Should Bank of England bend?
The stock markets appear to think it’s over. The banks, by their behaviour, seem to fear that it’s only just the beginning.
I’m talking about the poisonous impact of the credit crunch.
Yesterday the US stock market enjoyed its best start to the second trading quarter for 70 years – and the London market fared pretty well too.
But closer to many people’s lives, said it would while other banks have been hiking mortgage rates and insisting that borrowers put up larger deposits when buying a property.
So do these trends contradict each other, as they appear to do?
Not really.
Markets rose because of relief that (and , on a much smaller scale) had made a clean breast of its losses and the hope that other banks will do the same. The expectation would be that when the full damage has been exposed, the proper rebuilding can start.
And perhaps more important, the £10bn odd of new capital being raised by UBS and by shows that the material is available for that rebuilding: investors are supplying funds to strengthen banks’ battered balance sheets.
But many banks are still strapped for liquid funds and there are still strains on their capital.
Which is why First Direct has temporarily said no to new requests for home loans after being overwhelmed with applications in the wake of mortgage-rate rises imposed by its competitors.
And the funding drought also explains why almost all British banks are providing fewer and more expensive mortgages.
If this contraction of credit were to generate a further slowdown in the economy, that would generate new losses for banks - and would make the stock-market rally seem a bit premature.
But if the economic landing is soft, then stock markets renewed optimism may turn out to be appropriate.
are not desperately supportive of a very bullish case – new mortgage approvals in February were 38% lower than at the same time last year.
The interesting question for me is whether the symbolism of First Direct’s mortgage-lending strike will prompt the Bank of England to be more generous than it might otherwise have been in shaping a new lending facility for banks.
The Bank of England has become persuaded that the biggest constraint on British banks is their inability to raise liquid funds against great swathes of their balance sheets, notably US sub-prime investments, their holdings of regular US mortgages, their lending exposure to private equity and other highly leveraged corporate deals, and their UK mortgage loans.
What the banks would dearly love would be two or three year loans from the Bank of England, with those unsellable and unliquifiable assets pledged as collateral.
Would that represent a sensible refuelling of the financial economy by the Bank of England or a dangerous bailout of banks that only have themselves to blame for the mess they’re in?
Even if the banks are culpable, would we be cutting off our noses to spite our faces by depriving them of succour – in the sense that we suffer when the lending dries up.
What do you think?
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Yes the BOE should provide multi year loans but there must be consequences for the banks as a quid pro quo.
The regulators need to get tough with the banks, force them to return to old style banking. The loan should only allow UK assets as collateral, if they want to hock their US assets they should be talking to the Fed.
If certain banks cannot agree to that then they do not get the loan.
From your link :
"First Direct, which is a relatively small lender, stressed that the move was temporary and that it had no problem raising funds to lend. "
From your column :
"many banks are still strapped for liquid funds and there are still strains on their capital. Which is why First Direct has temporarily said no to new requests for home loans"
So who's lying, Robert?
Hi Robert,
It's important to keep the First Direct issue in context.
I've been a First Direct customer for 15 years and they've always been fantastic.
I tried to arrange a mortgage yesterday and the staff were very apologetic about the delays in getting through to the mortgage department but could only offer a call-back in a week's time.
I complained to them for the first time ever and suggested that their existing customers were getting a raw deal because of their push for new ones.
Others must have done the same because the action today has closed application by non-existing customers while they catch up. That's typical of First Direct making customer service their first priority.
Could it be that other lenders are trying to squeeze extra profit out of the current media frenzy on the credit crunch? First Direct's rates are nothign amazing - just realistic when compared to the competition.
The annnouncement from First Direct could easily be spun to make it look like they have a funding problem due to the credit crunch. This could have devastating consequences for a bank that is just trying to put its customers first.
What goes around comes around. For years the major banks have been queing up to give us credit cards loans, and flogging mortgages that people can barely afford. Now that things are getting tough, they go crying to the Bank of England to bail them out.
I think that the British economy is in a mess.
Good British firms have been sold off and other companies have entered the UK without any restrictions. The French, in particular, have been having a 'hay day' with the lack of interest or enthusiasm by British residents. In my own area of the UK people just didn't know, or care, that their electricity, gas, insurance and even rubbish disposal have been taken over by French firms.
Despite EU law the French would never allow their companies to fall into the hands of other EU countries. They have pride and loyalty toward those companies.
Good morning, I watched your programme on 91Èȱ¬ 2 last night - lots of jolly pictures of big boats and planes but not really a serious assessment of whats going on.
Lets start with Government policy - the Fed and other Central Banks all created a regime of cheap money. For sure the investment bankers then figured out how to make money from it, but then thats what they always do.
Some, but not the moderate ones made a huge ammount, but then they have done for ever.
Lastly the investors were very happy to pay 2 & 20 on the basis that they were getting access to manager alpha. More fool them as in most cases it was only excessive gearing that generated the return. So what happened to the buyer beware?
Turning now to your graphics on how the rating agencies managed to rate sub prime as AAA. I dont think this reflected what was actually happening, in that the structure guys at the banks managed to combine mortgage assets, both low & high grade, in such a way as to persuade the rating agencies to give it an investment grade tag - perhaps there was some naivety here.
So on balance your view that greedy investment bankers ( I am not one of those) are to blame is not the whole story. Certainly they were a good part of it but along with all the other participants, together with politicians and Central Bankers.
I'm sorry but in your efforts to clarify a complex situation you have engaged in sloppy & sensationalist journalism. Not your normal approach!
I like many people think this should have entirely been charged to the shareholders not given by the BOE.
And before people jump on this about small shareholders they are not the ones who would have had to have paid large amounts...
The housing market is over valued by between 20% and 40%, depending on which comentators' opinion you put most weight by. Anything that stops a readjustment in that asset market is only a bad thing.
People need to learn, or more importantly remember 'that what goes up can also go down' ...and usually does!
If the banks simply return to multiples of 3.5 joint income for morgage lending then prices will have to fall inorder to meet the 'affordability' criteria... something the banks have been blissfully ignoring for the last 7 years of cheap and easy credit.
The BoE should nothing that would prevent this necessary readjustment.
I think something has to be done to ease things up a bit.
I would suggest a two or three year term of loan with the added incentive to the B of E / UK tax payer that a percentage of the loan amount may be converted to shares at the FTSE 100 price on the day of the loan.
That way if a bank borrows £ 1 billion and the agreement is that 30% may be converted to shares, for example, and the share price is £ 5 at the day of fixing the deal we get the following.
If in 2 years time when the loan expires the B of E has the option of buying £ 300 million of shares at £ 5 i.e. 60 million shares. If they have risen to £ 7.50 partly due to the assistance of the B of E why shouldn't we as tax payers see some of the benefit? The potentail gain to the UK taxpayer is £ 150 million.
The banks could list this in their annual reports for clarity sake. It could be treated in the same way as a Directors share option.
The Bear deal answers your question and provides the model The state's assumption of credit risk but only after shareholders have received $10 for shares that were trading at $70 on the Friday. The deal is justified by the greater damage saved, courtesy of a self feeding rerun of the Gt Depression
The Bank of England is damned if they do, and damned (indeed probably more damned) if they don't Welcome to the World of moral hazard.
On balance surely it is better to "get the system working again" and worry about the consequences later. Some sort of "liquidity tax" or the like on clearing banks in the future perhaps?
The figure that jumps out is Equity Withdrawal down by half on what it was a year ago. This is one of the main drivers of the economy. This would translate to job losses over the next two quarters and would feedback into these figures. The vicious circle has truly begun. The other main concern is banks raising mortgage rates for existing customers, this leaves the 1.4 mil people coming off their fixed terms with few options. Look out for the Halifax figures that are out over the next couple of days and wouldn't be surprised if the monthly fall is in excess of 1%. Now they'll be forced to admit that prices by the end of the year will be lower rather than flat (wishful thinking) and their curve will start to converge on the Nationwide graph (which I believe isn't being massaged as much as the Halifax one)
Very diaspointed with last nights programme.Why did you shy away from telling us the truth about our futures?
