Bank Of England Must Use Qe To Buy 'bad Mortgages', Warns Fathom Consulting

[interestrateripoff]

http://www.telegraph.co.uk/finance/economics/8102785/Bank-of-England-must-use-QE-to-buy-bad-mortgages-warns-Fathom-Consulting.html

Britain is in danger of creating a generation of "zombie households" that plunge the economy into a Japan-style lost decade unless policymakers take radical action to fix the banking system properly, a leading economic think tank has warned.

In a paper published on Tuesday, Fathom Consulting has urged the Treasury and the Bank of England to join forces and create a new "bad bank" to buy lenders' worst mortgages in a bid to "unblock" the credit supply.

Outlining unprecedented policy measures, Fathom said the purchases should be done through a second round of quantitative easing (QE).

"Put simply, [banks] have lent too much money against assets that have fallen in value, and those losses have to be fully recognised. Until they are, the economy will not be free to move forward," Danny Gabay and Erik Britton argue in the paper.

Mr Gabay added: "Compare Britain today to Japan in 1997 and there's not much difference. They had zombie companies, we're in danger of creating zombie households."

Fathom argued that, like Japan's companies, many British households "are being kept afloat by near-zero interest rates, which can not last forever, at least not with a functioning economy".

Banks are not writing down the potential bad debt as low rates allow them to avoid the issue. However, Fathom says, lenders are aware they "remain vulnerable … hence credit supply will remain constrained".

Mr Gabay said Fathom's proposal offers a way for politicians to realize their conflicting ambitions of strengthening banks' balance sheets and simultaneously increasing lending to support the economy. He added that it has followed "extensive discussion with Monetary Policy Committee members and other interested parties".

Research from the Council of Mortgage Lenders found that 2.9m homeowners would have home loans that breached the regulator's affordability guidelines if rates rise by just 2 percentage points above the current of 0.5pc rate.

Fathom's analysis found that if rates were to rise to 3.5pc "the debt servicing burden would match its peak at the height of the crisis". Banks currently have a capital shortfall of about £20bn if assets were marked to market, Fathom added, but the shortfall would rise to £180bn if house prices were to fall by 20pc by 2012 – triggering another credit crunch.

Fathom said, recent data suggests that households are no longer paying off their debts as they grow used to low interest rates – potentially trapping policymakers with near-zero rates. To avoid this, Fathom said the Treasury should create a "bad bank" to buy non-performing mortgages from lenders – "in essence the Northern Rock plan writ large across the whole banking sector".

Er no your wanting to lend to support house prices and not the wider economy. The UK has to move away from the economy being house price increases.

Yet another insane idea, bailout malinvestment with free money.

[OnlyMe]

From the comments.

Guess where the Fathom Directors used to work:-

Erik Britton, Bank of England

Andrew Clare, Bank of England

Danny Gabay, Bank of England

[Georgia O'Keeffe]

Why don't we all go the whole hog and create a World Bad Bank?

Now - in that case, who would have to fund it?

i would suggest Africa, you can add it to their debt, they are probably feeling a bit inadequate at the moment and feeling relatively loaded on an international scale, probably itching to join the party

Edited November 2, 2010 by Tamara De Lempicka

[Bloo Loo]

"Must support insolvent banks...must support insolvent banks"

and we must get those insolvent banks lending.

otherwise we will ALL die.

makes perfect sense if you are on a bonus at an insolvent bank.

I say...sensible new lending....bust a few banks....sell defaulters homes...let the BUST do its job of cleansing the malinvestment and malinvested out of the system.

[Georgia O'Keeffe]

Just to point out the obvious but a 3 year moratorium on bonuses would apparently cure the estimated capital shortfall at current rates.

but youd lose the talent running the banks and be in even a worse position when the mediocre replacements start misallocating Capital

Edited November 2, 2010 by Tamara De Lempicka

[Bloo Loo]

Just to point out the obvious but a 3 year moratorium on bonuses would apparently cure the estimated capital shortfall at current rates.

wot? how would they do that? its only bonuses that keeps the "talent" in place. They'd leave tomoz, to other jobs that would snap up their "talent".

you are a funny man.

