Root of the problem? What Can Be Done To Make Banks Lend?

I wasn't suggesting otherwise. Labour wins, lasts two years maximum with the country falling about their ears, *then* the Tories fix it. Eventually.

I think we still have some way to fall, why shouldn't Gordon get to enjoy that bit? There's no possibility of recovery with current public-sector policies, and he'll die sooner than U-turn.

And since people still mention Mrs Thatcher, who left politics almost twenty years ago, Gordon must be good for a couple of decades of blame. He has, after all, actually been running the country since 1997, he was just annoyed at not having the title as well.

On Tue, 13 Jan 2009 02:54:19 +0000 (UTC) 'M Holmes' wrote this on uk.politics.misc:

Stranger things have happened.

On Tue, 13 Jan 2009 00:44:01 -0800 (PST) ' snipped-for-privacy@aol.com' wrote this on uk.politics.misc:

DC is learning fast at a very difficult time.

Promoting lower govt borrowing is absolutely right, but people without jobs might find that hard to swallow.

IMV he is succeeding at informing the electorate that much of this current economic shambles has been caused by Brown and NewLab. That message is slowly getting thru the heads of media moguls. I watched Darling interviewed on Sky last night.

Brown the coward is trying to pass the blame onto everybody else. His rank dishonesty needs to be continually exposed.

The outcome of NewLab winning the next GE is beyond thinking about.

On Tue, 13 Jan 2009 08:16:32 +0000 'Maria' wrote this on uk.politics.misc:

I believe it to be true. Thousands of businesses are still using bank credit lines all day/every day. The economy has not seized up, despite the media gloom.

You can still get a mortgage if you want to buy a £300k house, have £200k deposit and a good job with income to service the mortgage.

You won't get a mortgage if you have £50 deposit and an insecure job which is hardly enough to service the debt.

Tescos et al are still using huge lines of bank credit daily to buy goods and pay wages etc.

Banks have returned to a more traditional role of assessing loan risks and acting accordingly. IMV they should never have strayed away from that, but were fooled by Brown's mantra of abolishing boom/bust and his fake efforts to show rising GDP. He built a house of cards to generate higher tax revenues.

Brown now wants banks to re-start irresponsible lending policies which got us into this mess, to feed his bubble economy so he can resume his tax/spend obsession.

ISTM that the outcome of this recession will be a smaller economy. (market adjustment you say further down). The chunk being lost is that which should never have been encouraged in the first place. Bubbles always produce a lot of dubious businesses.

Look at all the firms going belly up ...they're mostly firms which had shaky business models which only worked in Brown's bubble of cheap money and high consumer spending.

Interesting view. You don't blather, your views are always interesting :-)

I am of two minds on this. Either we are still going down the slope into a serious recession (depression?) or it's going to be a short and sharp one that Brown can crow about. What we do know from govt stats is that the decline started in mid-2007 but was seemingly ignored by Brown.

My gut tells me it's more like the former, given several other factors which have appeared at the same time (Peak Oil and the banking crises). As soon as the global economy picks up, the oil price will start rising again which will impose a cap on recovery. Hence my earlier blathering about the need to get off oil.

Brown's gross mismanagement of public finances will demand higher taxes and that too will impose another cap on recovery. There is also the risk of rising inflation due to the collapse in sterling and Brown's money printing game.

Thus, unrestrained recovery will not happen. That means high levels of unemployment and slow growth for some years to come.

He started it by providing 10 years of cheap money, ignoring housing inflation and repeating his mantra of abolishing boom/bust. Add to that a totally ineffective system of financial market oversight. Add to that his own irresponsible management of govt finances - excessive tax/borrow/spend.

All that encouraged excessive lending/borrowing and speculation by banks and private people. IOW a huge bubble which has been exacerbated by other factors mentioned above.

The previous ones were inflationary and the recession began as interest rates were hiked to reduce inflation. This one is debt-deflationary and began as interest rates were dropped to fight deflation. We haven't really had one of these since the 1930's and the last time we had a deflation here with domestic property as the primary asset was the Artisans' Mortgages crisis at the start of the last century.

He mistook the largest credit bubble in history for some sort of economic miracle that he fondly imagined he'd personally wrought. He's likely to go down as the Herbert Hoover of this one, and a deluded one at that.

The problems were that we were awash in credit; asset prices had been bid far too high as a result and there was too much borrowing. The markets were reducing credit availability and thus lowering asset prices and causing people to reduce borrowing and start saving again. In short, the markets are doing what needs to be done to get us through this and the best that Brown can do is to leave them to it.

