Wednesday, July 12, 2006

A problem discovered

City faces meltdown if debt crisis hits

It seems it’s the complex nature of smoke and mirrors, and of course city bonuses that may be the problem.

Posted by So Soon @ 08:24 AM (619 views)
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24 thoughts on “A problem discovered

  • Surely this article backs up what commentators on here have been saying for some time.
    I was amused by this comment, “The Bank is believed to feel that many institutions using these instruments, such as credit derivatives, are “sitting with their fingers crossed, hoping that the music doesn’t stop”.

    Seems those that comment about “doomsters” on here should include the the Bank’s of England’s Financial Stability Review in the list.

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  • An article which debates the effect of a risk happening, a rise in interest rates. One cause of the rise is given as further increases in oil prices – not really much sign of hurricanes yet and Iran seems to be cooling off. It does not convince me. It has CASSANDRA written all over it. In the unlikely event of this happening, it is more important to know what the BoE would do about it. This information is sadly missing.

    What I think is very good, is the definition of a crash. 25% over 3 years. I could accept this as a rule-of-thumb definition of a crash.

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  • I cant make my mind up if Im a doomster or not? I can see two sides to the arguement. Someone recently pointed out to me that you’ll never meet a rich pessimist, which, I thought was a pretty true statement. Then again someone posted a link to a Soros video on here the other day, Ive read quite a bit of his stuff and its not very optomistic.

    As for a crash, it has to happen over a very short period of time, certainly no more than 3 years.

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  • 25% off house prices over a three year period would be a very benign outcome in my book – one I would describe as a slump rather than a crash.

    Much depends on the point you choose to start counting, but my definition of crash would be more like over 50% in less than 2 years. I think the housing downturn is more likely than not to fit that definition.

    That banks might only lose £40bn sounds very optimistic – but perhaps fair if they mean per annum!

    One of the key elements of the HPC will be the increasing inability of the banks to lend as prices fall – resulting in further price falls and bank losses.

    Mapping it through, my bottom line showed the banks losing around £200bn in total – more than enough to propel the banking system into deep crisis.

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  • Blindleadtheblind says:

    TR…there is absolutely nothing the BOE or any other central bank can do about it should there be a crisis in the derivative market, the sums of money involved are simply to big. Remember 80% of this market is bets based currency / intrest rate moves…worrying isnt it

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  • The BoE doesn’t issue this type of stuff unless its really worried. Whilst cheap credit flows in from international money markets IRs are worse than useless. High IRs will simply create a bigger profit differential and spur on the carry-trade. The BoE is therefore effectively powerless…

    “The Bank of England is also increasingly concerned about the complex and risky financial instruments devised by banks and hedge funds, of which little is known.”
    So the current M4 figures could be wildly wrong.

    Globalisation is a double edged sword.

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  • Uncle Tom

    I’m impressed by your calls on interest rates rise but, defining a crash as 50% in 2 years? Is this possible – has such a drop happened before? The “crash” of the early 1990s took about 6 years to play out and drops were not as large as 50% – admittedly there was not the level of debt around nor the degree of property speculation but interest rates were >13%.

    Why will banks be unable to lend as house prices fall? The lending criteria at the minute appears to be anyone who has a pulse so I can see criteria tightening (which will hit savers like me – grrrrr) but lending stopping?

    BlindBlind

    And I was naive enough to believe the financial world was driven by very intelligent and educated people who analysed a situation, made a logical prognosis, and took action on the most likely outcome of a series of scenarios. Yes, it is worrying.

    At least I can feel safe in the knowledge that crash Gordon is managing our economy extremely well, having palced it on a sure foundation of investment to avoid the boom-and-bust cycle……

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  • Ontheotherhand says:

    Uncle Tom. The last house price crash was only 13% from peak to trough but it still is remembered as a crash and not a slump. If your definition of a crash is 25% then would this have made everyone feel better in 1989 to 1993 who sat in negative equity? ‘Oh well, it’s only a slump’ See the graph on ‘The last house price crash’ on this very site. http://www.housepricecrash.co.uk/graphs-last-house-price-crash.php

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  • Talking rot – you’re not very hot on your Greek myths. Cassandra was granted the gift of prophecy, but cursed by Apollo so that no one would believe her predictions. In short – she was right, but no one would believe her – not a good use of reference for your disbelieve of the BoE’s warnings… you sound a bit like Agamemnon to me.

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  • It always did worry me where all the money was coming from. Can anyone tell me which banks are overexposed in terms of lending more money than they have in deposits, or is this an institutional thing. I’m just wondering where is best to stash my cash.

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  • Jimmy James

    Yeah – good point. I fell into the habit of calling people on this web site CASSANDRA as they were predicting the future (accurately I believe) but no one else believed. The EAs, BTL-ers etc plied their public relations and the UK public just lapped it up. Can a crash be averted because no one believes it is possible, so panic selling does establish itself in the herd mentality?

    Agamemnon is a better analogy – it has been years since I read the Illiad. Might start it tonight now that I think about it.

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  • I have always maintained that the last housing ‘crash’ was, as an asset price movement, no more than a slump. The upsurge in property prices in the late eighties was rudely brought to a halt by interest rate rises and then slid over gently – but very painfully for those over-borrowed.

    I am convinced that the next correction will be much more dramatic – the long term market oscillation has reached an exceptional peak, and there is every reason to expect this to be followed by an exceptional trough.

    To understand why the mortgage lenders will find it increasingly difficult to lend as prices fall, you have to consider the assumptions they work on to justify their lending practices to those who provide the money to lend.

