91Èȱ¬

Doing nothing to free up normal borrowing is not an option. Even trying to raise 50% loans is expensive at the moment. We'll soon be back to 'you won't get a mortgage unless you've been saving with us for 10 years'! And that means a significant contraction to the economy.

The one advantage of deluded Gordon hanging on to power is that it is going to get worse week by week.

Doing nothing is the best option. Mortgage borrowing is pretty much at historic norms (deposit needed, 3.5 times income). The only problem is house prices are too high. Don't meddle. Let them fall. Don't bail out the feckless, all this will do is mean people who lost out by not being part of the boom lose again as the taxpayer vainly tries to stop the bust.

It strikes me that there must be a happy medium between the uptight bowler-hatted bank manager who despenses mortgages only to those with the whitest shirt and humblest manner, and the riotous lending of 125% mortgages on 30% over-valued houses seen in 2007.

I'd love to see a return to "normal", but I'm not quite sure I (or anyone else) knows where on the spectrum that long-term sustainable "normal" lies or how to get there.

Yes, but is he saying that while the Gov not BoE can decide to fund new mortgages, if it does so he will raise interest rates? Seems to me that Brown will throw money at anything to win the next election. Is the BoE warning him off or simply doing a Pontius Pilate?

I've found an interesting article on the 91Èȱ¬ web site see the link below:



It is dated Feb. 2002 and warns of the danger of CDOs being the next scandal waiting to happen.

It would seem the mess we're in was predictable back in 2002. So why have the BoE, FSA and Governments allowed it to happen? And when is someone going to accept the blame?

I think I understand what he is saying.
Seeing that all the bank's losses are presently untouchable as mostly equity in other peoples' property they will continue to squeeze this out gradually by rationing mortgages. The taxpayers and home owners will have to bear the cost. Big falls in house prices on the way.
This begins to look like an engineered recession.
But I'd rather have Mervyn King in control than Gordon Brown.
In the short term bad but in the long term better.

King is onrecord as saying that the banks where becoming addicted to the SLS and this was bad and would have to stop. It seems now he is saying that if the banks are like for example a heroin addict that can't go cold turkey, just switched to methadone. Only problem is, in both cases, it'is still the taxpayers money. Fear of another bank failing will keep us all poor for years.

Again, the risk of lending >80pc LTV is only borne by the bank if they have been irresponsible, or lax, with their risk analysis and lent at ridiculous Income Multiples. If someone can comfortably afford the repayments, and wants a house as a home not an asset, then they don?t care about negative equity and could borrow 150pc LTV comfortably at 2 or 3x Income Multiples, with very low risk of default. The return to 75pc LTV and huge deposits is because banks continue to loan, albeit at a slower rate, to people at 5 or 6x their salary because houses are STILL too expensive.

Here is a translation.

The market for people who will buy 50 pence pieces for £1 on ebay is currently frozen (due to an outbreak of common sense).

The Bank of England has agreed to buy the 50 pence pieces for £1 as long as the market remains frozen.

The world has gone mad.
"Sic Transit Gloria Bank of England".

Have to agree with 14thbaloo post number 5.

The NAB boss (John Stewart) was on the local TV a few weeks ago explaining in simple terms why his bank had just written off nearly $1 Billion in CDO value.

This was at the point the board of the bank decided it was his time to walk (with a very very nice $10 million golden parachute).

His explanation (as I drank my tea and ate my breakfast) was that no one could have foreseen the toxicity of these bond investments. They were A+ rated with a quoted default ratio of 1 in 10,000.
The NAB started investing in these (probably like sheep because everyone else was) in 2005.

The NAB has lost about 35% of capitalisation on the ASX since their peak last October.

A young upstart to its' banking crown St George Bank is doing rather better with its share price being considerably more resilliant. Thier board last week released discussions they had some years ago about the prospects of investing in CDO's and CDS's too. They concluded they didn't know enough about these investment vehicles even though they had gilt edged rating, and declined to 'risk' their assets in them.

By the way, a couple of weeks ago, the NAB also decided to dispense with the services of their risk officer as well.

