Thursday, Aug 06, 2009
The credit crunch has many months – or, more likely, years – to run
Daily Telegraph: How the housing market could still wreck the recovery
Notwithstanding the economic shafts of light in recent weeks, people are still suffering. Every week, tens of thousands more people lose their jobs. As their savings run dry, they struggle to hang onto their homes. Banks, themselves still trying to repair their balance sheets, are less willing to lend, even to those with the ability to pay them back.
Given that this is happening now, with interest rates at half a percentage point, one can hardly bear to imagine how tough it will be when, at some point in the next couple of years, borrowing costs have to rise again.
The credit crunch has many months – or, more likely, years – to run yet.
Posted by growler @ 07:13 AM (1149 views) Add Comment
20 Comments
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1. taffee said...
never in history have houseprices risen when unemployment is going up,credit is difficult and businesses are going bust
This is pure lunacy created by new labour
Low interest rates followed by raising them later created this problem and now its the solution?
2. growler said...
There is NO WAY the house prices are going to get any lift so long as money is tight, people are worried and traditional trading economies (bringing money to firms in the UK) are weak.
I would say that any little event could easily upset the apple cart.
- IMF out of cash as they have to prop up eastern europe is the one I favour. That will get the markets in jitters since the implicit bank of last resort is now not so flush.
- Countries borrowing more and more will need to remain demonstrably solvent --> huge cutbacks once their election campaigns have subsided. Since UK and Germany have elections looming, expect massive cutbacks --> cutbacks are not known to boost economies, let alone those that everyone needs to make.
- Car production. It just needs China to catch a cold - or is it flu. They're the buyers of debt - and they might need their cash stuffed into their economy instead to keep themselves from slumping.
-
3. luckyjim said...
Taffee - "never in history have houseprices risen when unemployment is going up"
House prices boomed in the early eighties while unemployment rose. Even in a deep recession long-term unemployment affects relatively few people. The fear of unemployment has a bigger effect. In the eighties the unemplyment was concentrated in specific regions so people outside those regions felt immune from the recession.
4. uncle tom said...
When the economy finally came off the rails last year, businesses took a defensive position and reduced inventories. This made a bad situation slightly worse. The old excess inventory is now pretty much cleared, and business is now buying again, but at a level that is commensurate with a consuming public that, for the most part, either cannot, or does not wish to, extend their indebtedness.
This resumption of orders is why some economic data is showing a small up-tick at the moment; but it is important to realise that this is just a one-off rebound, and not a trend.
Meanwhile the public sector is pretending nothing has happened to the economy, and is making no effort to reduce its needs for cash to a level that matches the reduced abiity of the private sector to generate the required wealth.
There is a sense in some quarters, that as the BOE has printed £125bn without anything obviously bad happening, it can carry on with more the same, covering the gap between public spending and tax revenues.
My belief is that inflation will now start to creep up, as margins are restored, and business compensates for a more difficult trading environment. Any further weakening of Sterling through QE will only serve to exascerbate the problem. Large scale borrowing (as this piece highlights) may prove very costly, and would force up interest rates.
While cuts in public sector spending will not help unemployment or consumer demand, they are also totally unavoidable.
Ultimately, the country needs to adjust to economy that has about 20% less GDP.
- We have only just begun..
5. uncle tom said...
"House prices boomed in the early eighties while unemployment rose. "
There is a close corelation between house prices and perceived unemployment - better than the corelation between house prices and actual unemployment - have a look at this graph:
http://images.google.co.uk/imgres?imgurl=http://newsimg.bbc.co.uk/media/images/43019000/jpg/_43019289_graph_406.jpg&imgrefurl=http://news.bbc.co.uk/2/low/uk_news/politics/6729739.stm&usg=__6huZW7nKFVnZySCl0YKpO9vYzig=&h=336&w=416&sz=26&hl=en&start=15&tbnid=_hGrhdSZ0_hT9M:&tbnh=101&tbnw=125&prev=/images%3Fq%3Dgraph%2Buk%2Bunemployment%26gbv%3D2%26hl%3Den%26safe%3Doff
6. devo said...
