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In bailout Britain, you can be too small to fail, too

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Toby Melville/Reuters/File

(Read caption) Residential housing sale and letting signs are seen in Hastings in southern England in 2008. Speculators who snapped up apartments to rent out are now having trouble getting paid by their tenants. But low interest rates are keeping speculators from bearing the full brunt of their losses.

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Interesting piece by the excellent John Stepek in MoneyWeek magazine's Money Morning email this week. It recounts the story of Fergus and Judith Wilson, a couple of maths teachers from Kent, who built up a buy-to-let empire of about 700 properties. Until the crash, that is. Now, of course, their properties are full of tenants who can't pay the rent, and they are trying to unload their properties onto a ropy market, but the potential buyers (particularly first-time buyers) just can't get the banks to give them a loan. Still, the one thing that is saving the Wilsons is the fact that they are paying hardly anything on their own mortgages, thanks to the Bank of England slashing interest rates to 0.5%.

There's something of a morality tale in this. About how our government and monetary authorities have systematically undermined the free-market system. By throwing money and cheap credit around for a decade, the government presided over a housing boom. Buy-to-let landlords simply couldn't lose. Then, too late, the Bank realised it had over-egged things and cut back, fast. So the banks ran out of money, and the rest you know.

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As Stepek says, the Wilsons – and thousands of other buy-to-let speculators – took a big risk, did not correctly anticipate the crunch coming, and so should bear the consequences, like every other entrepreneur. Except that now, the Bank has cut interest rates to just 0.5% – cutting the Wilsons' own mortgage costs. What should have happened is that they had a fire-sale of their over-ambitious, debt-driven property portfolio, and Kent first-time buyers would have been in the pink. Instead, the Bank of England is bailing them out – at taxpayers' expense.

"You can argue the toss about the morality of all this – actually, you can't. It's a travesty," says Stepek. "It's a complete betrayal of the capitalist system and anyone who foolishly thought that this was how the game was played."

That's the trouble. How can you play the game of capitalism, when governments keep changing the rules? You can't. So people either don't bother to go into the wealth-creating sector (despite all the 'cuts' talk, the public sector is still much safer, and better rewarded), or walk off and go to some country that nourishes the enterprise system. Thanks, Gordon.

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