It would appear the board now believes that perhaps someone could have foretold the toxicity of these investments.

bgrimer - you're misrepresenting a little (although I sympathise). The BoE is only allowing 50ps to be used as 1 pound equivalents for collateral purposes. It's not a problem unless (until!) the counterparty goes insolvent (er, like NR...). The aim is to allow banks to operate as normally as possible and thus reduce the risk of them becoming insolvent... but it's a risky game of chicken.

The Government should not give any more money to the Banks, The tax payer, who has been screwed by the banks for years, is now being asked to bail out these charlatans.

Tax payers money should be there to help out the tax payer, The government should invest in the house building companies and build decent affordable homes for all.

This will benefit the building Industry and finally destroy the false economy of deliberately creating a housing shortage to push up prices. Build homes, it will change Britain for the best and free up income we can all spend on a better quality of life.

Banking is the triumphant failure of wishful thinking over common sence ,everything was predictable and forseeable ,except to the maeoptic western visionarys called CEO'swho driven by a perfect synthesis of greed and stupidity could not not butt see beyond their non refundable bonuses

To think that Robert Peston is interviewing the cheer leaders of industry and asking them about the future when he should be asking them about the past and what wine did they use to wash down the golden goose and who got the wishbonuses .....

And we wont even be able to go back to eating cake

Connercial banking was driven by the aquisition of AAA's holes ,they were fired up borrow boys ,at the time and are now back on the street trying to sell their worth less AAA,s

We have had the credit crunch for a year now and still it seems the bankers want a subsidy from the taxpayer. This is begining to look like a habit.

It is quite correct that Mervyn King says that any continuation of the special support needs to be decided by the government. This is a political decision and he is but a mere regulator.

I have said it before but we now need to see a strategy by which we begin to move forward out of the credit crunch. That such is not forthcoming is a great concern as by impication this means the matter goes far deeper than is being disclosed.

I agree with the comment above that Mr Brown seems ready to sell his granny to get re-elected. Always assuming he hasn't traded the poor dear in already. I just hope he isn't after selling my grannies as well.

King has once again been hgoodwinked by teh banks who just appear to assume they can pull the wool over everyones eyes and continue to get overpaid salaries and insane bonuses for 10th rate work.

HM Treasury (HMT) and HM Government (HMG) must insist banks stop mucking around and make them sell off unrealated business they control to get sufficient cash in.

They are dragging their heels on doing teh right thing and must now be told in no uncertain words enough is enough. If HMT and HMG are incapable of forcing this issue then what the devil is the point of any of them.

We can exclude the FSA form the Tripartite as they have shown such outrageous levels of incompetance they make the banks look like they are doing something.....not!!

Government should not intervene in the market to get banks lending mortgages again. We're supposed to have a capitalist economy - why not let the market sort this out?

The reason banks aren't lending is in part because house prices are too high, because of reckless lending in recent years.

House prices are now falling, and all the lenders know they have a long way still to fall. The market is correcting. This should be allowed to proceed.

Hence lenders will be very careful about lending at anything more than 75% LTV. Because if they lend more than that, and house prices fall about 25% then they won't get all of their money back.

So the market IS now working. It was failing when it was lending 100% to people who self-certified their earnings. But now it is working properly by greatly restricting lending against overvalued properties. House prices will fall back to a much more historical ratio to average earnings.

Once house prices have fallen to this level, the risk of further falls is greatly diminished and lending will resume, hopefully on more sensible basis than we say during the past few years.

So if the government leaves well alone the situation will sort itself out, and in 2-3 years we'll be able to borrow sensible amounts to buy houses at sensible prices once again.

Unfortunately politicians won't let this happen, and they'll try and meddle in the market hoping to buy votes, but instead they'll prolong the correction.

ChiefWhiteHalfoat , cheers for the explanation as to the difference between NR and the big US institutions from my previous post. I think that cleared it up for me!

In US they cut the rates and avoided recession. Now I belief that government should take back the power from BOE and government and set interest rate.

These people in BOE are making UK have recession we could still avoid it by cutting interest rates to 3.5% or even less. Number of people I know have lost their jobs, others are frightened and almost all the companies are making a loss or profits have fallen so there is no threat of inflation.

Remember, when house prices were going through the roof BOE didn't do any thing.

