Saturday, December 6, 2008

Interest rate cut mean more capital erosion at the banks.

Before you cheer too loudly ...

The rate cut and anti-repossession measures are a huge gift to people who took on large loans during the boom, and to those who can no longer afford them. Banks are making huge losses from their past lending errors. To function properly, they now need to make a margin. Yet they are saddled with tracker mortgages giving them 1.5%-3% interest, while having to pay out more than that to savers. Result: misery. The banks are supposed to be lending more, this move may, perversely, result in them lending less.

Posted by mytimeisnigh @ 10:08 AM (1787 views)
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18 thoughts on “Interest rate cut mean more capital erosion at the banks.

  • planning4acrash says:

    But the Bastards get Euro Parity and the Central Bank captures the fractional reserve banking system, making banks dependent on it, at the mercy of their dictate for capital.

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  • This is the inevitable consequence of price fixing, however, on the plus side, as has been noted here and elsewhere, the fall in property prices will be bigger.

    Maybe we will end up with scenario where we have to buy houses with cash we already have ! What a dream scenario.

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  • Does the Govt wish to encourage money to move more freely, or is it more intent on preserving the imbalances that have grown up over the last 10 years?
    It would seem the second is true, which is not the business of govt. The situation looks more chaotic by the day.

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  • base rate down 1 %, a FTB mortgage with the halifax is still 7.14%,

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  • If the purchasing power of my savings declines slower than the value of a home I would like to spend the rest of my life in, I would be overjoyed. That is the only hope I have right now.

    Compare that outlook to that of a BTL lord. My outlook is driven by concern hat the value I have created over the last ten years is not stolen from me through monetary policy, whilst the BTL scab is, and always has been, driven by greed, speculation, and the premise that they can benefit using from the wealth created by others through holding an unproductive asset.

    Actually, I was thinking about a zero interest rate policy a bit last night and was wondering how it could possibly work?.

    Why would banks lend if they are not getting paid to do so?

    Why would people calculate the amount they want to borrow based on anything other than interest rates moving up over the medium term? After all thats the only direction they can go if they are at zero. Doesn’t this mean that people will still be borrowing based efectively on a scenario where rates are non zero (in other words levels of borrowing cease to be a function of rate level as they approach zero)?

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  • letthemfall, further up the chain of command, above the apparent chaos
    is well organised wealth extraction and transfer
    resulting in economic slavery and more debt.
    Growth = more debt, but more debt doesn’t necessarily mean more growth.

    it has been that way for a long long time

    jackas, taxes and interest rates are not essential components of an economy. – XAT3

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  • malct:
    Well, the rich will always try and hang on to their wealth, come what may, and add to it if they can, and have little interest in a fairer society. But if you mean there is an organised conspiracy of the wealthy, I doubt this, though perhaps the effect is much the same.

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  • I just heard a tlking head on BBC news 24 say the following:

    “People saving money is the problem. Their savings is my unemployment”

    There it is. I think I’m starting to work this out.

    The problem is that the debt based economy has led us to a stage where people can’t distinguish a unit of value and a unit of debt.

    This is extraordinary – it means we are bordering on losing sight of the fact that money should essentially represent the present value of labour. If you have worked in the past then the money you have today should represnt that. If you borrow money, then it should represent the value of the work you will do in the future to repay the debt.

    We have lost sight of the fact that borrowing should be linked to the present value of labour NOT spending. At some point we will (already have) reach the stage where debt had become so large, the present value of productive labour will never repay it, because we are focusing on maintaining consumption that is based on debt, not productive labour.

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  • @jackas,
    Extremely well put. I wish you had carried on. Your conclusion is…?

    My conclusion is that the debts must be shrunk retrospectively, which is what the government is trying to do. This unfortunately wipes out the savers. Either they are forced to spend, or the government must spend on their behalf, both ways end up with savers having less in real terms. Hence the flight from sterling. The main problem is the winners, i.e. those with money in the bank from property sales. The banks are in trouble because of their obligations to the savers, not because of their income from debtors.

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  • it_is_going_with_a_bang says:

    “If Darling wanted to support the property market, he should not have squandered £12.5bn on the VAT cut. The money should instead have been directed into a programme of social housing”

    Now that would actually be money reasonably well spent which is obviously why it has not happened.

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  • @stillthinking

    My conclusion is that our only hope is a prolonged, drawn out depression which rebuilds the nations balance sheet. Non-productive speculative asset bubbles must deflate – that includes property. Productive assets, whilst they may fall in nominal value, should maintain their value or increase in real terms. The UK should focus on saving and producing rather than consuming and borrowing. It’s the latter that got us into this mess.

