Nope. I've been warning people for a decade not to confuse the two. In a bubble, as credit expands, people mistake it for cash because it can be traded for cahs, or more accurately for assets regarded as being as safe as cash. The prices of those assets get bid beyond reason. There's always one primary asset regarded as a Golden Ticket to riches which is bid up beyond all others. This time it was domestic housing, though it could as easily have been flower bulbs. The rise in price of that asset raises the amount of credit available to borrow against it. Then that credit bids up prices some more and the bubble is driven by a positive feedback loop.
Unfortunately the feedback on the downside is also positive, so as credit vanishes, prices fall. This causes bad loans at banks and so credit becomes yet more scarce and this drives prices down further. This is the essence of debt-deflation. What it amounts to is an attempt to squeeze sixty trillion in credit down to five or ten trillion in cash. Not everyone with assets or credit is going to get paid what they think it is worth and so it's a race to deleverage and get into cash. The banks are in many ways the least exempt from this.
That's a side effect. What is declining is the amount of credit in the system.
In the UK, it was an insignificant part of mortgage markets before 2000.
Eh? The reason for securitisation was a surfeit of borrowers and not enough deposits. The solution was to sell the loans and use the cash from the sale to make new loans.
How much better placed would we be now if the *hadn't* got the funds? House prices would be at a third or a half the level they are and the debt black hole in the banks would be a great deal smaller.
Something very similar was tried in the South Seas Bubble (now the second largest credit bubble in history) as government debt was securitised as shares in the Sword Blade Company.
Except that now that we're cutting down on borrowing, Brown is borrowing vast amounts of money on our behalf. he just won't accept that the bubble is over and start working to getting towards where we need to go.
Indeed. I'm most heartened to see this.
Perhaps their customers were involved in the bubble and feel less able to spend now that it has vanished. Companies which supplied the bubble and its speculators will always be at risk of vanishing with it.
Let me ask you one question: how many of his customers owned housing through borrowing? How likely is it that those customers now feel poorer? Ho probable is it that they regard a pie and a pint as discretionary spending?
Governments have proven to be terrible at picking winners. Inevitably they'll choose the politically connected and convenient. Just look at the bailouts being considered for car companies in Labour marginals. We'd be far better leaving this to the markets.
Precisely.
Yet now, we're being asked to bail out borrowers who didn't pay for redundancy insurance to enable them to pay their mortgages if they lost their jobs. If they won't pay for it themselves, why the hell should the rest of us do it for them?
It will be salutary. People need to learn once again that debt is a treacherous friend.
Prices go up and then they go down again. It's a cycle. Those unprepared to learn from history will suffer from it, but we'll all get past it.
Have you considered that if they can't afford it without borrowingm they just plain can't afford it? All this borrowing just puts people in hock and prevents them spending on other goods and services while inconveniencing everyone else by driving prices to the Moon. What we're headed for is far far more sane.
More businesses which catered to the bubble. It might be a good idea to get them building schools again.
And this makes us all vulnerable. How much better for us all if they didn't have those debts?
The bust after a credit bubble is almost always fast and hard. It's hardly as if it were unexpected. These people could have prepared.
I think if we left the markets to do their work, we'd be through in four or five years, and we're through one of those already. The way Brown is going though, I fear it could be twenty. I vaguely recall reading that there were six decades of deflation after the South Seas Bubble.
That's true of course. However they do have what they paid for at a price they thought worth paying. They haven't lost anything.
In which case the house will be freed up for a family which can pay and which had been held out of the market by ridiculous prices. One person's loss is anothers gain. That's how markets work.
Folks who make poor financial bets will always be disadvantaged compared to the bet going well. If it had gone well, who'd be crying for all the folks kept out of housing by high prices?
That does surprise me. Haven't you been spending enough?
I too have never paid interest in my life. I suspect there aren't many of us.
I'd rather it was heaped upon those debtors and lenders who got us into this, but Brown and Darling seem determined to protect them and only them.
That much seems certain.
I'd have let the banks go down (with the existing guarantees to depositors then enacted) and the more sound parts of their businesses, and the better of their personnel, released for use by their more careful competitors.
FoFP