[OnlyMe]

but youd lose the talent running the banks and be in even a worse position when the mediocre replacements start misallocating Capital

The way to stop banks misallocating captial is to shut the ******* down or starve them of money.

[scepticus]

"Fathom argued that, like Japan's companies, many British households "are being kept afloat by near-zero interest rates, which can not last forever,

err, yes they can.

zero short rates are the new normal. Everything else is going to have to adjust to that.

[gnosis]

"Fathom argued that, like Japan's companies, many British households "are being kept afloat by near-zero interest rates, which can not last forever,

err, yes they can.

zero short rates are the new normal. Everything else is going to have to adjust to that.

what, rates are going to stay there permanently? dream on

[interestrateripoff]

but youd lose the talent running the banks and be in even a worse position when the mediocre replacements start misallocating Capital

Yes we wouldn't want any mediocre person misallocating capital what we need are highly educated morons doing it on a scale never before achieved.

[Bloo Loo]

"Fathom argued that, like Japan's companies, many British households "are being kept afloat by near-zero interest rates, which can not last forever,

err, yes they can.

zero short rates are the new normal. Everything else is going to have to adjust to that.

for now...just look at margins in small business...skweezed by higher costs, skweezed by EXPENSIVE loans, skweezed as the pool of customers diminishes, skweezed as savers have less disposable for spending.

this can go on for so long, but we WILL have a very long depression, and this is what we are having...as long as they support busted banks and busted businesses with money they dont have.

zero rates may be what the politicians see as the cure.....but look where the money is going.....to the very people that piss it down the drain.

[leicestersq]

I wonder if anyone can dream up a grander way of creating moral hazard than Fathom Consulting has managed here?

The only parallel I can think of is the Pope's absolving those of their crimes, before they committed them, when sending the Crusaders on their way to slaughter in the name of God.

Now we have calls for the Head of the Banking Church to urge the disciples to thrust more loans onto those who do not have the capacity to repay.

Who pays Fathom Consulting? I think the public should be protected from those who pay them.

[leicestersq]

"Fathom argued that, like Japan's companies, many British households "are being kept afloat by near-zero interest rates, which can not last forever,

err, yes they can.

zero short rates are the new normal. Everything else is going to have to adjust to that.

scepticus, Japan has had near zero rates for many years. Mind you, they are a nation of savers, not spenders.

FWIW, I think that we are in a bit of a lull here in the UK. Inflation is on its way through commodity price increases, and when people realise they are losing the real value of their money through inflation, we are going to see people spending, not saving.

So I wonder who is right? Do you feel sure in your prediction? I have to admit, I dont feel certain about my prediction of rising interest rates sooner rather than later, but I will stand by it.

[kilroy]

"Fathom argued that, like Japan's companies, many British households "are being kept afloat by near-zero interest rates, which can not last forever,

err, yes they can.

zero short rates are the new normal. Everything else is going to have to adjust to that.

Including busted pension schemes? Just look what happened to uniq......

[Democorruptcy]

Horal Mazard

[Har Fast]

What would "Bad Bank" do with the non-performing loans? If it had the mandate to actively foreclose (rather than "extend and pretend" for balance sheet reasons by the current banks), that could bring a wave of new repo supply to the market.

On the other hand, without proper regulation of lenders, LTVs etc etc, this is just an invitation to another credit bubble surely? And what are the chances of proper regulation, given the banks' and buildings societies' outcry over the FSA proposals?

The scary thing is that Fathom seem to be pretty much BoE insiders.

[crouch]

for now...just look at margins in small business...skweezed by higher costs, skweezed by EXPENSIVE loans, skweezed as the pool of customers diminishes, skweezed as savers have less disposable for spending.

this can go on for so long, but we WILL have a very long depression, and this is what we are having...as long as they support busted banks and busted businesses with money they dont have.

zero rates may be what the politicians see as the cure.....but look where the money is going.....to the very people that piss it down the drain.

Exactly, and that is what is wrong with the policies so far; they've not solved anything, just shifted the debt onto the taxpayer from the banks. As you say the problem with low interest rates is that it encourages consumption which is exactly what we don't want because that will most likely be financed through more debt. There's no pain free way to deleverage from the debt levels we have and the sooner people realise that the sooner the problems can be solved in a sensible way.

