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Happy Birthday Dear Credit Crunch

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From Moneyweek today, From David Stevenson

Today marks a big day for the global credit crisis. It’s exactly one year old.

Or to be more precise, 24 July 2007 was when the world’s stock markets finally cottoned on to what was being brewed up in the murky world of US sub-prime mortgage derivatives. From within 1.5% of its high, the FTSE 100 dropped 6% in three days. By the end of the month, everyone working in the financial markets knew far more than they’d ever wanted to about the alphabet soup of CDOs, CLOs and SIVs.

Many of the supposed ‘experts’ said it would all be sorted out within a few weeks. But not only was that not even close, it was just about as wrong as you can get. Because what we’ve seen so far is only the starter. In fact here in Britain, the real credit crunch is just about to begin

We may think things are tough now, but they’re about to get tougher.

So far, ‘all’ we’ve seen is a so-called liquidity squeeze in the money markets, as well as lots of banks incurring plenty of heavy credit losses. OK, property prices have tanked, but as we’ve been saying at MoneyWeek for longer that we can remember, the UK housing market meltdown is hardly a huge surprise, because prices rose so far into fantasyland they had to crash at some stage. The liquidity squeeze simply provided the pin to burst the bubble. And while there have been loads of media tales about consumers cutting back and their borrowing limits being reduced, here in Britain our credit card borrowings are still up by 7.5% over the last year, according to yesterday’s figures from the British Bankers Association.

But now things are set to turn ugly.

It’s often said that credit is the lifeblood of capitalism. The amount of credit sloshing around in the system depends on two things. Firstly, the level of bank capital - broadly, that’s the total of money raised through share sales, etc., added to profits made – and secondly, the ‘credit multiplier’: somewhere between £8 and £10 of credit is created, i.e. lent out, for every £1 of banks' risk-free capital.

Early estimates of credit crunch losses were a complete joke

Here’s where all those credit losses come in. We now know that the early estimates of the overall damage were a complete joke. The first guess from US Federal Reserve chairman Ben Bernanke was a ‘mere’ $50bn. Now we’re already up to over $400bn and counting. And we haven’t seen the half of it yet.

Globally, “banks and brokers will destroy somewhere between $1,000bn to $1,400bn of their own risk-free capital owing to losses on all forms of credit in this crunch”, says David Roche of Independent Strategy. This means that in theory, the planet’s credit should contract by something like 8-10 times the amount lost. In reality, it’s not quite that bad, because capital will be boosted by future profits and fund-raising exercises like rights issues, but even then, “you are left with a reduction of 5%-7% in global credit”.

That may not sound too horrendous. But Mr Roche reckons that for every $1 of GDP growth, we need $4-$5 of new credit, “so even a standstill in total credit outstanding is a credit crunch”.

Why we are facing a savage slowdown in bank lending

Here in the UK, banks certainly aren’t likely to be able to keep up their recent rates of lending, having been hit by £27bn of losses already with a further £8bn-ish of property-related write-downs on the way.

“We think that about £65bn in extra capital is needed in order to compensate for the credit crunch and to keep lending at recent levels”, says Vicki Redwood of Capital Economics, “and banks are already showing signs of contracting. Just for their balance sheets just to stagnate, UK banks may have to raise £35bn.”

Even that’s unlikely to happen. The UK banks may so far have managed to raise about £20bn of capital, but the tap is being turned off - there are now signs of ‘shareholder fatigue’. If no more cash is pulled in, the banks could have to shrink their balance sheets by as much as 7% or £180bn, equivalent to some 13% of annual GDP.

In short, all the pieces of the jigsaw are being put in place for a savage slowdown in bank lending. Indeed it looks like it’s already started. Eurozone bank credit expanded by 10% per annum in the year to April, but loan growth is now plunging. In the US, total bank credit has turned negative in “the sharpest fall in over 40 years”, says Ambrose Evans Pritchard in the Telegraph.

And here in Britain, one of the key measures of money, ‘adjusted M4’, which covers loans to UK businesses, has actually shrunk by 3.5% over the three months to May, according to Bank of England stats. What’s more, over the last four months, mortgage approvals have almost halved, said yesterday’s BBA figures.

There’s always a bit of a time lag before this lot hits the high street. But now we’re finally starting to see the impact on the official retail sales figures. The 3.9% plunge in June more than reversed May’s rather suspect-looking 3.6% rise. Annual sales growth has now dived from 7.9% to 2.2%. As Redwood says, “the consequences of this squeeze on capital for the real economy could be devastating”.

In other words, the real credit crunch is about to begin. That means a brutally sharp recession, with much lower company profits and many more job losses. And your bank manager could be about to start getting extremely nasty.

EDIT: Even get the spelling wrong with CUT AND PASTE!!!

Edited by Bloo Loo

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Funilly enough I don't see it that way at all.

