We're Riddled With Debt... But The Cure Is A Killer

[The Masked Tulip]

All doom and gloom article, house prices crashing, millions in debt, companies in debt, argues whether Labour can survive an independent BOE and want state hand-outs to all who are in debt it seems.

http://www.independent.co.uk/news/business...ler-860815.html

[BandWagon]

http://en.wikipedia.org/wiki/Sawed-off_shotgun

[AteMoose]

Inflation ok, deflation bad....

[Fully Detached]

Excellent work professor - I'm sure the banks would willingly enter a policy of debt forgiveness, since they're like, so flush at the moment.

[Authoritarian]

Indeed, the Bank of England, determined to fight the next war with the tactics of the last one, has bizarrely decided inflation is the primary issue and that it will be able to control international commodity price increases by suppressing domestic demand. The trouble is that if the Bank succeeds in restricting our domestic spend, it risks plunging Britain into outright economic meltdown. Why? Because the real risk is not inflation, but deflation.

Yeah, lets slash the base rate to 2%, that's worked so well in the U.S in averting a financial disaster. Instead of worrying about inflation instead we should concentrate on keeping the price of over-inflated housing high...twisted logic.

Edit, unless its escaped the authors attention the BofE have already cut rates from a recent high of 5.75% in Dec 07.

Edited July 6, 2008 by chefdave

[corevalue]

Yeah, lets slash the base rate to 2%, that's worked so well in the U.S in averting a financial disaster. Instead of worrying about inflation instead we should concentrate on keeping the price of over-inflated housing high...twisted logic.

My take on it too. Punish the prudent and save the sinners. Grrrrr...

[Guest The_Oldie]

With the honourable exception of David Blanchflower, the Monetary Policy Committee seems oblivious to the risks.

[time 2 raise interest rates]

Yeah, lets slash the base rate to 2%, that's worked so well in the U.S in averting a financial disaster. Instead of worrying about inflation instead we should concentrate on keeping the price of over-inflated housing high...twisted logic.

The BoE have lost control of base rates. They've already slashed the base rate from 5.75% to 5% only to see

mortgage rates soar. When the base rate was 5.75% you could get a 2 year fixed around 5.5%, now the base

rate is 5% you can get a 2 year fixed at 7%.

All those renting can't lose at the moment. House prices are falling while mortgage rates soar.

[Not Long Now]

I think the article is a very poor one if i'm honest - lacking in consistency.

He states:

Likewise, Japan in the 1990s tried to stem a property and asset boom by raising interest rates, which again were too high for too long; the result has been 18 years of deflationary stagnation.

and also...

Instead of looking on glumly as the disaster unfolds, we should be enabling households to meet their obligations. We need to construct a more radical version of the anti-foreclosure legislation currently before the US Congress – and prevent mortgage lenders from repossessing properties and, in any subsequent sell-off, driving asset prices still lower.

Likewise, help is needed for the millions of indebted and credit-impaired Britons. Since they are, like the Third World, enslaved by unpayable debt, an extensive programme of debt forgiveness and freezing of interest is required.

He is missing the key point to come out of the Japan bust: that the reason it went on for so long was due to the very "bail out" policies he is advocating.

[interestrateripoff]

And still no one is asking for increasing the repayment of debt.

[AwaitingFairPrices]

My take on it too. Punish the prudent and save the sinners. Grrrrr...

Agreed. A very conflicting article. It acknowledges the stupidty of multiple GDP debt, but then thinks the solution is to encourage debt by lowering interest rates and forgiving the debts of the sheeple.

It is naive to think that people will be grateful for lower interest on their debts and use it to their advantage in paying off the debts sooner. It will just encourage a whole new generation of sheeple to join the party.

And as for the talk about the treasury taking over from the MPC....numpties.

AFP

[thod]

We need to construct a more radical version of the anti-foreclosure legislation currently before the US Congress – and prevent mortgage lenders from repossessing properties and, in any subsequent sell-off, driving asset prices still lower.

Oh no my house is falling in value, we must do something!

[time 2 raise interest rates]

And still no one is asking for increasing the repayment of debt.

