BOE to unveil GBP 50b bond swop plan

To bail out the bankers of course.

FoFP

Well they must have their bonuses still and the shareholders must have their divi.

So this will keep house prices high, keeping the first time buyers out of the market, keep savings rates lower than they would have been??

Tiddy Ogg.

That's the plan. The banks get to recapitalise through offloading their dodgy mortgage-backs. They also do so through wider margins as base rates are cut and mortgage rates are raised. The politicians have agreed to whine about this but do nothing about it and the banks have agreed that they'll have to do some sorts of rights issue to take cash from shareholders.

Labour are desperate to avoid another Northern Rock. They'd also rather like to shore up house prices. Note that in the swaps,some AAA mortgage-backs have been priced at a 30% discount by the government - this means the government expect house prices to fall so far that they'll hit mortgage-backs to that extent, and the banks agree.

Another wrinkle is that they've set the banks themselves up for a margin-call scenario. If the mortgage-backs lodged as collateral fall in value (which they will as house prices fall or as delinquencies increase) then that banks are required to pony up fresh AAA's to replace lost collateral.

The possibility that should keep Darling awake nights, is that falling house prices and rising defaults squeeze the capital of the banks even as the government demands new collateral to be lodged to replace that lost. It's a vicious circle that's inherent in the structure of what's been created here. It's also a likely scenario for the point that the government throws up its hands and says "Sorry taxpayers, you just lost

That would mark not only the end of Labour government, but probably the end of the Labour Party. Anyone idiot enough to tie government debt to the fortunes of a commercial company should carefully read the history of The Sword Blade Company (later to become The South Seas Company) and what happened after such an arrangement came apart.

I confidently predict that Labour's attempt to hold up house prices in defiance of Mister Market will have the same resounding success as the Conservatives' attempt to shore up the value of the Pound.

FoFP

In message , M Holmes writes

Sounds about right for stage one.

Which is almost inevitable at this point.

Not counting the fact that we might well not be getting everything back from NR either and the chances are that they will try a further bail out before admitting defeat so probably rather more than 100B.

Some never learn from history they just have to experience it for themselves and it looks like that is where we may well be going.

Likewise, I would venture that they stand about the same chance as Canute did only difference being he might well have realised his limitations.

What are the likely consequences of this scheme? Massive inflation? More tax increases?

Still hard to say. Politicians will naturally veer towards inflating their way through a debt-deflation, particularly in a fiat currency regime.

There are complicating factors this time however. The first is that commodities already have a high inflation rate. Exacerbating that could instigate a peasants revolt and there's the ever-present risk of it collapsing the currency. Labour arre probably proud that they're the only Labour government not to have yet achieved that. The second is all that mortgage debt. While in the long term, it might be helping the debtors to inflate their way out of the hole they're in, in the short term the bondholders and savers will compensate themselves for any inflation risk by hiking mortgage rates. A two or three more percent on mortgage rates would likely destroy housing markets pretty much there and then.

That pass has been sold. The Japanese government only managed to control mortgage rates during the credit bust there because the Japanese are inveterate savers. The sheer amount of private debt undertaken here during the credit bubble has meant that it's those supplying the cash, rather than the central bank, who decide interest rates.

My current take is that the government will try the usual reflation, but when the side-effects make it politically and economically untenable, we'll be into debt-deflation. If we're really unlucky, commodity inflation will still continue regardless.

FoFP

Not a pretty picture.

Perhaps, but I always promised folks here that we'd get a ringside seat at the denouement of the largest credit bubble in history. Best get comfortable and enjoy the show. They're going to be writing about the history we're currently making for a very long time.

I have to say, it's all been jolly interesting so far, and it's been happening somewhat faster than I'd thought it would.

The only thing that was so unexpected that it startled me was reading that California median house prices are down 26% year-on-year (California Realtors Association figures) and in Santa Barbera, down 39%.

If asked previously, I'd have bet that house prices couldn't fall more than a dozen percent per annum outside of a war zone. If they fall that fast when things kick off here, everyone is going to be jolly surprised.

FoFP