I think something has to be done to ease things up a bit.
I would suggest a two or three year term of loan with the added incentive to the B of E / UK tax payer that a percentage of the loan amount may be converted to shares at the FTSE 100 price on the day of the loan.
That way if a bank borrows £ 1 billion and the agreement is that 30% may be converted to shares, for example, and the share price is £ 5 at the day of fixing the deal we get the following.
If in 2 years time when the loan expires the B of E has the option of buying £ 300 million of shares at £ 5 i.e. 60 million shares. If they have risen to £ 7.50 partly due to the assistance of the B of E why shouldn't we as tax payers see some of the benefit? The potentail gain to the UK taxpayer is £ 150 million.
The banks could list this in their annual reports for clarity sake. It could be treated in the same way as a Directors share option.
The Bear deal answers your question and provides the model The state's assumption of credit risk but only after shareholders have received $10 for shares that were trading at $70 on the Friday. The deal is justified by the greater damage saved, courtesy of a self feeding rerun of the Gt Depression
Yes the BOE should provide multi year loans but there must be consequences for the banks as a quid pro quo.
The regulators need to get tough with the banks, force them to return to old style banking. The loan should only allow UK assets as collateral, if they want to hock their US assets they should be talking to the Fed.
If certain banks cannot agree to that then they do not get the loan.
One High Street Bank converts Credit Card debt from unsecured to secured by imposing an immediate fee of £2000 and then subsequent solicitors fees at £500 per day. The bank raises the argument that it is in business to make money . Fair enough , but if any business runs out of liquidity then it fails and all creditors strip it of assets in a similar way.
The question is - when the same bank goes cap in hand to the BOE for funds - why should the tax payer stand for it ?
What I wouldn't give to be a fly on the wall when the heads of the Banks are asking for help from the BOE. I hope they are made to squirm like I was many years ago by my Bank Manager for being £50.00 overdrawn and asked how I was going to get my account back in the black. Fast forward a few years and the same bank was trying to give me even more credit so they hit their monthly bonus.
The greed of the banks and their arrogance have made a mess of the world economy and I know that they will get away scott free when the proverbial hit's the fan.
For those of us with long memories, what is best deescribed as the 'Credit Explosion' which occured up to August 2007, was itself an anomaly. Governments, and central bankers, did not seem to worry over-much about asset-price inflation -though I remember Alan Greenspan talking about 'irrational exuberance' a number of years ago.
Ultimately, this long period of loose credit for assets - particularly housing - has led lenders to seek more innovative ways of lending - higher multiples, lowering the borrower's quality threshold, lowering required deposits. When the US housing market turned down last year, this sometimes risky approach then left many lenders with loans that were less than the houses they were mortgaged on. Due to these debts being packaged and traded this meant that amount of affected debt was far larger than anyone could properly understand and also has caused many banks - some of whom don't operate domestically in the US - being affected.
It is my thesis that the root of the problem is that both sets of bankers - central and commercial - have too long ignored the dangers inherent in this asset price bubble and therefore both are to some extent culpable.
As I indicated in a recent letter to Warren Buffett (which he read, I believe), the banks have only themselves to blame for this madness. Bankers seemingly forgot what it means to be a banker -- sound due diligence and a careful examination of collateral and your borrower's payment history before a loan is approved. The "originate and distribute" securitisation model, created by bankers with the able assistance of many amoral lawyers and accountants, led to this sea change. But, as the architects of their own doom, they have only themselves -- and their greed -- to blame. Should we bail them out? No. Let capitalism do what it's supposed to do: promote "survival of the fittest" in business terms and make way for new, more efficient and less foolhardy players. No more welfare for the multi-millionaire class. If we as a society pay a steep price for this "tough love" in the short-term, at least we'll gain over time as the institutions responsible for this mess learn a very painful lesson.
I do think the banks should be bailed out. We cannot afford to let them collapse. However, I think as a condition we must demand that for these loans there must be tighter regulation of loans especially in the housing sector. The over prices of houses caused by this bubble has done nothing but made the average person in this country poor due to large while now causing massive economic instability. There must be greater regulation in the market because clearly the banks cannot look after themselves.
I'm also with First Direct, but come on, a bank putting customers first?
Get real!
I agree with Post #1. In particular the return to the old style banking, meaning regular periodic supervisory review that goes back to the bank licence and what it means to carry on business as a bank. The regulator must send out auditors to run compliance checks. When breaches of the requirements are exposed, for instance contravention of risk management compliance, the regulator has to get tough and obtain undertakings, give directions, impose penalties or revoke the bank's licence. And that's nothing that isn't already legislated under general principles of bank regulation.
As long as they roll this out they can provide loans till the cows come home.
Correct me if I am wrong, the writedowns are mark to market and the banks may not actually incurr any loss going forward when the market is back up again. As regards to liquidity crisis, I dont see there is any crisis. The banks can borrow cheap money supplied by the fed @2.5% , and the money can be loaned to borrowers lets say @3.5% , the banks would still be in the money. As regards to Fed supplied new money, lets understand this , the dollar is the most sought after currency in international trades which means the USA can print as much dollars as possible to quench the thirst of hungry dollar seekers , in return the USA will be able to import commodities such as OIL.
Re Post No 2, you may have misunderstood what RP meant which was that many mortgage lenders are strapped for capital which has restricted the availability of mortgages generally. This has resulted in those other lenders who have not been affected by the credit crunch being overwhelmed with volumes of applications that are much larger than usual. One of these is First Direct who seem to have sensibly suspended accepting new applications.
In a captitalist free market economy, which I thought the UK's is primarily, the Central Bank should be there to provide emergency support not ongoing funding for Banks.
just when did banks change from being prudent lenders to a home for gamblers? When did a savings account or a loan become a "product"? when did these intelligent people decide that lending $200,000 to someone who was unemployed was a good idea?
By all means bail out the banks but there must be strings attached. They must be made to go back to old fashioned banking, they take deposits by offering interest and lend the money deposited at a slightly higher interest rate, its not rocket science. that way the risks are minimum, the obscene salaries are history and we get back to sanity.
The housing market is over valued by between 20% and 40%, depending on which comentators' opinion you put most weight by. Anything that stops a readjustment in that asset market is only a bad thing.
People need to learn, or more importantly remember 'that what goes up can also go down' ...and usually does!
If the banks simply return to multiples of 3.5 joint income for morgage lending then prices will have to fall inorder to meet the 'affordability' criteria... something the banks have been blissfully ignoring for the last 7 years of cheap and easy credit.
The BoE should nothing that would prevent this necessary readjustment.
BOE should help banks as much it would do to me when I can't meet my repayments.
Question for all...
In case BOE takes these asset backed securities as collateral and pay out 50% in return do the banks value these investments down as well?
Perhaps if more people saved more and borrowed less we wouldn't be so vulnerable to these situations getting out of hand.
It's all very well leveraging based on other peoples' money and looks great for as long as it works, but the trouble is that it works perfectly until it doesn't.
Those with cash on hand will survive this easily. Those reliant on other people lending money for the same price tomorrow as they did today will struggle.
Robert, I was listening to Radio 5 Live yesterday and it was reported that First Direct had stopped accepting applications because they were offering a very attractive fixed rate which had generated more applications than they could physically process. That does not accord with your own comments suggesting that they had a liquidity problem? Why are you so intent on trying to strike fear in to people where it is not justified. Heaven knows have you not got enough material where it is justified ?
