Bank of England Reduces Bank Rate by 0.25 Percentage Points to 5.5%

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The Bank of England's Monetary Policy Committee today voted to reduce the official Bank Rate paid on commercial bank reserves by 0.25 percentage points to 5.5%.

Reply to
Enzo
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Whoopee!

er, that means my savings income will be reduced.

Bummer!

John

Reply to
John E

So when house prices go sky high the BOE can do nothing to keep them under control as they are not in the 'inflation basket' but when they start to fall the BOE reacts straight away. Hmmm - that's not right.

I hope we don't go US with this and actually start bailing out those that over spent.

Reply to
Sam Smith

I was pondering the Paulson Bailout. As always, I have a few thoughts:

Mises said of debt-deflations "There is no mathematical solution to debt". Either the mortgage deadbeat gets stuck with the bill, or the lenders and investors do. The deadbeats are voters and 2008 is an election year while many of the investors are overseas.

That said, the US has gained hugely from global structured finance, and exacerbating its problems could come back to haunt them. It's also clear that not a huge fraction will be helped by this solution. They've said they won't help flippers, speculators and landlords - folks have gotta be resident in the home. Then folks have to have 3% equity. Those on

100%LTV neg-am and interest only 2-28 teasers are out. Those have to be the dodgiest mortgages and will feature largely in future defaults. Then many who had close to 100% mortgage or who used equity withdrawal to get there will be upside down due to falling house prices. That ratio can only increase in the medium terms. Those with poor credit records are out, as are those who aren't current (or nearly) with their mortgages over the past two years.

I'm not sure that's going to leave a lot. Meanwhile lumping dodgy mortgages onto a federal guarantee system might just end up where the pension guarantee system ended up: bankrupt and sorely in need of a taxpayer bailout.

Let's just say this was a credit buubble and we're now into the debt-deflation part. If a deadbeat defaults on their mortgage, every Dollar lost in the aftermath drops the money supply by a Dollar. However, if the lenders are strapped for cash and running against capital requirements (some of the folks who really know this stuff think this is why banks are hoarding cash) then every Dollar lost to them eventually means the money supply loses ten Dollars due the the magic of fractional reserve banking. In that light, transferring liabilities from deadbeat debtors to their borrowers is simply making the problem a hell of a lot worse.

Of course on thing on the minds of Paulson et al is every foreclosure (and they're running at near a quarter mllion per month) means another house on the pile for sale and another ratchet down in house prices. That means more people upside down on the mortgage; more people likely to default; another hit to CDOs; more credit crunch, lather, rinse, repeat. They want to avoid that death-spiral.

However, if they legislate down the income stream from mortgages, that's the equivalent of a partial default. The prices of the mortgage-backs and CDO's have to be written down to reflect the lower present value of the reduced income stream. Needless to say this isn't what the holders of already impaired CDOs need right now. Many of the supposed AAA-rated tranches, which were allegedly protected from defaults, have already taken drops of 12% to 23% (the mortgage termites have eaten away the lower tranches which acted as a shield). Dropping them further eats more of the lenders' capital. See above point about the effects of fractional reserve banking on the money supply. Thus we have CDO writedowwns; a further tightening of lending; less credit to bid on house prices; acceleration in house price falls, and we're neatly back in the above death spiral.

Half the US mortgage markets (subprime, alt-A and Jumbo represented near

50% of lending in the past two years) have damn near closed down. Those few who can still get a mortgage will have to pay a rate they can't afford to obtain it.

Meanwhile Fannie Mae and Freddie Mac own or guarantee (yes, if your mortgage-back defaults, we'll pay any lost interest or capital!) the other half of the mortgage market. Both have taken small writedowns on CDOs and small writedowns on impaired mortgages they're going to have to pay out insurance on. I haven't yet found anyone who thinks they're being realistic in their writedowns. Still, Freddie needs 5 billion in capital and Fannie 7 billion, and both have made significant cuts to their dividend. This indicates they know theyre going to run close on capital, and if they've really lowballed on the writedowns, perhaps soon. Fannie and Freddie being unable to make loans will really hit what's left of US mortgage markets hard. Basically what's happened up to now will be a mere foreshock.

So what's to be done? Well, the Republicans probaby figure they want to put as much of the mess beyond the election as possible. Unfortunately that's the thinking that got everyone here in the first place. We knew from Japan 1989-present that when the bubble burst, things would be unpleasant. Greenspan, Bernanke and Brown decided that rather than take their licks in a deflationary recession, and risk doing a Japan, they'd cut rates to the bone after the Dotcom Crash and see if they could goose the already old credit bubble into an encore. We got it in the form of the mortgage bubble, as everyone bailed out of stocks and pensions into mortgages. The trouble is that a big part of how bad things will go after a bubble bursts depends on how long it lasts, how much debt is incurred and what fraction of eople participate. In both the US and UK, about half were in stocks, but more than two-thirds are in housing; and in both the debt was under GDP in 2000, but is now 140% in the US, and 162% in the UK. It goes without saying that the bubble has been goosed into lasting longer. It's now, without any doubt at all, the largest credit buble in history, and the most widespread globally. It makes the South Seas Bubble look like a Sunday School raffle.

I always said Greenspan was the guy who would save a recession at the cost of a depression. The chances of me being wrong on that are diminishing by the day.

Reply to
M Holmes

So, use your savings to buy a house...!

Reply to
whitely525

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