If readers to this blog wish to have their postings understood, can they PLEASE NOT USE INITIALS without stating first what the initials relate to? I am referring in particular to posts 7, 8 and 10 where the writers messages are incomprehensible because of this failing and lack of consideration to readers

........Libour rates up!!

sorry,did I say''Libor'' ??

The US hasn't avoided recession, although recession as defined by 2 quarters of consecutive negative growth is more of a technicality than a reflection of the economy. They've postponed recession by throwing government (taxpayer!) money at private companies to fiddle the figures... probably in order for (technical) recession to be delayed until the Democrats take over the White House. Cutting rates allows bad banks to work again by borrowing cheap from the government and lending expensive. Doesn't fix the problem - just lets banks siphon money out at the top of the lending pyramid and leave the pain to the end borrower. Might as well just let the government lend directly to people, which is what it's already started doing by taking over Freddie and Fannie.

No one seems to be asking whether the UK economy is actually fundamentally sound. That is, are we producing more useful 'stuff' than we consume? It occurs to me that we used to, but we don't any more. We're living off the legacies of previous decades and centuries and we've reached the stage where the whole country believes it can live in fine style based on the mere existence of houses which we buy and sell to each other. Any industry we haven't already outsourced is hamstrung with all kinds of health and safety and environmental red tape. Our virtually illiterate youngsters all have top grade 'A' levels which enable them to walk into degree courses, but only in such vital disciplines as golf course management.

At the other side of the world there are billions of eager, highly educated workers prepared to do anything to get a share of our wealth, and we are doing absolutely nothing to prepare for it. Wheeler-dealing with loans and mortgages helps to obscure the fundamental truth, but is merely putting off the inevitable.

Why should the Bank of England use the peoples money to finance the 'fat cats' without insisting that the quantity of 'cream' (take home pay) they consume is severely curtailed.

It is an outrage against the people of this country that our money is to be used to continue to provide these bankers with the gigantic bonus and salary packages.

Let the institutions who come cap in hand pay a price, and that price should be replacement of the management board. These are the 'highly skilled' money men that have ruined their businesses. Why should the poor of this Nation bail them out without making them suffer?

Have to disagree with post number 18.

Unlike the government, the Governor of the Bank of England was one of the few people to sound a note of caution over the pace and extent of house price inflation. The reason the Bank didn't raise interest rates (sufficiently) during the housing boom is surely due to the absence of house prices in either CPI or RPI.

I do not recall any note of caution from the Government during the whole housing boom. They simply sat back and basked in the popularity generated by the credit boom. Totally irresponsible imo.

The economy should be controlled as a whole there is no point in having BOE in-charge of CPI and government controlling growth and the rest of the economy; it will be a disaster as it is happening now.

What ever happens, top bankers have the money to have a great life but normal man in the street depends on jobs that BOE is destroying by keeping interest rates high.

High salaries and bonuses can be controlled by tax or even by capping (i.e. 100% above a certain level of income) but it should not be controlled by destroying lives of normal people as its happening now.

Post #19 busby2

Please let me oblige....

The first one is 'given away' in Pesto's blog
SLS = Special Liquidity Scheme

The others are...

LTV = Loan To Value (ratio)
CDO = Collateralised Dept Obligation
CDS = Credit Default Swap

I've been reading these blogs for over a year now and it takes a while for them to stick in the grey matter if you don't work in the financial industry.

You'll have to look them up on Wikipedia if you need an explanation of what they are.

Also look at the following web page...

It was recommended by a person on another blog earlier today detailing how far back the FSA's concerns go... and yet they still did/do nothing!

I suspect that our Mervyn is not a happy man. His bluff of "moral hazard" has been well and truly called. The banks knew that they could call his bluff. Just like drug addicted offspring whose parents end up buying drugs for them.

The banks now know that Mervyn will bend with the wind and eventually pander to their every whim.

I think the BoE is right to ensure that otherwise solvent banks stay liquid, even if it means taking on some risk of loss through insolvency.

A liquidity panic spreads like wildfire through financial systems, and can topple almost any bank, solvent or not, with huge consequences for the economy. It was an important factor in making the great depression much worse than it needed to be.