    Its not a conclusion I come to lightly. The reason I hope for this is because the alternative is a collapse of our monetary system

    We have a choice – turn up the treadmill speed until its going so fast we can’t hit the stop button and we fall over, or hit the slow down button today voluntarily.

    Unfortunately politicians will never be elected with the mandate that they will cut spending and induce a slowdown to ensure the long term stability of our currency and our economy, so we are doomed.

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  • I would say the banks are in trouble because they have to attract savings, while under pressure to lend cheaply. They cannot do both. Since they need to rebuild capital, we may see savings and mortgage rates stay higher than expected. Savers who intend eventually to spend on a house are not in a bad position, unless the Govt are able to engineer a reverse of the debt unwind – unthinkable, probably impossible. Let’s hope so anyway.

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  • Thanks.
    I am not so sure that saving is so useful. Normally saving is useful because, behind the scenes, the money actually goes into industry i.e. generates goods in the real economy. However, at the moment we have had an artificially high level of consumption and there is an excess of production (over the world not the UK). From this, saving causes deflation and kills economic activity. Saving in our current environment is impossible, “paradox of thrift”. So all we can hope for is that the inflation that we should have had over the past ten years will finally come out.
    We are, in fact, being strangled by the savers (my opinion), whether they are those who have STR, or foreign governments holding reserves, or whoever.
    The equivalence of not borrowing being the same as saving is wrong IMHO. We need to borrow less and also save less. As the great M.Thatcher said, money needs to change hands because that is what keeps production up. We need more velocity and less cash.

    As an aside, I do love this site. What an eye-opener it all is !

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  • There will be a brief period when they have to push up IRs to try to fend off the inflation and prop up the currency, which will should the final blow to the property market.

    Having said that, the way they are chucking ‘tax-payers money’ (soon to be ‘quantitavely eased’, or printed money..) at the problem, who’s to say they wont just offer to pay people’s mortgages for them, until wages rise enough to meet the higher interest payments!

    The timing of re-entering the market will be crucial…

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  • @ Jackas 10 – ‘We have a choice – turn up the treadmill speed until its going so fast we can’t hit the stop button and we fall over, or hit the slow down button today voluntarily.’

    Are you kidding? The chance to put the brakes on has long passed. Should have started the steady slow-down in ’05, but the great foresight of BOE and gov’t thought that lower interest rate, and ‘no more boom & bust’, would result in ever increasing growth.

    Well now the system has fallen over, and nobody knows how to limit the damage. All parties, banks, industry, gov’t, greedy irresponsible general public (in debt), and sensible general public (Not in debt), all have a vested interest in which way the situation should be managed. There are serveral variables all being tweaked. No-one has the answer, because there is no answer.

    What will happen will happen. It will suit some, and will not suit others. I suspect the gov’t will try to appease the many at the expense of the few. Well that could very well be the sensible ones (The few). But I hope not.

    Regarding savers being the problem, I don’t believe peaple are saving, just not accruing as much debt as they have been for the last few years. The debt people accrued against their over-priced properties (Incl’ re-mortgaging to buy new cars, etc…) is what supported growth . Now that people realize house prices do not continue to grow, the spending of other peoples cash has stopped and so all luxury goods retailers will suffer, as well as most other retailers. It’s happening, it’s real, it will only continue to get worse. By far an ideal situation, but we are in the brown stuff, with no idea how to get out.

    Sorry for the rant.

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  • planning4acrash says:

    “People saving money is the problem. Their savings is my unemployment”

    Nonsense. What we have is a ware between speculators and savers. We desperately need savers to invest non-debt capital into our economy.

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  • There is no non-debt capital. Isn’t that the whole problem? We have a debt based money system. The reason why £3 gets you a drink at the bar is because some poor bugger loses his home if he doesn’t dance to your tune. All savings are ultimately either secured or unsecured debt.
    Non-debt capital would have to be just printed money.

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  • I have no idea of figures but I’m sure I keep seeing references to the fact that there are a huge number of people in this country with savings, far more than those in debt. The queues outside Northern Rock highlight the fact a lot of people have savings. It amazes me that there is no lobby for savers because I would argue their voice would be far louder than that of the in debt. All those pensioners who are seeing a lifetime of prudence being destroyed for the sake of what? If Labour get this wrong (and they will) they will be out of power for at least another 18 years.

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