It's going to hurt as foolish speculators see their investments fall in value and as the overborrowed go to the wall. However they geared up to service or profit from the buble and the bubble has gone. We need an economy structured for normality (last seen: 1984) and some current businesses and people have not been part of normality. There's no getting around that. Trying to bail them out will just make this last longer and cost us all more in taxes and lost GDP. There's scant point in taking those sensible enough to avoid the bubble and save down with those who overborrowed and spent. We're going to need them to rebuild the economy.

Brown is currently copying Japan - twenty years od debt-deflation and no sign of an end to it. If you want to have this through your entire career, give Brown your support.

FoFP

If it weren't for taxpayer bailouts, most of the banks would already have gone under through illiquidity. To recover, they need to make profits in order to replenish capital reserves. That means time while they take in money without giving it out. They also need to avoid more bad loans like the plague. hence 40% deposits on housing as they cover themselves for what they imagine will be the maximum possible fall in prices.

As I explained years ago, this would end up with people unable to get mortgages and houses trading largely for cash. This isn't abnormal. It was entirely to be expected.

FoFP

What's your analysis of why the banks in Japan are still struggling after 20 years of bailouts, and why despite the bailouts, 14 out of 19 of the majors have already gone under or been taken over?

FoFP

The Treasury publishes lending numbers each month. The Council of Mortgage lenders also do them for mortgage lending. The gist of it seems to be that mortgage lending is down somewhere between a half and two-thirds (in number of loans) and other revolving credit is just starting to show some drops. net mortgage lending looks set to be negative in 2009 (more will be paid back than borrowed).

Hard to say. The bubble started around 1984, so even updating 1984 numbers to present-day terms would only give us the roughest of estimates. Interestingly Japanese house prices are now back to 1982 levels. One would think they're now back to normal (at least for Japan) and shouldn't drop much further. Still, it looks like more debt-deflation there, so who knows?

They'll have to make do without borrowing. I'm having trouble seeing that as a terrible thing. Sure, gearing can increase profits in good times, but it increases the risk of bankruptcy in bad times. Businesses which aren't overborrowed are much more robust.

What does "seemingly viable" mean. If a business will go under without loans, they're vulnerable to a credit crunch.

True, but perhaps the number of people with one year's average salary available to spend are sufficient to give us a normal level of property turnover. It's not hard to see how that would promote a recovery. Then there's the fact that if people don't have to spend huge amounts on a mortgage, they have more to spend on other goods and services, further promoting recovery. Leigh Skene explains this very well in his writing.

FoFP

On Tue, 13 Jan 2009 10:37:02 +0000 'Joe' wrote this on uk.politics.misc:

I understand your comments and things could go that way, but I still think that DC will not willingly allow a GE victory to pass by if he can help it. For one thing, I'm not sure the nation can survive another 5 years of Labour in office. They would turn it into a police state and do irepairable damage to society.

No! There's no shortage of deposits and can't be since if you or I draw money out of the bank to spend, it simply ends up in somebody else's.

The problem is two fold.

First banks need to shore up their capital bases. The capital the government injected comes with an expensive 12% coupon. Before any dividend payment can be made to ordinary shareholders (the owners of any bank) this 12% has to be met. If it is not met then there can be no payment to shareholders.

In five years time, these preference shares become callable. Clearly the banks need to be in a position to call them i.e. replace the capital they represent, so that they can then return to a normal relationship with their shareholders.

Second, and probably more important is the risk spiral. For whatever reason, we as consumers are spending less and doing less. This makes more businesses vulnerable. Commercial loans can be the most risky of all since a company can be declared insolvent and walk away from its debts. Hence in a climate where companies are going bust and more are expected so to do then banks are more reticent to operate in this area.

The government may be right to consider commercial loan guarantees in specific circumstances but the tapayer should be asking who is going to pay for this extra risk.

Next there are secured loans. A secured loan provides the lender with a certain amount of protection against risk but not to the same extent if the security is overvalued. Houses ( the most common form of security) fell in value by 14 to16% last year and so a 90% mortgage is not going to remain 100% secured for very long. Thus if you want a new mortgage today, you are going to have to shell out 40 to 45% up front deposit. We're nearly back to the days when you could get a mortgage provided you didn't need one!

Of course such a high deposit knocks many buyers and particularly first time buyers (the bedrock of the market) out of the market improving the bargaining position of those left in, driving prices down yet further and exacerbating the situation.