With liquidity provided, a single bank can go insolvent in an orderly fashion without too much contagion, provided it is addressed early enough. And provided the BoE has valued the collateral sensibly, and keeps a close eye on solvency positions, it may still recover its loans, even from a bank that goes insolvent.

#29 crispblog.

So it is allright for Mervyn to oversee and organise a cartel?
Where is the competition element?
The banks will just continue taking what they can from their customers.

What gives them the god given right to be alone amongst commercial enterprises and be untouchable?

If they are that special then I see no reason why they should not be nationalised.

Why do I have the feeling that I am the victim of a street con artist playing the "Which cup is the pea under?" game.
What the heck is going on here and who is doing what to whom?
John C.

#30 prudeboy, it sounds like you are suggesting that individual banks rely on their competitive edge to avoid a run on their particular institution (which is how liquidity panics manifest themselves). In reality, no bank can do this. Not only are they exposed to potential cash shortages as a result of other banks running dry, they will also suffer from speculation around their own liquidity position and their exposure to others. The result is similar to a football stadium panic, where everyone tries to save their own skin in the shortest possible time, and get trampled in the process. And it can happen even when everyone has ample solvency to get through the crisis, if only given enough time to liquidate other assets (and pay back the BoE).

Well, whichever way you look at it the Bank of England has saved the bacon of most of our major banks.
So what is going to be done to stop them creating such an unholy mess again?
And quietly, in the background, do I hear the sound of a million private pension schemes dying a death?

#32 crispblog
So banks are a special case?
The bigger ones are not allowed to fail. When they get into trouble the rest of us support them. No moral hazard. Uncontrollable.
Nice work if you can get it.

If in reality, as you put it, the banks are unstable and prone to failure then they should either be allowed to evolve into some stable form or be nationalised.

The alternative is for the process to carry on as it is now. We should just expect to be stuffed every so often?

Well found 14thbaloo (the link foretelling CDO peril)
There must be grounds for retribution here, negligence, fraud? string them up! lock them up! flog them! .. not necessarily in that order . stupid bankers!

BankRSlicker

Many thanks indeed for your post 27.

I read the link you provided which dates back to the collapse of Enron. It begs the question as to why collateralised debt obligations (CDOs), which transfer risk from a portfolio of loans or bonds, often using an off-balance sheet, special purpose vehicle, are not illegal. The "off balance sheet" element smacks as an attempt to mislead amounting to fraud.

Mr Misra was quoted in the article as saying "Enron was at fault because it used credit derivatives as a way to conceal losses and to massage the balance sheet in a way that hid things from investors."

Why not ban the instruments themselves? The ability to pass on the risk to another party was a recipe for disaster as we saw in the subprime housing market in the US. Unrestricted credit fuelled the credit mountain here and unsustainable house price inflation.

An alternative might be regulation to provide that where a package of loans is sold to a third party, any loss caused by default is shared equally by both the buyer and seller of the package of loans where defaults exceed a percentage of the total considered normal for the expected level of risk. In this situation the seller of the package of loans would suffer considerable financial loss if they sought to defraud or mislead the buyer by passing on a package of subprime loans but would not suffer where defaults were in line with agreed expectations for prime loans. Would such a scheme be desirable or workable?

Busby - interesting comment about banning CDS. Sadly it's too late now, and of course if you ban one thing, along will come the next (ABS and MBS have been found to be equally fragile in the last year...) - banks have too much to gain from creating complex instruments and selling them to people who don't understand them at more than they're worth. Of interest with CDS is that there's USD 36 trillion, with a T, of nominal (not actual money, but the notional value of credit covered by the contracts) involved in CDS contracts around the world, and these things are OTC (over the counter), not exchange-traded. In other words each contract is between financial institution A and financial institution B, not a transferrable financial asset that can change hands in a liquid manner. So there's a huge web of interlinked CDS contracts joining up all the banks and investment managers. Suppose one of those banks goes bust, and voids its side of the contract... there's no protection (sic) for the other side, so they run into trouble, etc. It's not unfeasible that the whole CDS market could unwind if a major bank goes boom. Maybe someone else on this blog could help out here, but if this happened it would be an order of magnitude worse than anything at the moment, and I'm not sure how it could be sorted out in any sort of orderly way. The amazing thing is that (from what I see, at least) no one seems to be reducing their exposure to CDS - everyone's carrying on using them because cash bond markets have become very illiquid and the only way to trade large amounts of credit is to use CDS! I find it a little worrying...