[singlemalt]

'Fathom said, recent data suggests that households are no longer paying off their debts as they grow used to low interest rates'.

I'd concur with this. Of the people I've spoken to about this none are seeing the current low INT rates as an opportunity to pay down their mortgage they're like "who hoo! all this extra money every month".

[campervanman]

http://www.telegraph.co.uk/finance/economics/8102785/Bank-of-England-must-use-QE-to-buy-bad-mortgages-warns-Fathom-Consulting.html

Er no your wanting to lend to support house prices and not the wider economy. The UK has to move away from the economy being house price increases.

Yet another insane idea, bailout malinvestment with free money.

I thought the idea of the last 18 months of free money laned to the banks @0.5% + 200bn qe was designed to enable them to deal with just this.

[mattyfc]

http://www.telegraph.co.uk/finance/economics/8102785/Bank-of-England-must-use-QE-to-buy-bad-mortgages-warns-Fathom-Consulting.html

Er no your wanting to lend to support house prices and not the wider economy. The UK has to move away from the economy being house price increases.

Yet another insane idea, bailout malinvestment with free money.

Agree.

There is no problem with bank lending. They are behaving rationally in demanding higher deposits and ensuring that what they lend will be paid back. This rational has been sorely lacking for the last decade and was the main reason for the “credit crunch”.

The real problem is the expectation of bank lending that was created in the credit bubble between 2000-2008. We are now back to the pre millennium normal.

House prices need to fall as part of the economic rebalancing.

Current data supports a slow rise in interest rates. Not sure how anyone can be arguing for QE, unless they have some massive vested interest in buy to let or similar.

[Realistbear]

but youd lose the talent running the banks and be in even a worse position when the mediocre replacements start misallocating Capital

"We arrive at the inescapable conclusion that, based on mathematical models, a group of chimpanzees performing random selection choices as to what to invest in would have performed better than this group of supposedly savvy investment specialists who have succeeded in bankrupting their employers and the country along with them."

I totally agree.

[Traktion]

"Fathom argued that, like Japan's companies, many British households "are being kept afloat by near-zero interest rates, which can not last forever,

err, yes they can.

zero short rates are the new normal. Everything else is going to have to adjust to that.

Unless we have intergenerational loans, there is still a limit on the amount of capital which can be paid back. As I find the thought of intergenerational loans sickening, with children born into debt, I hope that never happens.

Additionally, if they decide to keep printing, this is bound to have an inflationary effect sooner or later, which would surely force a base rate rise.

IMO, they need to stop talking of money printing and monetary solutions and start looking long and hard at the fiscal solutions. This way, they may get away with keeping rates low, while attempting to get those with wealth to liquidate and spend, to allow those without to repay their debts.

[Lepista]

Unless we have intergenerational loans, there is still a limit on the amount of capital which can be paid back. As I find the thought of intergenerational loans sickening, with children born into debt, I hope that never happens.

Additionally, if they decide to keep printing, this is bound to have an inflationary effect sooner or later, which would surely force a base rate rise.

IMO, they need to stop talking of money printing and monetary solutions and start looking long and hard at the fiscal solutions. This way, they may get away with keeping rates low, while attempting to get those with wealth to liquidate and spend, to allow those without to repay their debts.

Intergenerational loans are efectively no different to renting.

The bank effectively 'owns' the property - you just pay interest (rent) on having the privelidge of living there, whilst paying for all the upkeep of the property thown in for good measure.

I'd rather rent.

[Snugglybear]

but youd lose the talent running the banks and be in even a worse position when the mediocre replacements start misallocating Capital

What, like the talent didn't, you mean?

[Traktion]

Intergenerational loans are efectively no different to renting.

The bank effectively 'owns' the property - you just pay interest (rent) on having the privelidge of living there, whilst paying for all the upkeep of the property thown in for good measure.

I'd rather rent.

I agree with your point about interest only loans, but by intergenerational loans, I mean kids being born into a debt repayment obligation - debts being inherited. I suppose you could argue that only having the option of a huge, interest only mortgage isn't much better, but at least we have a choice to rent.