I have to say that the 91Èȱ¬, Robert Peston in particular, is doing nothing to boost confidence. I have never heard such a lot of negative nonsense in my life. Until recently I had never heard of Robert Peston. What are his credentials for becoming the most heard economic expert in the country? The coverage has been rather simplified for the masses and is scaremongering. I personally have recently sold a £1millin+ property, considerably up on the value similar properties were selling for 6 months a go. Banks are still lending to people with good credit histories and witht he funds. they have only stopped lending to people who those people who are potential risks, as it should be.
The shops and bars I frequent are still busy and none of my friends/colleagues or aquaintances are particularly worried about the credit crunch. even with 10,000 job cuts in the City, numbers wouldn't be far off historical highs so the fear of these cuts has also been overstated.
Can we please have some balance!!
Thank you.
Who ever is at fault for what is hapening the bottom line is the economy is taking a hit and something needs to be done. Like it or not, banks are a vital part of any economy (especially the UK economy). Besides, banks are being hit hard by this already, the CEO's are losing their jobs and share prices (& profits)are falling through the floor, isn't this enough? Making more money available is not bailing the banks out, it is simply helping the economy to function.
And for everyone who says things like "house prices need to fall by 40% - 60%" they are not in the real world. This would be devastating to the economy, and ensure a deep and severe recession far worse than the last one (because so much of people's debt is now tied into their house prices). Saying 'tough, you shouldn't have borrowed so much' isn't the right response to all this, because a recession would help no one.
The whole banking system is emitting a nasty smell. I'm still not satisfied with the Northern Rock debacle. The Government employed three American companies (JP Morgan, Citi, and Blackstone)to try and sell NR together with it's off-shore GRANITE companies. The prospectus prepared called NR by a code name of 'BLACKBIRD', Project WING can be found on the Wikileaks website. It highlights the advantages of owning the GRANITE portion of the Bank, so why wasn't GRANITE included in the nationalisation ?
The Chairman of the NR Foundation (charity) is Alastair BALLS. I am still waiting for someone in the mainstream media to confirm whether or not he is connected with Ed BALLS.
There's that strange smell again....
Yes, additional liquidity is better for all, as it will not fuel uncontrollable inflation.
Should the banks be punished for imprudent lending - yes; market failure - no. Where is the line bewteen the 2 - 50:50 ?
So, split the "profits/gain from fixing the banks" - BoE/taxpayers get half the upside (via warrants)as a punishment to the banks, the other half of the gain is capitalised within the banks' balance sheets and the banks are told to stop getting creative on their definitions of Tier 1 capital.
I think that all british banks need to beware. The BOE is less of a guarantor at the highest level more of a wolf in sheep's clothing.
If banks borrow from the BOE, hey ! next step you find the BOE turns out to be "the Taxpayer" &, if the media turn ugly ( and they are never very pretty) the "taxpayer " aka "the BOE " aka " the Government" steps in and takes you over for a pittance.
Don't laugh, Mr Banker, it can happen to you too.
Perhaps there could be some quid pro quo either in terms of taxpayer equity in the banks being helped, but also some public acknowledgement of mea culpa from the banks with respect to their lending and investments would be welcome.
I would also like to think that the banks which offer offshore tax avoidance schemes would be helped proportionately less (or made to stop that kind of activity)
A separate question that I would like to be asked - is it fair that the savers/taxpayers robbed by Farepak should be subsidising HBOS which claimed priority as a creditor of Farepak?
I don't think there is a further need for a bail out of the UK banks. Yes mortgages are going up in price but this is relative - rates are still low on historical comparisons.
What we do not want to do is the equivalent of the US 'Greenspan put.' Then the only choice as banks and borrowers get deeper into debt is to lower interest rates until they are negative. Then we have a long term depression gauranteed - worse if that is tied to an inflationary commodity boom.
The answer is to let the banks feel the pain unless they really are going to fail and cause undue pain across the economy.
Government support of profit making companies does not make much sense to me.
just when did banks change from being prudent lenders to a home for gamblers? When did a savings account or a loan become a "product"? when did these intelligent people decide that lending $200,000 to someone who was unemployed was a good idea?
By all means bail out the banks but there must be strings attached. They must be made to go back to old fashioned banking, they take deposits by offering interest and lend the money deposited at a slightly higher interest rate, its not rocket science. that way the risks are minimum, the obscene salaries are history and we get back to sanity.
Hi Robert,
Who's money is the Bank of England (BofE) going to use?
It sickens me that commentators - and I unfortunately have to include you in this descrption. Unfortunate because you generally offer sound commentry - routinely fail to mention that utlimately, any BofE bailout is going to use UK TAXPAYERS MONEY. To be blunt, as a 'fee paying' member of 'UK plc' I do not want a share of any liability for the toxic waste which the big banks have ended up with.
Using UK taxpayer money to bail out bad business plans inspired by greed, share price engineering and creative accounting which makes Enron look saintly, is absolutely unacceptable.
If there is a liquidity problem because these institutions, (as an aside: who just awarded their top executives with bonuses which given the current climate make a mockery of their claims to poverty) won't lend to each other then fine:
The bank can offer funding at punitive rates for 2 years against only the most secure assets.
Anyone who believes that these markets will have corrected themselves within two years is in cloud cuckoo land. In two years the toxic debt is still going to be toxic.
The Fed in the US is going to continue pandering to the short term share-option myopia of the heads of business, keep their heads firmly wedged in the sand and not take the decisive action needed to fix the problems it helped ferment. This will mean that the US slumps into a recession the likes of which Japan is currently experiencing.
I would suggest a two or three year term of loan with the added incentive to the B of E / UK tax payer that a percentage of the loan amount may be converted to shares at the FTSE 100 price on the day of the loan.
great program last night.
Surely, all the banks problems have done is highlight that the banking system is effectively A STATE SPONSORED CONFIDENCE TRICK!
Back when I did "A" level Economics, I learnt that for every £1 deposit a bank takes, a bank can lend up to several times that deposit based upon the statistical near certainty that not everyone who deposited money would ask for it back at the same time (the dreaded "run" on the banks).
however the alternative to a banking system is barter, therefore a modern economy needs a banking system.
Therefore bankers are in the priveledged position that if they stuff up through pure greed they know that the state will feel constrained to step in!
However if we all ask for our deposits back at the same time, the banking system cannot deliver!
Therefore the banking system is A STATE SPONSORED CONFIDENCE TRICK!
Is it not?
The question is;
Why can't I borrow directly from the Bank of England?
Let us just cut out these middle-men banks.
They take the cheap money from the BoE, mark it up (to pay for their marbled premises, cover their losses and keep their bonuses fat) and pass the costs it onto us.
Who ever is at fault for what is hapening the bottom line is the economy is taking a hit and something needs to be done. Like it or not, banks are a vital part of any economy (especially the UK economy). Besides, banks are being hit hard by this already, the CEO's are losing their jobs and share prices (& profits)are falling through the floor, isn't this enough? Making more money available is not bailing the banks out, it is simply helping the economy to function.
And for everyone who says things like "house prices need to fall by 40% - 60%" they are not in the real world. This would be devastating to the economy, and ensure a deep and severe recession far worse than the last one (because so much of people's debt is now tied into their house prices). Saying 'tough, you shouldn't have borrowed so much' isn't the right response to all this, because a recession would help no one.
Any idea where the 400,000 Northern Rock customers that are being expelled are going to get new mortgages from at a reasonable rate ?
So finally you are starting to realise your mistake of bringing one of the most active, customer friendly mortgage banks to its knees with very dramatic and premature reporting.
I talk ofcourse of Northern Rock, where us small but loyal shareholders were brushed aside for personal and political point scoring.
Reap now your benefits.
Hope it hurts.
Our local estate agent tells me that prices have already fallen ten percent and are still falling.
Anyone who has purchased in the last few years with a mortgage of 90% or more of the value of their house will be unable to obtain another mortgage which is sufficient to repay their existing one.