    As they find themselves obliged to accept that prices are falling, the LTV’s they can offer will be drawn in, and bad debt provision will be increased, resulting in higher rates. As things get worse, the number of people defaulting on their mortgage payments is likely to increase sharply, and the lender’s sources of capital will get increasingly cold feet over providing funds for mortgage lending.

    As happened a generation ago, the mortgage lenders are likely to run short of money to lend.

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  • devil's advocate says:

    Excuse me for my ignorance and I know it’s been mentioned before but if interest rates do not go up significantly people will not be forced to sell. In the past two years it has been a buyers market and sellers have stayed away from the market. Admittedly a boom has taken place this year but it just proves that if sellers do not get the money the EA has told them its worth they will simply not sell. I know of loads of houses that have sat on the market for a year and been taken off only to come back on at £30k more and in recent months have sold.

    I don’t see what will force the market down……

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  • Blindleadtheblind says:

    uncle chris…there are bank guarantees for money held on deposit at banks, but when you look at how much of various currncies are losing value (inflation) thats not much compensation. Also remeber the poor folk in Argentina who simply could not withdraw their cash…cant happen in the uk? Better consider some quiet purchases of gold …

    Devils…understand what drives intrest rates is not simply what a cetral bank would like to do, its also what it is forced to do by the huge money markets…remember Soros and his joust with the BOE a few years ago?? Print to much money (cheap credit induced housing boom is proof of this) and later you pay the price

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  • I think Japan will announce an end to its 0% IR on Friday which may accelarate global credit tightening. This might be the tipping point for the MPC to add 1/4 of a point in August – Last years slowdown was caused by housing market jitters, – when they return I am of the view that this recent ‘mini boom’ will be acknowleged as a classic dead cat bounce.

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  • Waitingfor The Crash says:

    Uncle Tom thank you for your wise words. I agree with your predictions.

    What will happen is many people living with negative equity (obviously). BTL’s on the market… and people loosing the asset in the main house they used to finance the purchase of the BTL. We will see very low profits from the banks for 5+ years while they recover the cost of this.

    I do not see the end of the capitalist world though! I see market forces sorting out the crazy world that is London. No city bonuses and people having to work to make a living!! Nice thought that though – why should average people earn 60K+ for manager jobs in London – welcome to the real world.

    The banks will have hard times, and i am pleased about that. The bit no one has factored in here is a government which has destroyed the true UK economy, we need to attract investment and create jobs. Rising unemplyment / rising immigration & social welfare / no new investment.

    Tories to the rescue again – can we use stem cell research to grow a younger Maggie to come and sort it all out?

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  • Devils advocate – I refuse to beleive that you can visit HPC site – presumably with at leat one eye open – and not be able to think of several things that could force the market down.

    unemployment is at its highest for how long?!?!?!?!

    All of that debt and the massive increases in IVA and bankruptcy?!?!?!

    Look at it this way…. interest rates are at (pretty much) historic lows. Adjusting for inflation I think they currently stand at a 350 year low. Yes, 350 years. So why is ANYONE bankrupt? How can that possibly be?

    If people can go bankrupt without a specific shock, then the same can happen to homeowners. What was the figure released recently? 80%+ of IVAs and bankrupts site “borrowed too much” as the reason for getting into trouble. Not illness. Not unemployment. Just borrowed too much.

    FTBs left the market long ago. They are far outweighed by BTL that are in it for profit. Rental yields are plummeting. Capital gain is stalling. So the change of sentiment will come sooner or later. Yes, they may leave the property on the market for years because they don’t want to accept a low price, but even if prices are coming down very slowly they will try to sell sooner rather than later. This is something that could easily snowball.

    And on top of all this, the BoE are almost certainly going to have to raise rates at some point in the future.

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  • At last an overt admission from the BofE about why they’re crossing their fingers and burying their head in the sand over raising interest rates.

    I believe the Bank of Japan is due to make a decision on Friday, and that decision will almost certainly be for a 0.25% raise inthe base rate.

    This will get interesting.

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  • Is there still talk of the uk one day joining the Euro? I think a referendum would be needed.But with our interest rates being 4.5% at the moment and the euro being 2.75% (i think).For arguements sake, if we did join the Euro Could this help people pay there debts back? With the rate dropping or would it just be more ammunition for people to borrow more?

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  • bidin'matime says:

    “Another serious worry is the possibility of a global pandemic of a human form of avian flu”

    Who was it who derided my suggestion along these lines some months ago??

    It’s back to my pencil on the desk analogy – for those who missed it: The property market is like a pencil standing on a desk, point upwards. If the desk is steady, the pencil can be quite big and will continue to stand up, but it remains susceptible to a shock to the table. The longer the pencil, the less a shock is needed to topple it. The pencil is house prices and the desk the economy. Sooner of later there will be a shock big enough to bring it down.

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  • I lived in Thailand when Soros contributed to the currency crash in1997. The Thai government had been propping up the value of the Baht…until it no longer could. Once it got going it snowballed fairly quickly over a matter of months, went from 45 Baht to the £ to around 90 Baht to the £. Of course, that sort of thing could never happen to the UK housing market…could it?

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  • bidin, you’ve spent too much time at your desk.

    My analogy is the party that gets overrun with chavs and turns the atmosphere sour and starts trashing it for everyone.

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  • Well HPC blog may be a failure in the estimation of some short-sighted philistines, but if it’s encouraging TR to re-read the Illiad, this can only be a portent for the near future when he will be interpreting for all of us the mythological and psychic significance of the terrifying monsters and creatures shortly to arise in the politico-financial realm — in the wake of Bank of Japan’s bow wave.

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