Sunday, Nov 16, 2008
U-turn
Telegraph: Alistair Darling seeks delay on Northern Rock repayment
Northern Rock is no longer to be run down, and will instead become a state-owned bank. Without NR handing out 125% mortgages, the remaining banks cannot maintain 2007 levels of credit supply (or more probably don't want to). NR must therefore, arise like a phoenix to resume its former role. NR will presumably become an entity unlike other banks, with a non-profit mandate of credit expansion. International funding will be obtained by tax-payer guarantees for NR mortgage securities. Well, to me, this seems to be illegal under EU state assistance, also essentially this must count as an extension of government borrowing and so push the pound down further, and presumably this must also push up real long-term interest rates.
Posted by stillthinking @ 11:39 AM (957 views) Add Comment
11 Comments
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1. Bubble_court said...
The 2 head guys at the government should be placed under home arrest with immediate effect!
They will stop at nothing to re-inflate the bubble. Why don't they get it? Let it burst!
2. stillthinking said...
I just had this amazing thought,which you may already know, about deflation and our current sterling devaluation. Consider this;
start point
100 UK tomatoes valued at £100 with £1 to one euro ( or one euro is worth one UK tomato). This is the basis for the two following situations.
a) with deflation and no change in the exchange rate
200 UK tomatoes valued at £100 pounds ( pound to euro parity)
b) without deflation but the pound exchange rate collapses
£2 for every euro (but 100 UK tomatoes still costs £100)
Now although if you live in the UK there are big differences between the two, as far as the europeans are concerned these 2 situations are identical !!! Because in each case one euro buys you two UK tomatoes i.e. UK goods become identically cheaper in euros in both situations.
The key difference for us in the UK is that goods become cheaper for us also with deflation, but with a pound devaluation they don't. Or to think of it another way, policies to devalue the pound ( e.g. to support exports) perversely lead to goods becoming more expensive than they would be otherwise for UK citizens. I think its fair to say that a constant price is more expensive in the case that the price should really have gone down.
3. Digdug said...
Indeed
4. jonb said...
This is complicated somewhat by the fact that you can also get your tomatoes from Spain. If you had the situation where a tomato was €1 before devaluation, then after devaluation, English tomatoes would either become cheaper than Spanish tomatoes, and everyone in Europe would buy the English ones, or English tomatoes would go up in £ terms, and English tomato farmers would end up earning more money.
In reality what would probably happen is that tomatoes would go up a bit in £ terms and down a bit in € terms.
5. inbreda said...
Wow - what a tangled web.
So the UK tax payer is fronting up the security so NR, which iss ostensibly owned by the tax payer, can get funding to offer the tax payer huge amounts of debt that the tax payer then gets enslaved to, just to keep house prices high so that younger tax payers, who still have to contribute to this messy sytem but do not yet own a house, will continue to be priced out of the market unless they too enslave themselves.
So, basically, Gordon the Moron is sacrificing the uk taxpayer to foreign interests. Nice.
6. paul said...
Isn't this just a plot to put in motion the following:
1. Renegotiate and nationalise Northern Rock so that it doesn't have to make a profit.
2. Use it as a vehicle to part-nationalise mortgage lending.
3. Lend cheaply at a loss (to the taxpayer) to resucitate the housing market.
In other words, making current taxpayers and savers pay to keep property prices high?
7. mark wadsworth said...
@ Stillthinking, that is an excellent summary. Yet another crazy throw of the dice to reflate the housing bubble, which will not work.
8. bellwether said...
Still Thinking am I oversimplyfying the idea by saying that currency devaluation works well for net exporters but not with net importers, and if the UK is anything it is a net importer.
I've moved out of £ to an extent and plan to do more so but absolutely not into the Euro. Appreciate you were usuing E as an example only but worth saying as a lot of people seem to feel the Euro is a good bet and I doubt it.
The other point of devaluing the currency is to devalue the debt that lies at the heart of the problem - unless you take a more theoretical stance like p4ac where the heart of the problem is elsewhere
9. stillthinking said...
I wonder a great deal of all the shennigans of the UK government, and I also wonder about the UK getting itself into such a sick situation that we -have- to have a chronic housing shortage as the only way to maintain otherwise collapsing prices. I do feel that there is a chronic shortage irrespective of pricing, particularly for family homes.
I also think this perverse reasoning by a madman might be the reason for this deal with the devil. We are devaluing to prevent deflation. We are being placed in the situation where internal prices are being artificially maintained, which is not the same as healthy low inflation at all.
If that is true, then we are not about to enter a deflationary phase but we are already in one, albeit heavily masked.
The price of this disguise is an eventual sterling crisis, hence GBs panic sticken squeals to make sure there is nowhere else in the global economy to run, and as soon as interest rates are forced to rise through excess government borrowing the whole sorry deflationary recession will revealed ,a.k.a. a squeeze on the hugely over-indebted consumers/property speculators by the rest of us.
Going on unnecessarily, this also makes me think that, for the UK at least, any bubble in gold will paradoxically be self-defeating, because the rise in gold(sterling goes abroad and interest rates must rise) will only reveal the true increasing value of paper money, which is actually backed, and it is backed by river cottages, penthouses, hire-purchased lamborghinis etc
I am going to think about all this again.
10. stillthinking said...
@bellwether. One way or another I do think that getting out of sterling looks like a good idea. Remember for the Japanese experience, for them the goods were getting cheaper but they had a squeeze on wages and employment as a consequence. For people holding money outside of Japan however, not only did yen become cheaper but the goods for sale in yen -also- became cheaper. Double win.
The whole problem we have in the UK is a squeeze on wages and from that, a squeeze on disposable income, hence the best option to cut taxes and public spending without additional borrowing. As far as foreign citizens/currencies are concerned everything in the UK is already getting dramatically cheaper, both our properties and also our exports, and even if the situation changes from b) to a) *first post* that won't change.
11. bellwether said...
A run on Sterling would be a done deal if it was isolated in its problems but its not. While I agree that structularly we have horrendous problems, we also do tend to fixate on them because we are UK based. Make no mistake problems are legion elsewhere and this does need to be seen if sound decisions are to be made. Thus ef if we are talking currencies there are only very few currencies I'd consider swapping for sterling.
At a complete tangent, hadn't realised this but traditionally £1 sterling entitled the bearer to delivering of 1LB of sterling silver.