Valuations will be lower and high loan to value mortgages are unavailable.
Liquidity in the mortgage market is not the major issue.
Perhaps if more people saved more and borrowed less we wouldn't be so vulnerable to these situations getting out of hand.
It's all very well leveraging based on other peoples' money and looks great for as long as it works, but the trouble is that it works perfectly until it doesn't.
Those with cash on hand will survive this easily. Those reliant on other people lending money for the same price tomorrow as they did today will struggle.
One of the conditions that the BoE could put on any additional support is that no further loans were to be made to Private Equity companies but that those banks that helped set up a national venture fund for start-ups, spin-outs and early stage high value adding companies would be looked upon favourably.
"And for everyone who says things like "house prices need to fall by 40% - 60%" they are not in the real world. This would be devastating to the economy, and ensure a deep and severe recession far worse than the last one (because so much of people's debt is now tied into their house prices). Saying 'tough, you shouldn't have borrowed so much' isn't the right response to all this, because a recession would help no one."
Sorry, I spend half my life trying to be there for people who are in trouble one way or another. Their road to recovery always starts with admitting their problem. Denial only extends their suffering. Therfore the statement above is a load of old tosh. Do we screw over the millions to come just to allow todays unfortunates to get away with stupidity? I'd vote no.
The fact that anyone says house prices need to fall already shows people are suffering! By your own definition, house prices not falling by 40 to 60" is plain wrong!
Besides if we care about tomorrow. Mortgages Debt should be the only non taboo form of Debt and not a way of life. One way or another this needs correcting. If a painless way was an option I think everyone would welcome it. It's not.
House prices are only indicative of the market; the market being the amount of money made available to borrow; the available money is dictated by the lender; the lenders' greed is reflected in the salary multiples given; the profits made by the lender (banks) are taxed by the chancellor; the tax take from the financial sector is some £30 billion (tax take on manufacturing/£19 billion) - This particular government is reliant on the financial sector's greed (read profit) for it's ill conceived spending plans which happens to be - yes you've guessed it, based on borrowing!
Now that the central banks have bailed out the system once, the unregulated system as was cannot be put together again.
The problem arose because the incentives of the traders were all wrong. People knew this at the time but as they were all coining it in, no one was interested in doing anything about it.
If those who set up the deals knew they would not be around to see any downside why should they really care about making prudent investments? I imagine half those guys are retired and watching all this unfold from a beach in Barbados.
Much tougher regulation will be needed in future. I have some sympathy for the FSA in this as they were always told to be 'light touch' and 'hands off' in their regulation style. This will now need to change I fear.
Much tougher regulation must follow this as if the banks could no be trusted before the 'moral hazard' became obvious with the bail outs they certainly cannot be trusted now.
I am still astounded by the markets reaction to the news UBS needed to be bailed out by a consortium of banks. let's be under no mistake about what happened yesterday the US Banks (and one French) were covering their own backs providing 15 billion CHF liquidity to the ailing giant. This bank initially gave write downs of 18.4 billion USD and indicated this was a kitchen sink and all yet 3 months later they have come back to market with more writedowns of 19 billion to me they lied 3 months ago hoping the appetite for these products would have come back by now. What is to say they are still not lying. the Reason the banks bailed them out is not a revelation of the banks commitment to help out a rival but to me more of an indication that the exposure they have to UBS is more worrying and for the US banks it probably has not cost anything as they have probably repackaged the deal as aswap and put it on the Fed's balance sheet. I am sure the US tax payers will get no benefit for bailing out a bunch of greedy Swiss bankers other than unbearable inflation pressure down the line. I wonder if I get a credit card blow the money on worthless assets will the US tax payer please my debt as well.
In short, the whole financial problem has arisen because banks have lent money to people who cannot afford to pay it back.
The banks now want us to lend them the money to be able to cover them for long enough to make back what they have lost.
To strip this back to its bear bones, a bunch of gamblers have asked us to fund their bets for a few years whilst they make enough money from their gambling to recoup their losses.
I wouldn't give the gambler the money, and I cannot sanction the banks getting the money. Their argument is that everything would collapse around us if they don't get the money. My question is "is that really the bad thing that they make out it is?" If we are living in a fallacy that has been created by a debt fuelled boom, why is it such a problem if everything heads south to the level that it should actually be at? It is impossible to perpetuate the myth in the long term. Surely it would be better to unwind in the shorter term?
#49 Scamp
Most
"start-ups, spin-outs and early stage high value adding companies"
that get funded from grant aided state sponsored organizations are purely in it for the money they can extract from the government.
The venture capital funds get protected when the start up runs out of money. The government, us, picks up the tab.
If you do not believe me try and find out what has happened to the failed companies that received state funding. They are all conveniently forgotten.
Meanwhile older established companies in the area get out competed.
Grants are killing off the "old economy".
Where does/will the grant money come from?
just when did banks change from being prudent lenders to a home for gamblers? When did a savings account or a loan become a "product"? when did these intelligent people decide that lending $200,000 to someone who was unemployed was a good idea?
By all means bail out the banks but there must be strings attached. They must be made to go back to old fashioned banking, they take deposits by offering interest and lend the money deposited at a slightly higher interest rate, its not rocket science. that way the risks are minimum, the obscene salaries are history and we get back to sanity.
Hi Robert,
Who's money is the Bank of England (BofE) going to use?
It sickens me that commentators - and I unfortunately have to include you in this descrption. Unfortunate because you generally offer sound commentry - routinely fail to mention that utlimately, any BofE bailout is going to use UK TAXPAYERS MONEY. To be blunt, as a 'fee paying' member of 'UK plc' I do not want a share of any liability for the toxic waste which the big banks have ended up with.
Using UK taxpayer money to bail out bad business plans inspired by greed, share price engineering and creative accounting which makes Enron look saintly, is absolutely unacceptable.
If there is a liquidity problem because these institutions, (as an aside: who just awarded their top executives with bonuses which given the current climate make a mockery of their claims to poverty) won't lend to each other then fine:
The bank can offer funding at punitive rates for 2 years against only the most secure assets.
Anyone who believes that these markets will have corrected themselves within two years is in cloud cuckoo land. In two years the toxic debt is still going to be toxic.
The Fed in the US is going to continue pandering to the short term share-option myopia of the heads of business, keep their heads firmly wedged in the sand and not take the decisive action needed to fix the problems it helped ferment. This will mean that the US slumps into a recession the likes of which Japan is currently experiencing.
The reality is that we don't know what to think, until we get a better steet on just how much of the capital of the banks in the developed world have been wiped out. Look what is happening in Iceland, and then go figure, I think how many more Iceland's there are out there...
Surely Robert, the most obvious reason why the equity marekts are still so full is because your money has to be parked somewhere and the equity markets (commercial property aside)are fantastically liguid investments by today's standards with a good income stream to boot.
Some of the most sought after residential property (five bedrooomed houses in upmarket parts of Edinburgh are currently empty - the former owners moving on with a bridging loan no doubt. Finding the best part of three quarters of a million in today's mortagage market must be tough hence the breakdown of chains even in the areas of the property market that the pundits tells us will be exempt from a down turn. Pass the tin helmets!
We're told that the issue is that banks are not lending to one another as they normally do. If this is true then some banks are sitting on excess liquidity while others are finding things tight.so perhaps the BOE could act as intermediary - taking deposits from those that are flush and then lending to those that are short.
However I suspect that the resons that banks aren't lending to one another is because they are all suffering from having less funds than they would like - because funds are short overseas. So we either put up with the problems or the BOE acts as lender of last resort as it was supposed to - just a pity it didn't do that in good enough time to prevent the Northern Rock debacle.
LIBOR is 5.33%, Base rate is 5.25%
What is the problem?
#49 Scamp
Most
"start-ups, spin-outs and early stage high value adding companies"
that get funded from grant aided state sponsored organizations are purely in it for the money they can extract from the government.