Unsecured personal loans represent a high volume, low unit value sector of the market. High interest rates reflect the risk involved but individual defaults are not expensive. Hence such loans have been little affected beyond the reduction of credit limits. You can still get Buy now pay next year deals on the High Street.

Thing is that the money multiplier has collapsed, so fewer deposits are being made overall. Then there's the fact that banks were loaning far more than they had on deposit by securitising loans. It now looks as if securitisation was a phenomenon of the blowoff phase of the bubble.

Yup.

Yup.

To get us through this, we as consumers need to save more and borrow less. It's savings which lead to a healthy and growing economy. We were always headed for trouble with a negative savings rate.

Though mainly the overborrowed ones which built up to service the artificial demand in the credit bubble.

Obviously.

I don't see any reason to keep zombie companies or banks running and losing yet more money. Japan tried this and got twenty years and counting of debt-deflation. Who wants that?

I'd put it more that wwe're headed back to the days of sensible lending.

40% deposits with loans only to people who have saved for years and proved they can service a mortgage would be a good thing.

It's a good thing if house prices fall. The lower folks' mortgages, the more they'll have to spend on other goods and drive economic growth.

For the moment. The low default rate of revolving credit was predicated on growth of lending. If the amount of growth per annum exceeded the amount of losses, it looked OK on the books. Once growth stops, which it has, those numbers will look worse and worse and loan growth will go into reverse. It's already happened in the US (who are 12-18 months ahead of us in this) where car loans, credit card loans, and student loans are getting harder and harder to obtain.

Again though, it's a good thing. We need to reduce borrowing and increase saving to get through this. The economy, and asset prices, will adjust to the new and reduced credit flows necessary to get there.

It can be delayed, at considerable expense, but it cannot be prevented. Indeed, in preventing this reckoning by promoting bubbles as a result of the theory that we can always prevent a bust, we've now fomented a much delayed and very much worse bust. Those like Brown and Darling who want to throw money away delaying it yet further are essentially wreckers and need to be taken out and shot.

FoFP

first rule of banking.....'we will lend to you if you don't need it... and piss off if you do need it....' banks are in it for profit......and damn all else.....

as for housing...... housing is currently in a deflationary condition.... if you (and banks) *expect* a drop of 50%...then they'll lend you 40% or some such.... if you have a second property or a solid well paying job they may lend you 60 or more%

on one project i paid 7% above the usual mortgage rate to float a deal... go to mortgage brokers....take a good reputation....show you can afford to pay...show you don't really need the loan....

the banks don't want to loan to you if they believe that if the market price of the asset drops precipitately that you may just post them the keys.... incidentally a loan on a silly car will often result in the thing losing a large percentage after a week...

try mortgage brokers....

you can get money under suitable conditions whether you believe it or not

and you believe them? the leftist fossil media can always find somebody to whine along and say what they media want.......and if that isn't sufficient...they can edit the tape... why on earth anybody believe any of the trash emanating for the beeb or sky amazes me....

note your key word, 'struggling'... and then go back and read the basic rule of banking above!

the banks are up against a wall....

they have to much sub-prime paper.... they must first repair their loan books....

they can't do that by offering generous terms on dodgy deals... worry not.....those times will return whatever people tell you....

the army of borrowers rushed up to the top of the hill...and now they're rushing down... most people are lemmings....

the money will watch the prices fall...until they stop falling.... why pay more than you need... it's shake out the wide-boys time...

all he cares about is getting back into power.... the rest of it is the whining of a fool with his hand in the cookie jar

the clown and his merry men are busy printing money and trying to confuse you with lies.... you confuse too many things...and you still have that daft inclination to believe the pols and their idiotic media....

the clown does not control the economy...he just pretends to.... governments can rarely do good... they can just about always cause harm....

the clown has caused harm...the way every socialist government causes harm....he's taken your money and wasted it... and he's still panting for more

this week business is not very attractive as the pot is running dry...

his answer...as ever with socialists is to debauch the currency... and that is his central plan atm.... all the rest is window dressing and waffle....

regards

amazing how few words it takes to sum up :-)

he's an arrogant innumerate incompetent....ie, he's a socialist

regards

two things to be added...

1)far more people now have a chunk of capital....eventually inherited from parenti...