I have to agree with #24. It is outrageous that the tax-payers money should be called upon before we have had our pound of flesh from those who have been milking the system in the form of salaries and bonuses for so long.

Also, if the root of all our problems is excessive debt, why on earth would the BOE want to take steps to allow banks to lend out more?

It's obvious the only long-term solution is the winding up of all the bad loans, however painful that might be. This papering over of the cracks will only drag the process out for longer, not change the end result.

This comment was removed because the moderators found it broke the house rules. Explain.

The turkeys that run the banking system are trying to save themselves for christmas ,{so that they can be better placed to securitise ther best tranche in the christmas pudding }even if they have to collatteralise the thick end of their wishboneus

They promice[ha ha and ha] to not unduly affect the governments bottom line or expand its portfolio to infinity and beyond


They may be asked to withdraw from the deal prematurely should the RSPCA be called in by a gelas x in the press gallery

I conclude from this article that M. King is the right man for the job and does the right thing. He says what we all know: The debt bubble that was created instead of a sound economy meets its unavoidable fate and bursts. We all know that this had to happen, and that it would logically create a hangover but that it is ultimately a cure, not an illness. The illness is a society on debt, a freak financial system that cannot survive. Yet there are still people all over the place who continue to suggest that somehow, the bubble needs to be saved at the expense of the few decent people. There seem to be people who think that it is a long term option that the British can give crazy bonuses to their bankers, who outnumber productive jobs, feed thousands of non-productive estate agents and at the same time still eat something - with the help of foreign savers money who "invest" into them. No-one will invest in you again!

Post #36 busby2

You are welcome!......please be aware that you are in humble company......even the (relatively new) chairman of the US federal reserve, Ben Bernanke, had to have a training session of what a CDO was, as recent ago as October last year, by some of the representatives of the corporations that trade in these 'toxic instruments'. Please also take note that the US federal reserve remains to be a private concern....not even answerable to any elected body within the US gov't.

I believe that when a new US president is sworn into office it is convention/historical for the new president to utter the phrase 'so help me god' at the end.
I think the next/new president in January should change the phrase to 'so help US god'.

Mr. King says he has'nt but of course he has.

Got a 'magical piggy bank', that is what.

It is magical because a clerk at the BoE can walk up to a computer and enter a few billion pounds into an electronic ledger.

They do not even have to print the stuff any more like those 'under-developed' countries with their wheel-barrow loads of money.

So it continues in this country, the slow migration, via increased capital ratios, towards a Full Reserve banking system.

Won't it be nice when the pound in your pocket (or more likely euro) is your bond, after the English phrase 'My word is my bond'.

Or are we going to descend into financial entrophy?

Elvis is playing right now on another web channel '... caught in a trap, I can't get out'.

I do hope that is not an omen!

Unfortunately, Elvis has been followed by John Lennon's Cold Turkey.

Warren Buffet did warn that these exotics were 'financial instruments of mass destruction'.

Looks like capitalism is going through one of those 'eat itself' phases.

Post 44,Cold turkey caught in as trap minus wishbone ,if only

How did we find ourselves in a world where profits are privatized, but risk is socialized?

Does anyone on either side of the Atlantic seriously believe this course of action can be sustained?

I blame holiday firm XL and others going into administration on BOE. If BOE has cut rates this might not have happened. I am sure staff of XL and most of Northern Rock staff aren't the fat cats. There is still a chance that a very fat cat might buy XL on the cheap, so high rates will end up helping the fat cats.

#46 OldSouth

The question is not only how can this course of action be sustained, but how to wind-down the stupidity of the financial institutions, whilst causing the minimum of collateral damage to the global economy?

Perhaps it is impossible to avoid a catastrophic 1930's style depression? But should the Bank of England not try? I agree with other bloggers who find it totally unacceptable that the people who caused this catastrophe should not face a just punishment.

We need to construct a suitable punishment - certainly they should no longer be able to seek employment in the financial sector as a very minimum. They should also not be allowed to hang onto their ill-gotten gains.