The venture capital funds get protected when the start up runs out of money. The government, us, picks up the tab.
If you do not believe me try and find out what has happened to the failed companies that received state funding. They are all conveniently forgotten.
Meanwhile older established companies in the area get out competed.
Grants are killing off the "old economy".
Where does/will the grant money come from?
I agree with tim 11:39, The BoE should accept UK assets as collateral, but not US ones. If a bank wants to 'play away' it should take the consequences.
I have a fair bit of trouble understanding the meaning of fractional reserve banking in what is effectively a cashless society. Looking at the banking system as a whole, money is lent to a borrower and spent, but it always stays in a bank account somewhere (say of the person who sold the original borrower a house). So the banks can lend the money again and again. As I understand it the only constraint on how much the banks can lend are the Basel II Capital Ratios.
It seems to me that this whole derivatives/CDO/
off-balance-sheet-accounting thing was just a scam by the banks to get round the Basel II limitations, and having done so they were able to embark on the credit spree of recent years. But now the CDOs and things that they were using as make-believe capital turn out to be worthless, so their Capital Ratios are shown up as all to pot - and it is this that is causing the "Credit Crunch".
Actually all that has happened is that the banks' capital base is gradually being valued back at what it should have been all along, and their lending therefore needs to be scaled back appropriately (unless they can get additional capital by share issues etc). I assume the BoE loans don't count as capital, so don't make any difference?
A further oddity here is that if a loan is defaulted on, the bank's capital ratio is immediately improved, so it can just loan out the same amount of money again to someone else. So long as a bank's bad debt is no worse than that of the other banks, it doesn't lose out at all (the same interest is coming in, just from a new borrower). This would seem to explain why the banks have been so willing to make such ridiculously risky loans.
It's all quite insane, but it seems to explain what has been happening. Can someone please tell me I've got this completely wrong?
Robert,
I watched your program on 91Èȱ¬ 2 last night and I’m sorry to say that I thought it was a typical 91Èȱ¬ approach of vast over simplification that lays all the blame at the door of the most visible people in the city – investment bankers and hedge fund managers. The FSA and the SEC are institutions that are supposed to guard against moral hazard so why was there no mention of them in your program?
Your description of CDO’s was nicely animated but conveniently circumvented the actual complexities of the true financial model. Had you bothered to investigate this further, you would have realised that all financial models require assumptions and indeed some of the most well known models in finance today have very basic underlying assumptions.
My key complaint about your program yesterday is that it did nothing to educate the general public about what actually goes on in the city, but rather sought to vilify visible city workers by using gimmicks such as videos of expensive cars and interviews with elite concierge services.
Raman
So where's the economic theory to explain all this?
Welcome back Marx?
It could be argued that there is a clear case of 'monkey see, monkey do' going on here.
The monkey being the BoE, which seems to have lost a lot of confidence in its abilities (possibly due to Browns previous meddling) and is now rather slavishly following the Fed.
That is, the Fed is pumping whatever liquidity is required into the US market and the BoE is set to follow suit here.
These are interesting times for these major 'fiat' currencies.
I wonder how much longer the illusion can be maintained?
Post 45.
No ones being expelled - more than welcome to go onto SVR - which their originally affordabilty was based!
Further to this, how many of the 400k were caught up in the hysteria (fueled by 91Èȱ¬ and Peston) and queued to withdraw their saving (and deposited in all the other Building Societies (who now cry there being hard done too - boo hoo) so compounding the whole situation - guess it highlights the addage "what goes around, comes around" maybe more people should reflect on that saying before speculating
Thankyou (climbing down from my soap box - isnt it great living in a democracy!)
We didn't back the miners, steelworkers or shipmakers when they went bust, why should we back the banks? Surely not just because they wear sharp suits and work in swish offices?
Let the markets take their natural course - afterall the banks insist normally on no govt regulation and they themselves are not sympathetic to the miners/steelworkers etc.
So big deal if property plummets from its heights as banks can now only lend 3.5 x salary, so be it! Banks through blatant overlending have fed this boom of house price inflation (in which the govt has been complicit), so let them take it down again.
OK a few people may get hurt now, but think of ALL the people in the future who either won't have to borrow such stupid sums to buy homes and/or will now be able to actually aspire buy one - how terrible! Let's think long term, lower house prices means everyone in the future won't have to have such silly debts and the consequent drag on their finances for life.
"Even if the banks are culpable, would we be cutting off our noses to spite our faces by depriving them of succour – in the sense that we suffer when the lending dries up.
What do you think?"
Yes the BOE can supply sufficient liquidity to keep the economy going.
The price?
The resignation of all the directors.
There is no market in banking. The ownership of banks has become super concentrated over the decades since the last war. This means that national regulators and central banks have little influence over the banks. The BOE could perform somersaults to absolutely no benefit and probably huge damage to the rest of us.
We MUST be content to let the banking market collapse and reestablish itself if that is what its internal imperative now demands. Protect small (under a million pound) depositors by all means to provide some base of stability but let the rest find their own level.
This is not a council of despair it is just a realistic appreciation of the impotence of the BOE. If the BOE tries to 'punch above its weight' we will all be lost. My advice to Mr Mervyn King is to sit on his hands, put interest rates UP to dampen inflation as required but not to protect the incompetents at our major financial institutions as in essence there is nothing he can do anyway.
Whatever happens, the consumer will be fleeced to pay for the incompetent Banks' behavior as the Bank Regulators seem incapable.
The Banks should be made to show the additional charges they make through not paying interest, delaying transfers, and other wheezes, so that they claim a fair contract.
The financial system requires that Central Banks bail out the commercial and investment banks. Punishing them for their greed when they are needed to sustain the system is an expensive luxury. The Fed has learnt its history lessons well and not repeated the mistakes of the 1930s. With as much credit creation available as required, the problem of solvency will no doubt be solved by changing the rules. As for moral hazard, the policing of what is acceptable practice will be revised. Equity fund raising and cut dividends are likely too.
When depressions arrive the first course for central bankers should be to inject sufficient money into the economy in order to maintain liquidity and facilitate business. Had Mervyn King done that last July, Northern Rock may have been able to keep trading and the current 'credit crunch'may have been avoided. Even now he just dabbles with a £10-20 billion short-term facility when a much greater amount, over a longer term, is necessary. The Governor has been lucky - what if there had been more than one bank collapse due to his tight liquidity policy ?
Though it's most certainly not on the cards at the moment (timidity by New Labour - look how long it took for them to take over Northern Rock) it would be the most sensible option for the capitalist system, wouldn't it?
What a shame we don't have the Labour party of a quarter century ago in power today... Never mind Northern Rock, the whole financial sector would've been expropriated - and not for the sake of rescuing capitalism.
anyone that seriously believes (as opposed to what they ''say'') that the banks should swing for it - are living on another planet - if they think they will not be personally affected.
There are ways around this; lets get moving and leave the blame for another day.
I think of a group huddled together watching London burn in years past, arguing about who started it - as oppsoed to ''lets get the fire out''
I would not object to the BoE lending our money to the Banks for two or three years providing it is lent at rates which reflect the risks associated with the assetts being offered as collateral. As you said in your blog the assetts being offered are a bit "iffy" and not of much value on the open market.
What rate would you suggest Mr Peston? No less than LIBOR rate I hope or we will all be subsidising the very instutions and speculators that brought about this crisis in the first place.
If the BoE were to flood the market with cheap money again you bet the smart alecs would soon find ways to make obscene profits from it. Of course we can't let all the Banks grind to a halt. But they must not use our money to precipitate another round of runaway assett inflation like the last one. The 91Èȱ¬ could help by telling us on the news and at every opportunity exactly what interest rate is being charged.
