Cheap Credit - Hpi - Credit Cruch

[Wigler]

Dancing at the volcano's edge

Behind the complex stories of individual bank failures, state bail-outs and shotgun weddings lies a simple overextension of credit to ordinary people, chiefly in the form of home mortgages. All major financial firms are significantly exposed to these loans, which have been going sour at a rising pace in the US and, more recently, in Britain. Lending to individuals grew to record levels in both countries in recent years for two related reasons. It was very profitable for financial firms. And it was actively supported by governments of all parties as a central macroeconomic policy tool to maintain economic and social stability.

[interestrateripoff]

All I can say is thank god I was sat down when I read that.

It's the first time I've seen it mentioned.

[interestrateripoff]

Policy makers in the US and Britain thought they had found a macroeconomic perpetual motion machine in mass personal indebtedness. As the economy slackened they encouraged individual indebtedness and home ownership to bolster consumption. And as personal indebtedness rose, they brushed away concerns with assurances that rising house prices meant households could bear growing levels of debt.

This scheme will only work while house prices rise. And policymakers actively supported just about anything that would keep them rising, be it predatory subprime lending in the US or buy-to-let speculation in Britain. The British government's recent stamp-duty waiver for home purchases below £175,000 is another good example. Its only discernible aim is to entice poorer and younger households into propping up a falling housing market by buying into the so-called property ladder.

Capital markets have proven miserable at providing social needs like housing and pensions. Even without astronomical bail-outs, they are ridiculously expensive to society, and provision is iniquitous. Worse, they have created devastating economic instability. People are losing homes, retirements are being postponed and now millions will likely lose jobs.

No fundamental alternatives to the economic model of high personal indebtedness and high financial profits that created this mess are being put forward by the financial sector or mainstream politicians. It is too central to the economic consensus that has developed in the capitalist world over the past two decades.

It falls to the trade union and broader working-class movement to generate alternatives. Most immediately, unwinding the unsustainable levels of household debt that led to the crisis requires significant improvements in real income distribution. More broadly, public provision of quality housing, education, healthcare and retirement benefits needs to replace provision through capital markets. Achieving these demands will not only help reclaim terrain and wealth lost by ordinary people, but also help put back on the agenda the idea that conscious and democratic economic management is the only way to secure equitable prosperity and growth for all.

At some point it was going to get printed.

[interestrateripoff]

Put together a financial crisis, the better part of a trillion dollars of taxpayers' money and politicians preparing for elections and you are sure to get acrimony, posturing and demagoguery. What you are less likely to get is a serious examination of why so many of the world's leading banks are disappearing almost daily, and why only an unfathomable amount of taxpayers' cash appears to offer any hope of averting the collapse of the world's most sophisticated financial system.

Behind the complex stories of individual bank failures, state bail-outs and shotgun weddings lies a simple overextension of credit to ordinary people, chiefly in the form of home mortgages. All major financial firms are significantly exposed to these loans, which have been going sour at a rising pace in the US and, more recently, in Britain. Lending to individuals grew to record levels in both countries in recent years for two related reasons. It was very profitable for financial firms. And it was actively supported by governments of all parties as a central macroeconomic policy tool to maintain economic and social stability.

Since the early 1990s, major financial firms have developed profitable businesses in consumer and mortgage credit. The steady privatisation of provision of housing, retirement benefits, education and healthcare greatly enhanced the scope for this lending and selling of other financial services to individuals. It forced wage earners to approach financial markets to meet their basic needs. Major financial firms drew rising revenues from wage incomes through the provision of mortgages and equity withdrawals, consumer lending, investment funds and insurance, and from complex financial instruments based on those services.

High profitability and competition ensured that greed got the better of caution as financial firms sought to increase market share. This was particularly damaging in real estate lending. Increased mortgage credit by all lenders led to home price increases, which in turn induced individual lenders to lend even more. Speculative bubbles developed, with home prices and mortgage debt losing all relationship to ordinary people's stagnant incomes, from which mortgage repayments must inevitably be made.

The weakest link in this chain was subprime lending in the US. Lenders large and small fell over themselves trying to profit from selling a piece of the American homeownership dream to historically oppressed segments of the US population hitherto excluded from formal finance. Predatory adjustable-rate mortgages were offered to black, Latino and white working-class families with incomes too low and uncertain to stay ahead of repayments after low teaser rates expired.

The prospect of high profits from such lending helped drive a wave of financial innovation. Innovation allowed lenders to pass the high risks of these mortgages to international capital-market firms whose hunger for easy returns following the collapse of the dot com bubble helped convince them that new risk-management techniques and derivative instruments could defy basic arithmetic.

What about governments and regulators during all of this?