And they won't. This is why the BoE has stood idly by while the country has sunk in to £1.5 trillion

worth of debt and let house prices soar. It's the only thing that's kept the economy running over

the last 10 years and the homeowners have fell for it hook, line and sinker. They've happily mewed

all their equity away and not bothered about pay rises. How niaive. They've mewed and mewed to

keep the economy soaring, buried themselves in debt, now the plug's been pulled if they ask for a

pay rise it will be higher interest rates, burying them even deeper in debt.

Oh, you lucky renters. It's looking like you were the smart ones after all.

[Austin Allegro]

It's a bit unfair to compare the debt of the Third World, which is no fault of the ordinary people of those countries but rather their kleptocratic and corrupt rulers, with the consumer credit orgy in which most people in the West willingly took part.

[interestrateripoff]

My take on it too. Punish the prudent and save the sinners. Grrrrr...

I don't think you get the jeopardy, if you punish the sinners the prudent don't get there money back. It's a fantastic catch 22.

You can only punish the sinners when asset prices are increasing because the prudent will get there money back as soon as asset prices crash the prudent have got no chance of recovering the debt. The prudent only make money because people borrow. If no one borrowed cash the prudent won't get any interest.

[Frank Hovis]

The author, Phillip Blond, is a Theology lecturer at the University of Cumbria (previously Carlisle scout hut) and doesn't have a clue about economics.

This blog highlights some of his greater ignorances:

http://timworstall.com/2008/03/24/more-phillip-blond/

KimiK // Mar 27, 2008 at 2:14 am

Phillip Blond does have a field of expertise: theology.

‘Nuff said.

He may not be aware of it, but his basic position is neoluddite-ish.

A well-meaning and sincere man, for sure. Nevertheless I wouldn’t look to him for expert advice on economics, finance, or the organization of institutions and society.

I wish him no harm — just as long as he doesn’t cause too much harm himself.

k.

[Authoritarian]

The author, Phillip Blond, is a Theology lecturer at the University of Cumbria (previously Carlisle scout hut) and doesn't have a clue about economics.

This blog highlights some of his greater ignorances:

http://timworstall.com/2008/03/24/more-phillip-blond/

KimiK // Mar 27, 2008 at 2:14 am

Phillip Blond does have a field of expertise: theology.

‘Nuff said.

He may not be aware of it, but his basic position is neoluddite-ish.

A well-meaning and sincere man, for sure. Nevertheless I wouldn’t look to him for expert advice on economics, finance, or the organization of institutions and society.

I wish him no harm — just as long as he doesn’t cause too much harm himself.

k.

lol, when it didn't say at the bottom of the article what his was a lecturer in it did make me wonder. (Note to self, must use the wonderful resource that is the internet to investigate my hunches!)

Edited July 6, 2008 by chefdave

[benj]

This started off well, but seemed to flip half-way through and jump to completely unwarranted conclusions!

Instead of looking on glumly as the disaster unfolds, we should be enabling households to meet their obligations. We need to construct a more radical version of the anti-foreclosure legislation currently before the US Congress – and prevent mortgage lenders from repossessing properties and, in any subsequent sell-off, driving asset prices still lower.

Likewise, help is needed for the millions of indebted and credit-impaired Britons.

Why should "we" be enabling households to meet their obligations? If I take on an obligation, meeting it is my prerogative and no-one else's. Should I fail to meet my commitments, I expect to suffer the consequences. These people were more than happy to adopt an "every man for himself" attitude on the way up, where they were benefiting from rising asset prices and the less well-off were being denied this source of easy money. Now the shoe is on the other foot, they suddenly deserve a bail-out? For crying out loud.

The point of markets is to determine an equilibrium price for an asset. The point of secured loans is that lenders can offer cheaper money precisely because they have something to sell to recover their losses if the borrower defaults. What we are seeing right now is the market doing precisely what it is supposed to do. People will lose their homes, you say? That's a shame. Perhaps next time they will think twice before being so reckless with their finances.

Unlike the countries of the third world, endebted Britons had a choice whether to get into debt. They chose badly. Now they must live with the consequences.

