Thursday, May 1, 2008

Total doomsday scenario ….

Banks warned over lending fear

"The Bank of England has warned that banks' fears of a financial meltdown may become a self-fulfilling prophecy... Its financial stability report suggests the credit exposure not declared by UK banks may be near to £100bn. The twice-yearly report says that there is a "significant increase" in the risk that a major bank collapse or reluctance to lend will disrupt the financial system."

Posted by mark wadsworth @ 07:38 AM (1083 views)
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16 thoughts on “Total doomsday scenario ….

  • I’m no professional economist, but are we tackling the crunch the wrong way? If we are driving a policy of lower interest rates, is this not throwing good money after bad? If people are as risk averse – as this is undoubtedly the case – then we need to create quality collateral. Should we not be increasing interest rates to increase the propensity to save? This would create quality cash deposits. So to take a crass example, interest rates of 10% would make people think “I’ll have some of this and stick my money in the bank”. Sterling would become an interesting product. Credit would fly to other markets where the cost of money is lower. Businesses that are unable to get credit due to poor ratings and have perhaps run more riskier operations would shed jobs they ought not to have created. Eventually, the poor risk and good quality deposits would lift confidence that what is out there is good quality. And confidence is the key to the survivial of all markets.

    It seems counter intuitive and I am sure M King is well qualified, but I can’t help thinking we’re tackling this completely wrong in the UK.

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  • japanese uncle says:

    Had he raised rather than cut IR in 2005, he would not have to give them such boringly basic lesson today. What a laughable clown!

    I seem to recall he was referring to the predicament of the manufacturing/exporting sector as the reason for cutting the IR at that time.
    Bulls–ts of the decade along with their interference to scrap Lloyds TSB’s plan to merger Northern Rock.

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  • Good points Growler, except you are forgetting that GB and his crew, and infact every government, needs the public to spend, as spending builds the economy and tax revenue, while saving just helps a small proportion, ie the banks, and the government through stealth taxes on savings (and to some extent the savers), but not the ‘real’ economy. To spend the quantities now needed to bolster the squandered tax gains over the past decade, the sheeple would need to borrow. Hence the need for low rates and easy credit. The only real fly in the ointment is distrust; banks with banks, banks with the sheeple and businesses, and sheeple with the housing market. There will be a return to easy credit, as greed will always overcome ethics and sense, but this will take a few years, maybe even the next decade (human memory lasts 9 years, so I am told) and until then UK Plc will need to use every trick in it’s book to get the credit lines, in whatever form, going again. The government do not want you to save, they want you to spend, and spend, and spend, so they can keep spending, and spending and spending on the ‘nanny’ state, illegal wars, Olympic villages etc. All that said I would dearly like to see Mervyn take control and at least hold rates, until we get a good chance to see what effect the SLS and the previous rate cuts have had, and this could take 6 months or more.

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  • The Banks get us into a mess by allowing cheap and easy credit to sweep the nation and now the BOE tell us that the Banks will get us into an even deeper mess by operating tighter lending policies – absolutely laughable – is this an open admission of “we dont know what we are doing”?

    The Gov & BOE need to go back to basics and look at their main aims and objecrives – I’ll give them a couple of clues :- financial stability, stable exchange rate etc……………….

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  • it_is_going_with_a_bang says:

    “May be exaggerated” “self-fulfilling prophecy”

    and then goes on to say “The Bank of England also warns that there are potentially large exposures that have still not been declared by financial institutions.”

    A fairly mixed message being given here.

    If you have some equity and are not trying to take out stupid loans then you will get lending. The only lending that’s stopped is risky lending. I don’t really see why that should be a bad thing.

    Then “the Bank of England wants to change the rules under which banks operate”

    No Sh*t Sherlock.

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  • Funny how both the BOE and the Fed came out will bullish comments at much the same time – I reckon they had a little chat…

    Given that both institutions have an obligation to be moderately bullish (but not excessively so) it would appear that the financial system is not expected to climb out of the mire any time soon.

    The US Case-Shiller house price index is one to watch, which is still in freefall. Will the US market slump (as ours did in the nineties) or crash? (as I expect ours to do this time)

    The difference is whether or not the property market over-corrects and then rebounds, or simply slumps to a sustainable level.

    The banks would find a slump much easier to handle.

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  • What disturbs me is that the message coming out of the BOE seems to be, “come on banks, keep the party going, keep house prices up”. David Blanchflower was quoted on the front of yesterday’s Metro as saying (paraphrased) “that house prices could fall 30%, so we had better start slashing interest rates!” It could not be clearer, the prudent are to bail out the feckless and irresponsible. It makes my blood boil. What is even worse, is that it all seems to float over the head of the public in general. I truly despair sometimes…what hope is there for a world of sheep governed by wolves. Cassandra never had it as bad as this!

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  • mark wadsworth says:

    Thanks for feedback.

    Uncle Tom, in the USA prices are down 12% in the last year and this trend looks set to accelerat for the foreseeable, how is that a ‘slump’ rather than a ‘crash’?

    The arguments have raged on this site whether prices will fall ‘only’ 30% from their peak or as much as 80%, I can see arguments to support either view and anything in between.

    Even 30% would only take us back to 2004 levels or so, at which stage houses were already totally unaffordable for FTB’s. Is 30% a slump or a crash?

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  • Strange how even pensions are tainted with this ‘spend now, don’t save’ culture. Cos if you do contribute to your own retirement you are penalised and those that don’t are rewarded. It seems that saving is viewed as anti-social, whereas spending is pro-social.

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  • bystander – you are spot on…the problem with modern economies is that they seem to be driven by mechanisms to suppress saving and keep the spending, and stealth taxes, such as inflation going. Capital gains tax is a perfect example…for many assets the gain comes not from a windfall increase in value per se, but from inflation of the money supply. So, they “print” more money, dump it into the system, and then steal 40% of any inflation tracking I have in my asset. I wouldn’t mind if capital gains were offset against increases in value due to inflation. It is such a simple and transparent form of state appropriation of individual assets over and above income taxation, that I don’t understand why they bother with the facade and just send the goons in.

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  • Dave The Dog says:

    It’s all relative to the individual . . . if someone goes into negative equity it’s a crash for them!

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  • Those of us who did not borrow 8x earnings to invest in the pyramid scheme of property might object to our taxes bailing out those who did. However, because of my savings in UK banks I am, like it or not, exposed to the pyramid scam like everyone else, and I have to conclude that the pyramid needs to be kept standing, at any price. Inside Track and their ilk, through their success in conning the banks, the government and the home buying public have already walked off with our money.

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  • “how is that a ‘slump’ rather than a ‘crash'”

    Mark – I didn’t say it was. It’s looking like a crash at the moment, although there is a very slight softening of the descent line which leaves open the possibility of a slump, but only the possibility…

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  • “Is 30% a slump or a crash”

    It can be either, it depends how it gets there.

    If the fall starts rapidly and then steadily slows, without over-shooting, it’s a slump.

    If the fall gathers pace, over-shoots and rebounds before settling at it’s final level, then it’s a crash.

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  • justwatching says:

    Don’t forget JU @2, KIng did not vote for a cut in aug 2005, he was outvoted by the plants, (or planks?)

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  • Growler, that was essentially Margaret Thatcher’s policy in the 1980s.

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