"We don't want to stifle financial innovation," declared the associate director for risk-management policy at the US Federal Deposit Insurance Corporation when concerns were raised in 2005 about the spread of predatory mortgages and "liar's loans" made with no proof of income. Subprime lending was encouraged by officials to promote economic and social stability. Alan Greenspan recalls in his autobiography that as US homeownership rose earlier this decade:

The gains were especially dramatic among Hispanics and blacks, as increasing affluence as well as government encouragement of subprime mortgage programmes enabled many members of minority groups to become first-time home buyers. This expansion ... gave more people a stake in the future of our country and boded well for the cohesion of the nation.

Policy makers in the US and Britain thought they had found a macroeconomic perpetual motion machine in mass personal indebtedness. As the economy slackened they encouraged individual indebtedness and home ownership to bolster consumption. And as personal indebtedness rose, they brushed away concerns with assurances that rising house prices meant households could bear growing levels of debt.

This scheme will only work while house prices rise. And policymakers actively supported just about anything that would keep them rising, be it predatory subprime lending in the US or buy-to-let speculation in Britain. The British government's recent stamp-duty waiver for home purchases below £175,000 is another good example. Its only discernible aim is to entice poorer and younger households into propping up a falling housing market by buying into the so-called property ladder.

Capital markets have proven miserable at providing social needs like housing and pensions. Even without astronomical bail-outs, they are ridiculously expensive to society, and provision is iniquitous. Worse, they have created devastating economic instability. People are losing homes, retirements are being postponed and now millions will likely lose jobs.

No fundamental alternatives to the economic model of high personal indebtedness and high financial profits that created this mess are being put forward by the financial sector or mainstream politicians. It is too central to the economic consensus that has developed in the capitalist world over the past two decades.

It falls to the trade union and broader working-class movement to generate alternatives. Most immediately, unwinding the unsustainable levels of household debt that led to the crisis requires significant improvements in real income distribution. More broadly, public provision of quality housing, education, healthcare and retirement benefits needs to replace provision through capital markets. Achieving these demands will not only help reclaim terrain and wealth lost by ordinary people, but also help put back on the agenda the idea that conscious and democratic economic management is the only way to secure equitable prosperity and growth for all.

I'll just quote the entire article.

It seems a very neat summary.

[WSG]

At some point it was going to get printed.

indeed..infinite monkeys, infinite keyboards etc

[eric pebble]

I'll just quote the entire article.

It seems a very neat summary.

http://www.guardian.co.uk/commentisfree/ci...street.subprime

Indeed -- it is the elephant in the room.............

Edited October 1, 2008 by eric pebble

[eric pebble]

"As the economy slackened they encouraged individual indebtedness and home ownership to bolster consumption. And as personal indebtedness rose, they brushed away concerns with assurances that rising house prices meant households could bear growing levels of debt.

This scheme will only work while house prices rise. And policymakers actively supported just about anything that would keep them rising, be it predatory subprime lending in the US or buy-to-let speculation in Britain. The British government's recent stamp-duty waiver for home purchases below £175,000 is another good example. Its only discernible aim is to entice poorer and younger households into propping up a falling housing market by buying into the so-called property ladder."

http://www.guardian.co.uk/commentisfree/ci...street.subprime

i.e. The World's Biggest Ever Pyramid Selling Scam.....

Edited October 1, 2008 by eric pebble

[interestrateripoff]

It's time to sue the banks and put the salesmen in jail until they die.

[Selling up]

"We don't want to stifle financial innovation," declared the associate director for risk-management policy at the US Federal Deposit Insurance Corporation when concerns were raised in 2005 about the spread of predatory mortgages and "liar's loans" made with no proof of income. Subprime lending was encouraged by officials to promote economic and social stability. Alan Greenspan recalls in his autobiography that as US homeownership rose earlier this decade:

Liar's loan?

They can't even get Eric's soundbite right.

[eric pebble]

Liar's loan?

They can't even get Eric's soundbite right.

Same dog, different lampost.....

[Guest KingCharles1st]

Liar's loan?

They can't even get Eric's soundbite right.

And maybe one day we may even get someone in the media who thinks it "may just be possible" that a certain government/s turned a blind eye to

LIAR LOANS

[Leonard Hatred]

I won't be satisfied until I see the phrase "disastrous 2005 rate cut"

Edited October 1, 2008 by Sir Talbot Avenger

[interestrateripoff]

And maybe one day we may even get someone in the media who thinks it "may just be possible" that a certain government/s turned a blind eye to

LIAR LOANS

Someone in govt took the easy option and did nothing!!!!! Next you'll be saying some bankers made some very large party donations in return for looking the other way and not asking any awkward questions.

Then you'll be making some ridiculous suggestion that ex MPs / PM / central bankers have all ended up with very lucrative City jobs for doing their duty of looking the other way.

I tell you it's all lies. Our leaders would never have done such a thing.

[eric pebble]

And maybe one day we may even get someone in the media who thinks it "may just be possible" that a certain government/s turned a blind eye to

LIAR LOANS

Yup -- It got them another 6 years in power at least ---- and, more specifically, it bought Brown more time for him to hang on to his "Chancellorship" [sic!] - and so be in the right place at the right time in order to become PM.......

