when it stops.
Bonds that will preserve wealth by indexation to GDP, include in their benefits the real rate of economic growth which is necessary to preserve the share of the GDP that people earned as income - their share of GDP is preserved for them to spend. None of that wealth is given to, or shared with, another party. GDP-linked Bonds are worth a great deal more than an index-linked to prices bond and they are free of the sometimes horrendous wealth risk attached to fixed interest bonds. So borrowing will be cheaper, say 1% marginal interest above the index, compared to what some governments have paid at times (9% in the case of the USA in the 1980s and similar amounts in Europe today). See FIG 4 on this page.
HOW TO MANAGE THE RECOVERY Index-linked Bonds are worth more because they do not lose value during inflation. So governments can buy back the inflated and unsafe fixed interest bonds that they are currently servicing at a discount to their inflated market value if they offer index-linked bonds as payment. That might cut the national debt. It will certainly make for a clearer financial plan for the government's budget going forward. And if they can just print money to do that, well that is better than throwing it away. At least it cuts taxes so that we all get a share.
As just explained, the new ILS Mortgage Model can be introduced to prop up the inflated mortgages that are being issued and which are propping up house prices. The Hybrid ILS Model looks like just an add-on to existing mortgages, and is used by borrowers when interest rates increase, so as to prevent their repayment costs from running out of control.
The mathematics and theory involved has been developed over several years of research and the outcome has shown it to be the safest mortgage model ever invented. The mathematics can be read at the Ingram School of Economics online but not all of the work has yet been included.
The ILS Mortgage Model can also be offered in other forms. The straight ILS Mortgage is like paying rent, except that after some years rentals will overtake the cost of the mortgage.
If economic conditions are good, with rentals generally rising, then the ILS borrower will get smaller increases and maybe none at all.
If economic conditions generally are tough, rentals may stand still or they may even fall, but the ILS mortgage payments will fall and fall faster. See the illustration in the Interview with Boris Agranovich.
This adaptability can only be achieved if, when the mortgage is first offered, it is not too large; but it need not be too small either, even if nominal interest rates are high due to inflation. In other words, low interest rates or high inflated interest rates so not alter the amount that can be lent and they do not create property price bubbles.
That said, we need to be able to offer more just now so as to support inflated property prices and to allow the economy to recover. This means that the rate at which the payments cost can ease will be reduced. This means that it will be a bit hard on borrowers but the hardship will be felt more in the sustained high cost of their repayments than in any uncertainty about the cost-to income of the payments going forward. That is, even if incomes are falling or if interest rates are rising, their costs will be safe. And they will not have falling property prices to worry about.
The illustration given in the interview with Boris Agranovich, shows payments falling and the mortgage being repaid on time while incomes are standing still. As just stated, lenders cannot make things orderly like that if they lend more when interest rates are low - if they mis-price their product. And with the new mortgage model they can still lend as much when interest rates and inflation rates are high. The shape of the sketch below does not change a lot just because incomes are rising fast or falling. It remains very similar. So property values can be safe and stable. Everyone will be safe - no need for arrears problems or property price crash and collateral problems. No need for large deposits. With stable property prices and land costs, builders can plan far ahead and improve their efficiency. People will get more homes and better value.
MORE ON PLANNING ECONOMIC RECOVERY
The sketch at right shows a typical ILS Defined Cost Mortgage repayment schedule, although if the model is the variable rate ILS model instead, then the downwards slope in the payments will be variable.
The 21% of income line is about what rentals might cost for the same property.
The sketch does not change shape if there is a boom nor if there is a bust. Whatever the rate at which aggregate demand in the economy is changing, high inflation, low inflation, or deflation, this mortgage model and the amount that it can lend remains about the same.
There is a proviso - that the cost (the price) of money remains above the low level that primes inflation, and below the level that would swamp lenders with money they would not be able to lend. This keeps the price of money much more stable than we are used to seeing. And if for any reason the price gets distorted and moves far outside of those two boundaries, lenders can be sure that this will unwind and probably overshoot in the opposite direction, as it has done in the past. So they can average that out and stay stable with their repayments pricing. Check out the mathematics and the back testing that has been done (this to be added later).
If too much is lent the slope downwards becomes less steep and there is a risk of Payments Fatigue and a risk that some people whose incomes are not doing so well may want to drop out. At least that will not be a huge crisis for the lending or savings industry. As with rent payers, they will move on when they choose to do so.
If money is cheap like it is now, the downwards slope will be steeper or more can be lent at the same slope.
We can use these facts to lend more and support property values just now, whilst that is needed to prevent the banking industry from collapsing under the weight of falling property values and rising interest rates - which is their prime concern just now. We do not need low interest rates to protect these banks or those borrowers and home buyers. We do not need to distort everything that way. We can manage the system so as to allow incomes and property prices to return to their normal price / income ratios over time without devaluing property. We can allow incomes to catch up and close that over-priced property value gap.
So if we do that we can all go back to work and get paid. Economies that have balance and security of finances do well. Economies that are out of balance and need some help to get moving can also recover without the need for a stimulus. If you and I feel safer we may spend 1% more. If on average everyone spends 1% more then GDP can rise by 1% and thousands of jobs will be created. We get into a Growth Spiral.
A CHANCE TO HELP To vote for a government commission of enquiry into these solutions please visit this SHOUT site. If you are a banker or other expert you can write to the SHOUT editor at the address given on that page. Your letter will be published if it is clear, short, and well argued. If you just say you support what you have read and want the commission of enquiry, add in your level of expertise. A central banker or a famous economist will get front row position. If your letter is based upon false premises then you will get a reply from the editor and a chance to correct the mistake. If you can prove anything that we have written is wrong or inaccurate, we will make changes.
COMMISSION OF ENQUIRY
The details for the proposed commission of enquiry can be found right here on pages 1 to 10 in this website, where the background can be read on page 1 and where some details of the commission of enquiry already carried out can be found.
Support in written testimonials from bankers, actuaries, and an economist, can be found here on this site in the next two pages after this Home Page.