What do others think should be the legal mechanisms to achieve this end (if indeed they agree with me that there should be a just retribution.)?

#47 alphaGlen

You really want the BoE to cut rates now?

Do you not think that it was a decade of ultra low rates that caused the problem of the liquidity bubble in the first place?

In my view, a sensible balance where savers and borrowed receive and pay reasonable rates needs to be restored. Savers will not save if the rates are too low as had been well demonstrated over the last decade. The whole commercial infrastructure has become biased towards huge unsustainable borrowing to finance business and this has to stop (slowly and in a controlled manner).

Business needs to fund their capital requirement through equity not borrowing (the day of these called private equity 'investor' must be over. They buy a business with borrowing and borrow more to fund its needs, strip it of its assets and then sell it on. These have become carpet baggers and been essentially legalised agents who destroy value, but the gigantic availability of huge excess liquidity (easy borrowing) has caused them to act in this way. (BoE please note!)

@47 - The scarey thing about XL going down is that it was a complete surprise. There was no warnings that they wre in trouble, nothing.

Makes you wonder how many more firms are in the same boat.

49 John from Hendon

As thing are there is no choice, interest rate has to be cut; in the long term I agree with you, also I agree with what happened in the past.

But in the short to medium term rates has to be cut to bring back stability, otherwise lots of poor people are going to lose their jobs and houses.

When a building is in fire we have to do what ever we can to extinguish the fire, then we can thing what can be done in future to improve fire safety. In my view BOE is just waiting and watching the fire as it spread from one building to another.

#51 alphaGlen

The trouble with cutting rates is that my guess is that even negative interest rates will not restore stability.

It (cutting rates) is too much a kin to starting a fire in a burning house to stop it burning down. I fear it is disillusional to believe that there is anything that the Bank of England can do that will alleviate or even reduce the coming storm. Better to get it over with and then rebuild from the ashes.

52 John from Hendon

Well, if we go for ashes there will not be any thing to build from, better and cheaper to rescue what is left.

I still think Mervyn King is right and has been throughout the 'credit crunch' - if we do cut interest rates now, inflation will rise and hence pay claims accelerate even more. This is as many have said, an economic cycle which has to play itself out in the medium term.

Being a cycle there is no quick fix and anyway what fix are we looking for? If we pump cash into the housing market it will only sustain it for a few months and will have encouraged more people to take on more debt - the source of the whole problem in the first instance! House prices need to carry on falling until well into 2009.

It is interesting that in the good times we could all see the risks in over lending/borrowing but chose to ignore them, now in the bad times we suddenly want public funds to bail us out. Yes redundancies will increase but longer term this will again recover, we cannot and should not spend our way out of this.

As a footnote, will be interesting to see how the Japanese economy plays out, with interest rates at virtually zero, their economy contracted violently this last quarter - the governments answer? they are asking industry to give people big pay rises so they can go and spend it to save the day.... wonder how Gordon and Alastair will feel about that?

On slightly different tack.....there is a great piece in Private Eye - Issue #1216 (i.e. the one with Milliband saying to Brown "Your so useless you can't even sack me") about how 'Merv the Swerv' countered questions at the Commoms select committee regarding the source of leak of the Northern Rock liquidity crises. It's got to be read!...I thoroughly recommend all to read it (if you didn't already).

Few points:
Preston are you sure that the BOE will be allowing swaps of treasury bills for new mortgage bonds? If so then this completely contradicts the statement that the measures "will not and cannot solve the shortage of funding to finance bank lending, including mortgage lending." My interpretation was that extension of the scheme was just for the mortgage securities issued up to the end of 2007. Another confusing point "It is not the purpose of central bank liquidity insurance to provide a source of long-term funding to the financial system - indeed it cannot do that. Only private savers or taxpayers via the government can provide such funds." The SLS uses Treasury Bills, this is already underwriting by the tax payer not the BOE.
Also, the long term funding he refers to needs to come from the wholesale money markets, it's a chicken and egg situation the wholesale markets will only start to buy mortgage securities again when house prices start to rise again.
However way you cut this up the former chancellor and the BOE are responsible for this mess and they should take more responsibility to resolve it. The reason there was so much easy credit was due to the increasing trade imbalance that's been created under labour, with this extra volume of sterling being loaned back to us in the form of cheap mortgages and other credit. The banks have to loan this money out that's there business and if they had charged more for credit they would have been severly criticised for profiteering. The government has failed by not addressing the fundamental structural problems with the economy and the BOE which is an extension of government anyway has failed with it's monetary policy and continues to do so. 91Èȱ¬owners are getting severly penalised for their incompetence, they need to be doing more to turn this around.