Forget about trying to manage the money supply. Why don't we just sell the Bank of England to someone in China, India or Japan? By outsourcing the management of the financial system, there will at last be complete outsourcing in this country.
And at last we will have Freed the market of economics.
Failing banks should be allowed to fail. Some will survive and some new ones will start up.
Giving the banks money is like paying Danegelt to the Vikings. It just delays the day of reckoning and makes you less able to defend yourself when that day comes.
Or to put it more financially, lending money to the banks will boost money supply, increase inflation, reduce the value of the pound which in turn will reduce money supply, resulting in more money having to be leant and so on until the pound and the UK economy has been well and truly trashed.
If the treasury are desperate to increase money supply, why don't they do it the old fashioned way and start investing in the UK. The UK needs power stations and new railway lines, not overpaid bankers.
So traders are happy that UBS et al have made a clean breast of heir financial woes? Frankly this is just the start of problems for the worlds major banks. The US subprime crisis show no sign of letting up. Ireland, Spain etc are discovering they have been profligate. And the UK has its own pandora's box in respect of overvalued commercial property, subprime, self-cert mortgages and £1.4trillion personal debt. As the UK economy goes down the toilet then expect further spread on mortgage lending rates and other lenders withdrawing from the market altogether. Britons will be spending many years rebuilding (if they can) their personal balance sheets and our debt financed economy will go tango uniform.
I would not object to the BoE lending our money to the Banks for two or three years providing it is lent at rates which reflect the risks associated with the assetts being offered as collateral. As you said in your blog the assetts being offered are a bit "iffy" and not of much value on the open market.
What rate would you suggest Mr Peston? No less than LIBOR rate I hope or we will all be subsidising the very instutions and speculators that brought about this crisis in the first place.
If the BoE were to flood the market with cheap money again you bet the smart alecs would soon find ways to make obscene profits from it. Of course we can't let all the Banks grind to a halt. But they must not use our money to precipitate another round of runaway assett inflation like the last one.
The 91Èȱ¬ could help by telling us on the news and at every opportunity exactly what interest rate is being charged.
We need to remember that the banks have generated a new economy. After Mrs Thatcher had destroyed manufacturing, through throttling the money supply, the movement into the mortgage market by the banks began a new era. Our economy is based upon loans to the housing market in the UK and US - giving us a time of growth and buoyancy. It's definitely weird and arguably wonderful but it's all we've got. Whatever happens the banks need ample support and any attempt to teach them a lesson should be avoided.
My understanding is that LIBOR is nearer 6%, one of the reasons why mortgage rates are going upwards !
Lenders are withdrawing Base rate trackers like the Skipton did today or increasing margins in anticipation of the BOE reducing rates over the next quarter.
They are also increasing the cost of fixed rates in an attempt to slow up the demand for their products.
This works short term. A mortgage rate that was say the 20th best available last week is in the top 5 today. No doubt the top 5 deals will be gone by next week as mortgage brokers seek out the best deal for their clients and overwhelm these lenders.
I think we do need BOE intervention but with conditions attached.
Clearly what is happening at the moment is that the demand for money is greater than the supply.
If banks are allowed another tranche of money from the BOE this must be made available to customers and not salted away to boost their depleted reserves. However, the FSA could impose restrictions on remortgages for example a rule that only allowed say remortgage customers the facility to capital raise by an additional cash amount say £10,000. This would provide a wake up call to consumers that they cannot live beyond their means and remortgage every 2 years to pay off their debts and then go out on another spending spree.
The resourceful consumer and those desperate for money will not be defeated so easily. Whilst mortgage approvals are down,people are switching into other areas to fund their requirements credit cards and unsecured loans.
This is more expensive in the short term and could lead to higher default levels in the future. This is no good for anyone.
The days of cheap credit are gone, for how long nobody knows ?
Therefore what is required is a total reform of both unsecured and secured lending.
If this does not happen the credit crunch will become an inevitable cyclical event.
If the BOE committee or the FSA do not take action then they will be judged as being not fit for purpose and will need to be replaced or reinvented.
If it takes government intervention with cross party support so be it. We cannot afford bank failures or a financial meltdown or a recession There are precious few winners if this happens and too many loosers.
"Even if the banks are culpable, would we be cutting off our noses to spite our faces by depriving them of succour – in the sense that we suffer when the lending dries up[?]
What do you think?"
I think that is what the Japanese thought, and look where it got them.
It was only their personal savings and manufacturing-led export industries that kept them afloat for the last 20 years. Their currency became a source of cheap funding for foreigners and their stock market never recovered after the collapse.
Britain is even worse placed.
I have the moral fibre to take the medicine now.
Do the banks?
Does the Bank of England?
Does the government?
Their attempts to hide the bad debt are a recipe for a depression.
The answer to the question:-
Who is to blame?
1. Central Bank and Goverment who have actively promoted ever increasing amounts of consumer debt over the last 10 -12 years. Most evident in the months after September 2001.
2. The Banks, who blinded by the ever increasing profits has not once stopped to think what is undepinning all this debt.
3.The shareholders, pushing for ever increasing dividends and profit.
4.The Media, forever promoting the 'buy a property in every town get rich quick schemes'.
5. The consumer, for getting sucked in by all the above and now struggling to repay the ever increasing debt.
Of course, its only those people who fall in to category 5 that will be held accountable because no ones watching their backs.
On balance I am with the banks, I'll wager it's going to get much worse yet!
Perhaps someone will take more notice when the jobs start disappearing.
AND THEY THINK ITS ALL OVER....
My son works for an HBOS subs in the mortgage business. Are they learning the lessons of what's happened? Hell no, just today they approved a mortgage app that my son thought they should decline but he got OVER RIDDEN ....self cert, dodgy accountant (who's phone never gets answered), income source not only unsubstantiated but substantially increased from previous appplication despite very modest job & very economicaly challenged house location. THERE IS NO WAY BOE should support such rubbish lending with OUR money until these banks demonstate real and visible controls and have a least one brain between them.
> What do you think?
What is it that makes bank think that
the tax payers are more gullible
than big businesses? Sure, we should
take their unsellable collateral, but
with one condition. Should it turn
out that we need to call on that
collateral, and it is still not
possible to raise the amounts
required to repay us (with full
interest), then we require the bank’s
shares instead. If we end up owning
every bank in England, and still
loose out, then such is life – the
credit crunch really was a
significant event, eh? But otherwise
we all get what we need. If the bank
shareholders are confident that the
value of their collateral has only
temporarily collapsed, then they
will have no hesitation in
promising to pledge some of their
business to the taxpayer in return
for the loans. But if they are not
confident that the crisis is
temporary, then they are trying to
make a monkey out of taxpayers, so
no-deal – let’s set up new banks with
our taxes instead, to replace them
once they go pop.
In the month since JP Morgan took over Bear Stearns after the former went to the wall, we have seen JPM shares advance by 18%. This suggests that the central banks should not be providing more liquidity in order to keep the financial markets flowing. Instead it might be better if they just let the market bears decide which banks should go under and which of them will survive stronger and more powerful than before. It might be brutal and there will be a lot of carnage in the financial markets but it will be better in the long run.
If George Soros is correct in his premise that the global financial markets will shrink in the forseeable future then this reduction in numbers should happen sooner rather than later. History proves that in the past this scenario always followed similar upheavils in the financial markets
I do not see any problem in the BoE lends to both retail and I-Banks if two conditions are met.
First, the rate it lends takes into account the risk they pose. The mortgage market in the UK contains far less sub-prime borrowers then the US.
Second, if it became clear that a bank needed substantial help (i.e. another Northern Rock) then it must be the shareholders that suffer. This is a fundamental rule in business and economics. It sends perverse incentives if an owner of a firm taking a very risky business benefits in the boom years but does not suffer in the bust.
The case of Bear Sterns where the shareholders were going to receive only $2 per share was an exemplary one. When the offer was increased to $10, is far less so.