[time 2 raise interest rates]

If they change the rules on repossessing a property for the mortgage lender, there isn't a bank

or building society in the world that would give a mortgage on the grounds that they couldn't

repossess it if their customer started to default on payments. Still, if they did change the rules

houses would become worthless as no-one would be able to buy one due to the evaporation of

mortgages.

A bit like what's happening now, but more severe.

[enrieb]

From the article

On a macroeconomic level, it is a matter of choosing the least-worst option. Loosening fiscal policy until international price inflation bleeds out of the system at least keeps the whole ship afloat. Focusing on inflation now risks sending us all to the bottom. Domestic inflation is a danger that can be tackled later – now we have to lessen the debt burden (currently at 173 per cent of household income) and help people pay their bills.

Phillip Blond is a senior lecturer at the University of Cumbria

With the mortgage market in crisis and house prices falling, putting up interest rates to keep a lid on inflation will only tip the UK economy into deep recession, says Graham Turner. As the next election gets closer, Labour may not be able to afford an independent central bank

----------------

The Government needs to decide whether an independent central bank is worth the political price – the loss of perhaps 200 or more Labour MPs at the next election. If the Bank of England refuses to cut interest rates, the Treasury should assume control of monetary policy. Otherwise, the collapse of Northern Rock may become a template for more banks.

Graham Turner is the founder of GFC Economics. His book 'The Credit Crunch: Housing Bubbles, Globalisation and the Worldwide Economic Crisis' is published by Pluto Press

Its very disturbing to hear that these economists think the solution to the debt problem is to loosen fiscal policy and cure the effects of inflation with more inflation. Politicians and economists seem more scared of recession/depression that they are of inflation. Perhaps if the US had attempted the hyper inflationary route in the 1930s then we would be more afraid of inflation and would be calling for a deflationary solution this time around.

[Mr. Gruff]

Hmm, drop interest rates to keep the economy going. Again this is typical of the British attitude that debt is "our money" and never needs to be paid off. Whether you like it or not, debt to GDP ratio cannot increase indefinitely. It HAS to be paid back at some point.

Dropping interest rates is pointless, they need to go up. A recession is undesirable but necessary in order to remove inefficiency from the market. For instance, it is not in the interest of the economy to have so much capital tied up in Barratt boxes when it can be used elsewhere, and to employ armies of "leasing agents" to manage people's "portfolios"

[kingsgate]

My take on it too. Punish the prudent and save the sinners. Grrrrr...

Unfortunately, these are politicians and they depend on winning votes.

If there are more "sinners" than prudent people, then helping the sinners is the way to gain popularity.

Life isn't fair. Its about winning. Especially if you are a polititican up for election.

[time 2 raise interest rates]

Unfortunately, these are politicians and they depend on winning votes.

If there are more "sinners" than prudent people, then helping the sinners is the way to gain popularity.

Life isn't fair. Its about winning. Especially if you are a polititican up for election.

But you're forgetting one thing the powers that be have called time on the Labour party, that is

why house prices will crash and interest rates will rise, and the Conservative will win the next

election. Brown is a dead man walking.

Edit to add the last bit was just a figure of speech.

Edited July 6, 2008 by time 2 raise interest rates

[interestrateripoff]

And the tories will do what????

The entire system is screwed.

I'm sure if the tories had been in charge we would be in the exact same position, maybe the spending wouldn't be as out of control but house prices would still have gone through the roof.

The tories sold off the council houses to make the poor and stupid feel rich when in fact they had just got themselves into debt. It was a get rich quick scheme and it's finally come of the rails with sheer stupidity, or has been engineered to come off the rails by the all seeing eye in a grand scheme to enslave us all. Depending on your insanity or paranoid level.

[Not Long Now]

And the tories will do what????

The entire system is screwed.

I'm sure if the tories had been in charge we would be in the exact same position, maybe the spending wouldn't be as out of control but house prices would still have gone through the roof.

The tories sold off the council houses to make the poor and stupid feel rich when in fact they had just got themselves into debt. It was a get rich quick scheme and it's finally come of the rails with sheer stupidity, or has been engineered to come off the rails by the all seeing eye in a grand scheme to enslave us all. Depending on your insanity or paranoid level.

The Conservatives may have done the same thing, but the fact is: Labour are in power and the buck stops with them.

They are out at the next GE.