If the SLS or the new version to be announced next week had been in place when Northern Rock run out of wholesale funding would it have survived? They needed to swap £25 Billion of mortgage securities, I wonder how much the rest of the banks have now actually swapped, £200 Billion in total?
Moral hazard, the real moral hazard is to allow thousands if not millions of homeowners watch their wealth disappear down the drain and potentially end up bankrupt.

Sorry a lot to get off my chest.
A tight monetary policy will only reduce demand in the UK and should only be used when inflation is a result of an overheating UK economy which increases demand in the UK. Unfortunately we are not a big enough economy to affect overall global demand, any reduction in UK demand will be compensated for in other countries. This is the fundamental flaw with current monetary policy in this country in an increasingly globalised world economy. We should not be fixated on the base rate as the single lever to control inflation.
To keep interest rates high to protect the value of the pound is also folly. The pound is sliding becasue no one wants to invest in the UK, particularily the property market either directly or through the purchase of the mortgage securities. This will only be resolved with a return to confidence in the housing market and a consequent return to investment in the UK in general. We need these capital inflows because of the structural problems in our economy leading to a huge trade deficit. Which ever way you look at this Gordon Brown has messed up royally, you cannot have a robust macroeconomic strategy with a separation of fiscal and monetary policy to so called independent authorities. The government is the ultimate authority and as such should hold responsibility and accountability for both monetary and fiscal policy. Who pays the BOE wages, how could they ever be an independent entity?

When is a bank a private company - when it makes a profit. When is a bank a private company propped up by the taxpayer - when it makes a loss. Sounds good to me. Sounds like normal service on Gordon's Fantasy Island

#58:

Monetary policy and inflation are more tightly linked than you seem to suggest. Loose monetary policy works because it creates lots of new money; tight monetary policy works because it creates less. You can't have one without the other - and loosening Sterling monetary policy too much will always cause Sterling inflation eventually simply because there are more pounds to go around. You can't appeal to outside demand to compensate because the inflation (or lack or it) will affect the exchange rates in proportion.

Secondly, an independent BoE is the right way to do things because it's introduced honesty in to monetary policy. The bank sets monetary policy by taking fiscal policy as given and adjusting policy to hit the Government's inflation target. If the Government wants looser monetary policy it can either change its fiscal policy (borrowing less means lower interest rates for the same inflation) or increase its inflation target. What it CAN'T do is what governments down the ages have done when they want a little temporary popularity: reduce interest rates for political reasons and lie about (or just not mention) the effect on future inflation.

#60
Thanks for the patronising economics lesson but with respect I think it is yourself that needs to go back to school. You exemplify my very point, there are no direct links between local monetary policy, inflation and exange rates, if it were that simple the BOE would easily have maintained inflation below 2%. Look at what has happened to the dollar since the fed cut interest rates dramatically, it has strengthened and if you look at US inflation it is no worse than ours. The increase in oil and food prices has arisen from a global increase in demand and a global reduction in supply(food). Tightening monetary policy and thus reducing incomes available to spend on goods may well reduce demand in the UK(it will reduce savings first) but unless that monetry policy is adopted globally it will have negligible effect on inflation. The bigger risk to inflation is devaluation of sterling, and despite having a tighter monetary policy than the US the pound has fallen dramatically with respect to the dollar.
The tri-partite system for managing the macro economic policies and regulating the financial systems is a complete failure. The FSA and the BOE are just extensions of the civil service, their responsibilies should extend to carrying out the executive's policies , the buck should stop with the treasury and the rest of government. It needs coordinated and centralised control and responsibility.
Monetary policy needs to consider the growth in money supply, current account deficits, fiscal policy, the structure of the economy and exchange rates, it can not be separated off and managed 'independently' with inflation targets as it's only goal.