A request for help from the financial experts, relating to the chart I posted last night. Thanks.
Can someone explain the huge and sudden increase in reserves (from £10 billion to £32 billion) in Q2 of 2006 ?
This was pre-credit crunch and QE.
http://www.housepricecrash.co.uk/newsblog/2009/08/blog-the-highly-perverse-world-of-quantitative-easing-24698.php
7. uncle tom said...
Devo,
It's all a bit mystifying, especially as the blue line on the graph gets erratic long before any problem was widely acknowledged.
And why, in our increasingly plastic age, has the quantity of notes and coin doubled since the turn of the millennium, when inflation has only been around 20%??
8. devo said...
@uncle tom said... the blue line on the graph gets erratic long before any problem was widely acknowledged.
Exactly.
My gut instinct tells me this chart and its THOROUGH interpretation is crucial in understanding what is going on.
Alas, I lack the necessary insider knowledge.
9. mark said...
Anyone see the BBC news on TV??? They are saying the RICS stated prices will go up during 2009... that was all they said...
if things do go that way then it would be the shortest turnaround in history which should be impossible...
10. uncle tom said...
Devo,
Why not email that graph to Robert Peston? He hasn't much in the way of scoops recently, and might start digging..
..failing that, Private Eye might take an interest.
There might be a perfectly rational explanation, but it could also be the case that the BOE knew the banks were in trouble long before it became public, and were doing strange things behind the scenes as they attempted to deal with it..
11. devo said...
@ uncle tom said... it could also be the case that the BOE knew the banks were in trouble long before it became public
And, by extension, the government
12. devo said...
10. uncle tom said... Why not email that graph to Robert Peston?
Thanks for the suggestion, I may well do that if someone here can't interpret it.
13. flashman said...
devo: The BOE increased the rate it paid on commercial bank reserves sometime in mid 2006. A classic bit of monetary theory says that increasing bank reserves as a percentage of deposits soaks away excess liquidity. In 2006 there was definitely excess liquidity. This 2006 increase in commercial bank interest paid, wasn’t particularly expected, so that probably explains why the chart started rising in 2006.
Then, when the credit crunch started, the BOE significantly increased the level of reserves each bank can hold with them (by about 7% I think), which probably explains why the chart carried on rising.
The more recent increase is explained in Conway’s article (the banks are hoarding cash and don't want to lend it out).
I've stuck to the facts above but here's a bit of opinion...In late 2006 banks definitely started looking at each other with suspicion.
14. devo said...
Thanks flashman.
'the chart started rising in 2006'
That phrase doesn't accurately describe the chart though, does it? There is a short, sharp spike of about £20 billion in March 2006 which stands out like a sore thumb. That suggests to me some sort of 'event' in the higher echelons of finance.
15. flashman said...
Devo: Just asked a colleague...In early 2006 the BOE, for the first time in history, started paying interest on the reserve balances held by banks. They targeted a huge increase in reserves of over 20 Billion. That is the momentous event.
They did it to create stability and to help them contain any future crises. Don’t laugh
16. devo said...
15. flashman said... In early 2006 the BOE, for the first time in history, started paying interest on the reserve balances held by banks. They targeted a huge increase in reserves of over 20 Billion. That is the momentous event.
Surely this was seen as 'newsworthy' at the time?
17. devo said...
To answer my own question...
News Release
Launch of New Framework to Modernise Sterling Money Markets
18 May 2006
From today, for the first time in its history the Bank is paying interest on reserve balances held by banks and building societies. They now target average balances with the Bank over the periods between the MPC's monthly interest rate decisions rather than having to 'square up' every day. The Bank has moved from daily to weekly short-term open market operations...
http://www.bankofengland.co.uk/publications/news/2006/055.htm
18. flashman said...
You're welcome
19. refusetobuy said...
All very interesting.
Good digging and commenting.
20. flashman said...
The real question is: did they do it because they were worried, or was it just forward thinking? I think worried