The main UK banks and some especially are not overly exposed to the sub-prime loan originations in the US.. LTSB for example has pretty much zero exposure, bank shares are now rising and I suspect will maintain that level or rise further, oil has come off the top now and I think it will get back to atround $100 which will rapidly reduce inflationary fears, china/india will/are seeing some signs of slower growth and I belive will see lower inflation levels, spending is down in the UK but not massively so. ETC etc

I am not of course predicting that everything is behind us or anythign like, nor am I predicting that house prices won't continue their downward spiral... but I do think there are some very positive signs out there which may well indicate that we have a very good chance of avoiding the worst the doommongers have predicted.... equally much that you read in the press is very wide of the mark... for instance that capital economics paper quoted in the origianl post said lenders would restrict borrowing because they are running out of funds... its palpable nonsense and doesn't reflect whats going on... lenders have reigned in the riskier end of their lending but are looking for as much prime business as they can get their hands on... the niche lenders funded by the wholesale markets have gone but the mainstream lenders are having a bonanza.... massively increased volumes at higher margins... I am sure when the reporting season comes in if they go into that much detail you'll see the likes of Abbey and C and G and Halifax (residential) and RBS reporting massively increased volumes... C and G for instance I know for a fact did 200% jan-march 2008 vs the same period in 2007, Abbey for instance is predicted to be 300% up.... hardly an indication that they are running out of cash.

Equally anecdotal evidence suggects the commercial high street lenders are actively seeking new business so theres no shortage of money to lend there either, they have simply targetted their funds at the prime market and switched off everythign else.

So in short I am much much more positive about the outlook than was the case a few months ago... we are not going to boom times, we may well see further rises in unemployment and a recession, but from my perspective its not looking like its going to be nearly as bad as it could have been... house prices will still fall but I suppose wemay see a different picture emerging on the shape of the fall if the economy is not hit as badly as I was thinking it might be a few months ago.

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Last year they said it would be over by Xmas.

They said that about World War I

Very soon though the massive dam holding back the pent up demand will burst and things will be back to normal.

Unless of course the banks took all that 50bn they stole from us and invested it into Comodities.

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Happy Birthday to you

Happy Birthday to you,

Happy Birthday dear CREDIT CRUNCH

Happy Birthday to you!

& 3 cheers to ye olde crunch.....Hip Hip HOORAY, Hip Hip HOORAY, Hip Hip HOORAY.

Bless you crunch.

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Funilly enough I don't see it that way at all.

The main UK banks and some especially are not overly exposed to the sub-prime loan originations in the US..

That's because they are more exposed to UK sub-prime.

The UK housing crash hasn't started in earnest yet.

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That's because they are more exposed to UK sub-prime.

The UK housing crash hasn't started in earnest yet.

I'm afraid thats a sweeping statement that does not reflect the facts... LTSB for instance has no sub-rpime business, none whatsoever... HBOS has some written under BM Solutions but its at a low level compared to theri overall book, RBS has never been in the sub-prime market, nor has Abbey.... so when you make your statement that they are exposed to UK sub-prime you are basing it on what exactly ? Of course banks will lose (all of them) from losses due to negative equity and I don't know what that hit will be, but lets at least be hinest about it shall we, its not sub-prime exposure.

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the niche lenders funded by the wholesale markets have gone but the mainstream lenders are having a bonanza.... massively increased volumes at higher margins... I am sure when the reporting season comes in if they go into that much detail you'll see the likes of Abbey and C and G and Halifax (residential) and RBS reporting massively increased volumes... C and G for instance I know for a fact did 200% jan-march 2008 vs the same period in 2007, Abbey for instance is predicted to be 300% up.... hardly an indication that they are running out of cash.

That's interesting. Where are Abbey et al. getting their funding from? It's not from the wholesale markets, I presume that saving hasn't gone up by 200 - 300%, so where are they getting their money from?

Peter.

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I'm afraid thats a sweeping statement that does not reflect the facts... LTSB for instance has no sub-rpime business, none whatsoever... HBOS has some written under BM Solutions but its at a low level compared to theri overall book, RBS has never been in the sub-prime market, nor has Abbey.... so when you make your statement that they are exposed to UK sub-prime you are basing it on what exactly ? Of course banks will lose (all of them) from losses due to negative equity and I don't know what that hit will be, but lets at least be hinest about it shall we, its not sub-prime exposure.

However some of those banks do have exposure to liar loans, the question is how much. I personally know someone with a 200k Abbey mortgage interest only when she hasn't actually worked for over seven years.

The big banks didn't openly accept sub-prime borrowers but they didn't exactly go out of their way to make sure they weren't getting any by the back door either.

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However some of those banks do have exposure to liar loans, the question is how much. I personally know someone with a 200k Abbey mortgage interest only when she hasn't actually worked for over seven years.

The big banks didn't openly accept sub-prime borrowers but they didn't exactly go out of their way to make sure they weren't getting any by the back door either.

You make a valid point but not the whole picture.... not all the big bansk have done what Abbey do in allowing for fast track cases......(and the abuse that goes with it)... for instance C and G hasn't and nor has woolwich and nor has RBS nor has Nationwide..... in the high street Abbey and Halifax are the prime movers in that field... even there they are asking for around 25%/15% and a very high credit score to get through the mix.... there will be abuse of course, and indeed some of these will go wrong but the fact that they still do it indicates that their evidence of problems with these loans is very low.

Sub-prime is not something you can apply to every case.... sub-prime is where customers have evidence of credit problems and I maintain the big boys were not in this market in a material way... most of it was done through the ncihe lenders.

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  • 399 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
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      • Even
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      • up 5%



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