Edited October 1, 2008 by eric pebble

[eric pebble]

I tell you it's all lies. Our leaders would never have done such a thing.

[espada]

Lower interest rates can boost the prices of assets such as shares and houses. Higher house prices enable existing home owners to extend their mortgages in order to finance higher consumption. Higher share prices raise households’ wealth and can increase their willingness to spend.

Surely it's logical isn't it?

[eric pebble]

Lower interest rates can boost the prices of assets such as shares and houses. Higher house prices enable existing home owners to extend their mortgages in order to finance higher consumption. Higher share prices raise households’ wealth and can increase their willingness to spend.

Surely it's logical isn't it?

AND?

[espada]

AND?

well, BANG I guess.

Sorry, just fishing with a dodgy bit of bait. That's a quote from the "How monetary policy works" page on the BOE site. I was quite taken aback, although why I don't know, when I came across it some time ago. In my naivety until I read this I don't think I had realised that it was Govt policy to use MEW to drive this bubble...

[tinker]

'Money for nothing', a truly inspired economic policy. Trouble is if you drive the economy by MEWing and HPI you give ownership to those (fools) that participate. The whole 'have it now, worry about it later...' credit culture has been akin to drug pushers standing outside school gates to rope in the naive and gullible.

People are generally financially illiterate (the dumbing down). They believe what they are told by authority figures and that nice man on the BBC. The people are part of the problem, they need to be part of the solution by coming to their senses. The bad news being piled on should help in their re-education.

Like a lot of people on here, I want the people who gave out the 'sweeties' and told the lies to end up in gaol or to be deprived of their ill-gotten gains. That will only happen if the people do come to their senses. (The anger in America gives me hope.)

[Rich1965]

"It falls to the trade union and broader working-class movement to generate alternatives. Most immediately, unwinding the unsustainable levels of household debt that led to the crisis requires significant improvements in real income distribution. More broadly, public provision of quality housing, education, healthcare and retirement benefits needs to replace provision through capital markets. Achieving these demands will not only help reclaim terrain and wealth lost by ordinary people, but also help put back on the agenda the idea that conscious and democratic economic management is the only way to secure equitable prosperity and growth for all."

It's nice to see an article in the mainstream press admit this at last BUT I can't be having this last paragraph!!

Labour helped create the problem,now they want them to solve it aswell!! Un-real!!!! :angry:

[eric pebble]

Labour helped create the problem,now they want them to solve it aswell!! Un-real!!!! :angry:

[Fudge]

"It falls to the trade union and broader working-class movement to generate alternatives. Most immediately, unwinding the unsustainable levels of household debt that led to the crisis requires significant improvements in real income distribution. More broadly, public provision of quality housing, education, healthcare and retirement benefits needs to replace provision through capital markets. Achieving these demands will not only help reclaim terrain and wealth lost by ordinary people, but also help put back on the agenda the idea that conscious and democratic economic management is the only way to secure equitable prosperity and growth for all."

It's nice to see an article in the mainstream press admit this at last BUT I can't be having this last paragraph!!

Labour helped create the problem,now they want them to solve it aswell!! Un-real!!!! :angry:

New Labour turned away from the trade unions and the broader working class when Blair dropped clause 4 from the manifesto. I think what we will see is Labour returning to its working class socialist roots and the Tories returning to its old Etonian old boys network.

[eric pebble]

New Labour turned away from the trade unions and the broader working class when Blair dropped clause 4 from the manifesto. I think what we will see is Labour returning to its working class socialist roots and the Tories returning to its old Etonian old boys network.

Er...... I think you'll find both parties trying to grab the very middle ground......... The days of class warfare and polarisation are well and truly over -- thank goodness. It was all so childiish anyway.

[interestrateripoff]

Irony Eric, I was jesting.

Blair landing a nice 500k+ job at JPMorgan

Teflon Terry former BoE official now multimillionaire after running various banks since retiring from the BoE, can't remember his more senior mates name but he left for the banking world and ended up some very nicely paid jobs.

[Methinkshe]

It falls to the trade union and broader working-class movement to generate alternatives. Most immediately, unwinding the unsustainable levels of household debt that led to the crisis requires significant improvements in real income distribution.

First time I've since this solution in print. Fact is, until households can rid themselves of a greater portion of the unwise debt they have taken on, the economy will stagnate. That, imo is why we will have inflation. Wages have got to rise and house prices have got to fall until the 2 - 3 x average income historic ratio for house prices is reached. If the average salary is £25K (this is just a guess) then the average ftb house should be £50 - £75K. If the government decides that such a large fall in house prices is undesirable, then the average wage must be inflated instead. One way or another, the historic affordability ratio between average house prices and average salaries will have to be restored.

And that doesn't take into account unsecured credit card debt. That's got to be unwound, too. And without rising house prices to draw on, wage inflation is all that's left.

Inflation here we come.

Edited for typo

Edited October 2, 2008 by Methinkshe