Sunday, Jul 05, 2009
Lending must shrink
BuyToLetMortgages: UK Lenders Ought to Cut Lending by £500 billion
Existing lending needs to shrink by 500 billion due to the failure of residential property securites, according to a BoE report. This is at odds with the government's policies of expanding lending. Not really, though, if you split lending into categories. We need additional lending to business and reduced lending for asset purchases. The only way to square this circle will be to introduces caps, and to regulate loans by type. Mortgage restrictions have been mooted in the past by the FSA amongst others. I am sure we will hear more of this in the future.
Posted by stillthinking @ 01:53 PM (993 views) Add Comment
6 Comments
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1. stillthinking said...
Perhaps some of you will remember a while ago, there were reports of such mortgage restrictions/limits, and presented as though they were a done deal. This was an absolute bombshell, as a knife into the very heart of property prices. However, it turned out to be just testing the water.
But, it is true, that we need to continue lending to businesses and investment more than ever, while constrained within a reduction of overall lending. At the moment falling prices act as an automatic constraint against mortgage expansion. Also, although interest rates are a tool to control borrowing, working essentially by changing costs and the ability to service loans, but the obvious way is to regulate.
Regulation is -great- because you can achieve the same effect without the necessity of high interest rates, essentially by mandatory loan restrictions by type. I think we need to do this but I don't really see how any party can propose this before an election, as the necessary result is a government mandated reduction in property prices. Interesting eh.
2. hpwatcher said...
I think once the great incompetent gets kicked out, there will be a complete watershed, as no one will have any vested interest in trying to hide the real situation....as most of it is down the fool Gordon Brown.
3. uncle tom said...
We have not heard a great deal recently about the underlying problem of mortgage lenders borrowing short to lend long; but it has not gone away.
I recall the balance of UK savings vs UK loans showing a £400bn difference - the nett amount owed to investors from overseas, mostly under arrangements that were short term in nature. In addition, some 30% of government debt is also foreign owned.
I find it hard to reconcile the QE policy with the need to roll over these loans, unless there is an unspoken agenda to print enough cash to cover them, which would imply a sterling devaluation of 25% or more.
If the financial world believed that to be happening, Sterling investments would be jettisoned with indecent haste, with dire consequences for the value of the pound.
What I don't really understand is why the currency dealers are not running from sterling already. Maybe it's because all the other major currencies have serious problems, and Britain's global role as the world's honest broker (which few within these islands really appreciate) is prevailing.
China has been throwing straws in the air on the matter of an alternative reserve currency, mentioning a variant on the IMF SDR's as a possibility. I suspect their real agenda is to canvass support for the Yuan as such a currency - a path they have been very reluctant to navigate until now.
There was an announcment very recently that indicated that Chinese exporters could now use the Yuan for pricing goods, without having to convert to dollars when those goods were shipped. Although this is only a technical change (I have been negotiating in Yuan for a couple of years now) it may pave the way for the Yuan to become a fully convertible reserve currency.
If that happened, much of the support for western currencies would be severely compromised. The Yuan and other currencies of the developing world would probably rise sharply, taking the price of commodities and manufactured goods with them.
Such a broad base of inflationary pressures would be hard to resist, and having chased interest rates down in the vain hope of creating economic stimulus, so the developed nations would start a race to the top when setting rates, in order to attract more of the limited funds available.
This would imply a period of high inflation and high interest rates.
If I am being prescient, then this is the underlying agenda for the second phase of the depression.
4. Neil B said...
@ Uncle Tom - I agree entirely: We wither have low interest rates, low lending, QE, spiraling debt, low savings and ultimate devaluation of sterling. or, the complete opposite.
5. mark wadsworth said...
This all makes perfect sense.
As UT points out, the huge gap between UK bank deposits by households and UK mortgage borrowing has reached about £800 bn (I though it was £700 bn, but never mind). In olden times, the two were pretty much in line, it wasn't until 'securitisation' took off about ten years ago that the gap, financed by overseas lenders, i.e. China, japan, petro-states grew this big.
But let's not forget that UK mortgage borrowers are repaying gross about £100 bn to £150 bn a year - if all the banks just made no new mortgage loans for four years and just collected interest and repayments and redemptions on sales, they'd be able to recoup/repay all this gap in four or five years.
Obviously, this runs counter to The LibLabConsensus that house prices must be propped up at all costs, so it ain't gonna happen, but hey ...
6. stillthinking said...
sterling -has- dropped 25%, maybe they are bang on the money. we will notice that at some point. my understanding of forex though is that nobody ever gets to sell sterling, very few transactions get carried out, because -both- buyers and sellers come to the same valuation conclusions at the same time i.e. it is not the action of volume selling that sinks sterling, it is just marked down to a different value (I read this in a book about foreign exchange, presumably the inspired people manage to sell out, as forex speculation dwarfs underlying real demand and supply transactions). So there won't be additional sterling held overseas as a result of devaluation, just literally our money is worth less.
I don't know because it seems to me that sterling should have dropped more dramatically than it has, but maybe (it is possible) that now, today, sterling is at the correct value, and what is out of whack is not the value of sterling, but our measure of inflation, which is based on an unsustainable level of production which is shutting down as we speak. because for a 25% devaluation, I didn't notice much change to be honest. tomatoes are very expensive and so is cheese, but you would think there might have been a bit more to it. I am not making my point very well, but I think perhaps we consider a further debasement of sterling -must- be on the way, because we haven't properly noticed that actually sterling is already debased. Like a shot dead man walking who is convinced he is about to be shot.