Thus, the BoE, in my opinion, should give the banks 2or 3 year loans, but only at a rate that reflects the risk their assets hold (as the bank is supposed to be the lender o last resort).
@32 "Saying 'tough, you shouldn't have borrowed so much' isn't the right response to all this, because a recession would help no one."
Actually that's a nonsense. A recession helps the very people who caused it. It devalues companies substantially and allows for cheap and easy pickings.
The rich get richer, corporations get bigger, and joe-schmo loses his job and home to pay for it.
Classic free market capitalism I think you'll find
The banks should not be helped. They must pay for what they have done even if this results in pain for all of us. The alternative, to let them off by throwing public money at them, will only encourage them to be even more foolhardy and result in an even bigger crunch/crash in a few years time.
The factor that has been missed is the physical manpower needed to process mortgage applications. With Northern Rock processing 1 in 5 mortgages over the last couple of years, other lenders are now faced with 20% more unexpected business. It will take at least 6 months for lenders to catch up and train enough staff to handle the demand. Lenders are withdrawing from the market to maintain service levels but do not want to be seen to pull rate altogther as this would cause more panic in the market. The increase in rates seen over the last few weeks is a result of the fact that no-one wants to have the lowest rate on the market.
Robert, How is it the Euro is so strong against the GBP at the moment? It's not as if the Eurozone is running away with economic success compared to the UK
#55 RudeBoy
Wasn't suggesting that the money for a VC fund should come from or be guaranteed by Govt but should come from the banks et al in return for the BoE providing liquidity into the market.
In other words the Govt/BoE could use leverage to push the financial institutions into doing what they should have been doing for the past twenty five years.
once again there is a nail in the coffin of 1st time buyers because of the greed of certain people in u.s.a./uk we in britain have to suffer the consequences never have i seen so many young married people staying with there parents or applying to local aithorities surely it is about time that the bank of england or someone should take the banks/mortgage lenders to task regarding exorbitant rates i would think that a rate of 1% above the bank of england rate would help 1st time buyers
As your own programme on 91Èȱ¬2 clearly explained, RP, it's heads they win, tails the rest of us lose. Unless the banks are made to suffer for their failures, they will not learn. Okay, we may well suffer a slowdown for a couple of years, but the vast bulk of people do not need to move home and a slowdown may well bring some sense to the general economy anyway. Bring it on.
The problem is that the BoE has consistently kept int rates too low and fuelled this fake boom, while our actual productivity has fallen further against our competitors. If the BoE now takes dodgy loans as collateral, what happens when there is a major default? Oh, I know, the taxpayer will be bailing out Merv the Swerve, Al Darling and their chums, so would it not be better just to belt tighten a bit now and leave them out to dry.
The banks are responsible for ensuring that they have enough liquid assets to keep going, and enough assets to stay solvent.
The economy simply cannot afford for banks to seize up because of the lack of liquid funds, hence short term liquidity loans are in order.
However, the purpose of the short term loans is only to allow time for the bank to free up liquid funds by selling some of their less liquid assets, close for new loans, or raise new share capital or long term debt.
The fact that these propositions are unattrative to the bank's shareholders in the current market conditions is not the problem of the taxpayer, until it begins to take banks into insolvency territory (at which stage some of these options become more difficult).
Until it does, the banks should not only be kindly requested to raise funds in other ways, they should be forced to do so in order to provide their own working capital, not rely on the tax payer for a cheap way out.
Hi Robert
My points are any change in base rates takes 18 months to hit the real prices with the man on the street.This is not expressed in the blogs/newspapers.
So why after 911 did rates drop?
What was so urgent?
This action caused indirectly the credit crunch ie cheap money that is on loan.
govts have no funds just the ability to tax and the experts are worried about debt £1.4 trillion,however from a economical point of view the M4 (money in circ) is way too high and harder to fix thus what will the govt do.
If anything rates should rise and if not why not.
open for comments.
Intervention is only worthwhile if it is going to resolve the problem. I have a horrible feeling that bailing out the banks is only delaying the pain not resolving the issue.
The banks are shrewd enough to see a profit opportunity when it comes along and I am sure they are happy to be seen to be going cap in hand to the Bank of England for assistance. They'll get cheaper money (but use the credit crunch as an excuse to increase their profit margins by not passing the benefit on to their customers).
The way the media is reporting the situation (and the 91Èȱ¬ themselves seem very keen to sensationalise any indications of a possible recession) only goes to help the banks in their argument that they need assistance and is virtually talking people into believing there is a recession happening now.
We have a base rate at 5.25%, low inflation and high employment. These are not the ingredients of a recession, but certain people think that if they say it enough times it'll happen. Don't look at the US, what's happening here.....people are tightening their belts (which they often do when household bills increase), but don't keep looking at every bit of data and print scaremongering headlines - statistics can be interpreted in many different ways and can be used to justify virtually any conclusion you want to reach. The banks see a way to make even more money and are taking it - watch them maintain their profit levels!
Post 92 the Euro is strong partly because it is spread across a large number of countries such as Germany, France, Spain, Portugal, Italy and Greece amongst others. As such the risk of economic failure in one country has less impact on it than the UK economy has on sterling.
The UK economy is widely perceived to be going downhill fast and the expectation is that UK interest rates will have to fall considerably in 2008. As such anyone holding Sterling will receive less in interest over 2008.
The smart money has been moving into Euros for some time as people do not expect the European Central Bank (ECB) to have to reduce interest rates and they expect Europe to weather the financial meltdown coming much better than the UK.
Does no-one understand or comprehend that infinite exponential growth is impossible? A financial system based soley on debt - with interest which is impossible to claim - is certain to eventually fail. All growth, financial or otherwise stems from energy. In the past it was human labour with some additional animal harnessing. For the last 100 years it has been ridiculousy cheap fossil energy this whole house of cards was built on. Fossil energy if finite, the exponential growth we have seen is finite - it IS now starting to fall down - get used to it. Next time around, let's have have a financial system which is infinitely re-cycleable, shall we? Let's not base it on a finite resource!
Not sure the banks are exacerbating the downturn, but the 91Èȱ¬ seem to be doing a pretty good job. Again another distorted report full of negative spin. First Direct have temporarily withdrawn products to new customers because they are overwhelmed with applications. Their parent HSBC has at the same time introduced a similar product to mop up these customers. Look at HSBC web site to confirm this. This is therefore HSBC/First Direct managing their administrative load. The CE of First Direct explained this clearly on the Radio 4 today programme yesterday but his comments where again brushed aside as the 91Èȱ¬ sought to extract as much doom and gloom out of the story as possible.
Why should banks secure preferential credit facilities when they are still reporting £billions in profits??? And have been doing for the last 5 years consistently????
It is exactly the same scenario asked of the oil companies; why are you receiving $18billion in tax subsidies when you are reporting record profits upwards of $300billion collectively????
Disgusting!!!
NO, DO NOT LEND THEM MONEY!!!! Prosecute those at board level for incompetence and misrepresentation of fact! Bail them out and it will get bigger!
8. At 12:25 PM on 02 Apr 2008, john thomas wrote:
The housing market is over valued by between 20% and 40%, depending on which comentators' opinion you put most weight by. Anything that stops a readjustment in that asset market is only a bad thing.
Are you havin a laugh? Try putting another 0 on the end of those figures and you will get the true amount. It costs next to nothing to actually build one!
As a mortgage broker i experence on a dayly basis the damage that the shortage of funds in the market place are having on first time buyers trying to enter the property market through to people who are unable to re-mortgage their properties as they are now worth less than they paid for them two years ago. Dispite two drops in the bank rate the average mortgage rate has risen by a quarter of a percent adding to lenders profits and not offering any comfort to their customers.