2)much bank borrowing has been from the far east and the gulf.. china is now trying to stimulate growth at home... the oil price is putting a hell of a squeeze on the oil producers so less easy to sell the debt abroad...

regards

On Tue, 13 Jan 2009 15:13:39 +0100 'abelard' wrote this on uk.politics.misc:

I saw snippets of Bernanke LSE speech this morning and he appears to understand the complex problems. I'd like to read the full speech ...if you come across one anywhere :)

regards

On Tue, 13 Jan 2009 15:54:29 +0100 'abelard' wrote this on uk.politics.misc:

Thanks much :-)

Ah ... now I think I see what you are getting at though I suggest you are confusing real money (cash) i.e that which you can withdraw on demand as opposed to debt (sometimes called bank money and shortened to money) which is created and destroyed on ledgers. So what you are saying is that economic activity is declining which is patently obvious.

Securitisation is nothing new. How else could a bank with a surplus of depositors over lenders lend out those surplus deposits? How else could a bank that has a surfeit on lenders acquire sufficient funds to meet that demand?

Which is exactly what is happening!

For the first time since God only knows when mortgages are being repaid at a faster rate than they are being created.

The problem here is that accelerated savings growth causes economic slowdown which inturn brings with it low income growth and hence reduced capability to repay and service debt.

Not only over borrowed ones! I have in mind a pub I use fairly regularly. Best food around! 12 months ago if you went in there on a Saturday lunchtime you'd be pushed to find a table. That meant you had to share and got to know folk. The last time I was in about 4 weeks ago, there were two other couples besides ourselves in there and not one familiar face.

That guy had a thriving business. His rent will be the same. He still has to heat and light the place. He still has staff to pay. Those overheads will not have come down much. I don't know but I suspect that guy is in trouble. If he is there will be little for him in today's climate to be had by going to a bank.

Now if he earned his profits by say charging an exorbitant price for balloons to decorate party tables then I might agree with you. Good sound businesses are going under too. Babies are being thrown out with bathwater.

No! Nor do I hence the qualification!

Of course that is the danger. Politicians make decisions on criteria other than sound commercial considerations.

My first mortgage was at 90% and that was back in 1964. I had to pay a one off default insurance premium that wasn't exactly back breaking.

All of this is relative. To be honest I hadn't given much thought to the aspect of prudence. I was more concerned with the effect of almost overnight removing the 100% mortgage facility and replacing it with a

60% version. Not unpredictably, the effect on the market has been catastrophic. Taking a moral perspective is all very well but new entrants have been virtually excluded from the market. New builds have almost stopped. Builders, bricklayers, labourers and God knows how many allied trades have suffered severely. This one shock in itself percolates through the economy. These people too have mortgages and other debts, used to use pubs, buy things and so on. Yes house prices were becoming ridiculous but what was needed, was stabilisation or at the very worst a gradual downturn. However, we can't order these things.

But such a reduction will take an age to work through. Anybody who bought this time last year by now is in negative equity. The amount they owe will still be the same (less a tiny proportional repayment) They are stuck for years. Worse still, some of them by now will be unemployed and in no position to maintain their payments for very long.

They will be forced to walk away which is going to disadvantage them for years to come.

There si seldom anything that is all good or all bad.

As a matter of fact the credit limit on my VISA has been just, without any solicitation from me, increased. I can't tink why I never went anywhere near the old one which is only there anyway as an emergency standby for travelling. I have never paid a penny interest on it in my life.

They will given time. In the meantime there will be much pain and distress. I'm know that will not be equitably distributed.

I'm pretty sure it will not be deservedly distributed either.

I'm sure you're right! IMV the government has already done what it was capable of doing and was expected to do and I hope will continue to do and that is safeguard the banking system. Any further interference will, at best prolong the agony, at worst make it worse.

On Tue, 13 Jan 2009 15:54:29 +0100 'abelard' wrote this on uk.politics.misc:

This was the bit I was after, where he clearly says that the sub-prime mess was only the trigger of the problem, and was underscored by a wider credit boom:

"However, although the subprime debacle triggered the crisis, the developments in the U.S. mortgage market were only one aspect of a much larger and more encompassing credit boom whose impact transcended the mortgage market to affect many other forms of credit. Aspects of this broader credit boom included widespread declines in underwriting standards, breakdowns in lending oversight by investors and rating agencies, increased reliance on complex and opaque credit instruments that proved fragile under stress, and unusually low compensation for risk-taking."

This is why I believe that even if the US sub-prime crises had not triggered the crises, and even if Peak Oil had not arisen, the UK would still be suffering a serious recession due to 10yrs of excessive cheap credit which fed into a large personal debt problem and overheated housing market, coupled to a failure of regulatory oversight. Brown is the person who allowed that lot to happen.

IMV the most one can say is that without the added problems, this recession might have been less severe.

I think DC & Co are focusing on this through the smokescreen of "it's not my fault" bluster put out by Brown...