The Bank of England and the government need to act today to reduce interest rates and lend money below base rate to lenders with the instruction to pass this benefit on to new and existing mortgage customers until confidence returns to the money and investment markets.
I was recently told that if you take any 10 year period since 1950, the average annual house price appreciation over that period is 7%.
If you can meet your repayments and dont need to move, then your just fine. If you've overleveraged and have been caught with your trousers down, then i just dont think you deserve any help.....
If the BoE is to increase its lending against dubious collateral, surely this should be done as part or an orchestrated process through which all banks are forced to come clean as to the real value of their securitised debt -- as I understand was attempted in Japan. The BoE should price such collateral aggressively, and not as a bail-out.
And in terms of the current mortgage famine and the points made in post 91, why doesn't the Government go the whole hog with Northern Rock and turn it into the nation's one reliable and tranparent issuer or mortgages, with straightforward long-term trustworthy mortgages and no small print? Perhaps as part of NSI?
Why the rush to return Northern Rock to the private sector, shut down its branches, and sack its competent staff in the midst of a mortgage famine and credit crisis created by that same private sector?
I could not agree more with comment#99. The UK economy is in god shape,high employment rate and the UK house prices are still increasing, but the pace has slowed down a bit. But the speculators are speculating Recession in the UK.Dont belive them.
Same old story- the US were here 6 months ago, the secured lending is drying up as the banks all know that property values are falling. People turn to their credit cards, not for the nice new frock or or patio set but to ay their council tax or power bill! Then when that runs out or up to its limit the brown stuff really hits the fan.
I feel sorry for those who couldnt get out and contempt for those who could but but were too blind to see.
Of course there will be a global slow down, I dont think were allowed to call it a depression or a reccession, these days its a contraction. Whatever you call it if Bill in Oaklahoma and Ted in Milton Keynes cant afford the New Action Man set from China then the world economy is screwed. Good luck to you all- I fortunately got out last year but others still cling to optimisism.
Dave C
Hi Robert,
I think that Northern Rock and all other banks who have offered unrealistic debt to thier customers should suffer and be allowed to fail. Why should I the taxpayer bail out a business? These companies are the first to complian about high taxes, in particular for 'social provision' but are the first to beg from the taxpayer when they want help, they are two faced in my opinion.
I also think your idea of regualtion in the good times is a good one. Banks should only be alloowed to lend 3.5 times income and over a maximum of 25 years. This would make prices more stable as would 25 year mortgages. I also think equity release should not be allowed.
On house prices why do we expect them to go up all the time. I think that politicians have suggested they are an investment when actually we should think of them as a place to live in. If we did then we might accept the price can go up as well as down.
My bank manager has told me to offer at least 30%-40% less than the asking price as the bank view is that this is their realistic value. I am currently looking to buy and I know the time is right for me but I also accept that prices can go down even further.
You will not be surprised to learn that Estate Agents 'claim' house prices are 'holding up' when I put in my bids. Another area for regulation is that a Bank/Building Society should not be allowed to own an Estate Agent as this can help drive prices up.
A couple of economists at the World Bank looked at 113 systemic credit crashes. They discovered that where the central bank wouldn't or couldn't interfere, clearup costs were 1% of GDP. Where they did, costs were 13% through 60% of GDP.
Then there's Austrian economics, the one branch that's said this was going to happen. Adherents such as Doug Noland spotted the credit bubble ten years ago and had mortgage-backs and credit default swaps marked as Ground Zero too. The Austrians say that the malinvestment has to be purged to get a new boom and trying to prevent, delay, or alleviate this is nonsense-on-stilts.
So count me in the Liquidationist camp. Let the banks go down and a plague on all their house prices.
Hi Robert
You are doing a great job - keep it up -and talk straight and hard.
Per the IMF, and anyone with commonsense, there has been too great a build up of debt over the last decade. A large chunk of that debt is supporting borrowing for over-priced houses.
I for one do not want my own kids starting into such a market - for them almost no hope in this country of a fairly rewarded life for hard work and dedication.
Why should I and other hard working and prudent taxpayers pay to dole out those who have recklessly gambled - and now want others to bail them out?
The BOE should stick hard to its job of controlling inflation.
But Robert - we all know inflation is way above CPI - because the government have fudged the figures in their favour.
Keep on at truth - keep messages straight - and hopefully borrowers and banks will appreciate what responsibility for one's own actions really means. That way future decisions will be soundly based! I HOPE!
Yes. There's no sensible or practical alternative.
We absolutely do not want the mortgage market to dry up and we certainly don't need a correction to house prices even though they are overblown at present.
The BOE has do do whatever it reasonably can to keep a balance on house prices. There are too many other debts dependent on them holding.
"Even if the banks are culpable, would we be cutting off our noses to spite our faces by depriving them of succour – in the sense that we suffer when the lending dries up"
Who is "we" ?
Many people have suffered as a result of the credit & property boom. Savers, people with regular jobs e.g. in manufacturing. People who are not good at/don't have time for DIY and can't get hold of builders. First time buyers.
In downturns only a small percentage of people lose their jobs or have to take jobs with a lower salary.
It's an ill wind that blows nobody any good and it wouldn't hurt if the wind changed to assist the decent, hardworking majority for a few years.
You have all enjoyed the orgy of inflated property prices and bloated debt for the last 10 years but childishly believe it can go on forever. You plead for the Government to make things better but are unprepared to modify your behaviour and curtail your wants. (Why are property prices not 40% of the consumer price index?)(That would keep interest rates at above 8-10%!) You are like little children who wish for their hurt to be kissed better. The children deserve it. You do not. I vote for a major crash and depression to teach you a lesson in your demotic paradise. Grow up. And read Martin vander Weyer in this week's Spectator to see how you have squandered your North Sea oil and been net spenders, instead of savers, for the past two generations.
It is time the Bank of England chose our newly nationalised bank the Northern Rock to offer loans and mortgages at more competitive rates. Why are we giving loads of cash to the banks to essentially pay off their bad debts which were of their own making. We could easily get Northern Rock to pay back it debts quickly by allowing the BOE to lend directly to the consumer via NR rather than through the greedy banks. I believe the banks are now profiteering from the credit crunch and could easily drop rates in line with the BOE interest rate, it is however not in their interest.
Just one comment on First Direct; they had been very aggressively entering the mortgage market with heavily discounted rates that were nothing short of spectacular. They picked up a lot of business very quickly in the absence of the usual players and incidentally did this directly, not going through brokers. They have now withdrawn presumably having achieved their aims. More relevant is the scaling back of business by the traditional big players who used to account for three-quarters of the market but now account for less than a third. The smaller lenders, seemingly often to their surprise, are left to uneasily pick up the slack. This scaling back by means of increased rates and fees by the big boys is what's shaping the market but surely to their satisfaction less newsworthy.
I have had enough!!
Me and my partner decided to get a mortgage and i have been keeping an eye on the rates and working out affodability and such. We decided to go with Natwest as they had the lowest rates and product fee and yet the longest fixed rate. BUT today i went onto the site and not only have they raised their % interst by a whole percent meaning we pay an extra £150 but they have raised their product fee by £300 thus now making it impossible for us to get a mortgage and we now have to pull out of the property we were gonna get i am furious that they havnt passed the bank of Englands rates onto the customers and now we are suffering!!!!!!!!!!!!!!
Post No. 115 - Very difficult to agree with any of these comments. To date, nobody seems to have voiced that consequences should always follow for failure (deferred success - pah !) and misdemeanours. Is it too simplistic to suggest that the ones that have benefitted most from lax controls should be the ones that should "contribute" to the mire that we are now in ? In the theme of "accessory to financial incompetence". Is it too much expect that the poor (getting) poorer "man in the street" underwrites the excesses enjoyed by the privileged few ? Possibly we can all be thankful that the "man-in-the-street" does not actually grasp the consequences of what is unfolding ?