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

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

Reply to
M Holmes
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Precisely. There will always be a first hole in a credit bubble and too much significance shouldn't be attached to it. Brown merely uses it to excuse his delusion that the largest credit bubble in history was his own personal economic miracle.

That said though, given the behaviour of Fannie Mae and Freddie Mac, it was always likely that the first breaking of the dam would be in the US mortgage markets.

It'd have been less severe if Greenspan had let it happen in '98 or

2000. it'd still have been less severe if Greenspan and Bernanke hadn't goosed the housing bubble between 2001 and 2004 to offset anticipated deflation from the bursting of the Internet Bubble in 2000. It'd have been less severe here if, as admitted by King, Brown and King hadn't goosed the housing bubble here in 2005 in order to prevent a bust. Basically the longer a bust is resisted, the more economic distortion is built up for it to correct. Brown and Greenspan will perhaps go down in history as the men who saved a recession at the cost of a depression.

Well, someone has to call him on his bullshit.

FoFP

Reply to
M Holmes

? ? ? ? -- Roger Lee

As far as I can gather the Japanese system has been reluctant to deal with the problems of bad debt. The Japs hate losing face and admitting failure as a collegiate culture so tend to prop things up piecemeal. The lending which led to to problems was often cosy keeping dodgy big companies going and accumulating bad debt which was partly hidden.

The UK banks will not do the same. It remains to be seen how much the crunch will cost in bad debt and how long before it halts. But I think (just my opinion) that nothing like the prolonged Japanese situation will occur.

Just today the papers reported the Commons committee hearing of leading economists like Buiter about the crunch. One said the banks will be back doing the same things in three years. Risky but it also means they will develop an appetite for lending again. Poised between fear and greed, greed will be back.

Reply to
MikeinCamden

or taken another year or two to explode.....

but there are several buses arriving at the same time... the us now has an oversupply of housing whereas the uk is not really in that position... the $ is much more robust than the £...and now the ? oil is clearly peaking and that is having repercussions around the world... globalisation is progressing..... the tectonic plates are moving to readjust....that doesn't much worry me...

the clown has let the population rise in an already crowded island...he's completely neglected the infrastructure.... he's just another mindless socialist spendthrift who believes he know better than everybody/the-markets.... he spends on his (and bliar's vanities) with not forethought beyond the next opinion poll and his cult worship..

no serious problems with any of the above...

regards

Reply to
abelard

If you ask the people --here-- who were making these bad loans, there universal answer is/was: "it's because everyone else was doing it, and we needed to be competitive."

They would package the loan(s) in group and sell them to a refinancer ASAP, not to get holding the bag as it were -- usually at the very end of the business day. They knew these loans were made on bad or no references, no jobs, no credit histories, etc. The sooner they could get them wrapped under a larger blanket package, and sold to a "mortgage-based refinancer group," like Freddy or Fanny Mae (here) the sooner they got their piece of the loan's initial interest pie. Then ultimately the bad loan(s) was/were under layers and more layers of re-financed packaging.

When the bubble burst, no one would make loans of any kind, even based on the best of loan principles. It was a real panic. ...And still is really.

Everyone is holding their breath.

I can get a loan as easy as signing my name right now, but a lot of really good fiscally sound businesses can't. And that is not good for business, nor the economy. ..Any economy.

Reply to
Jason P

(snipped for brevity)

Thank you all. This thread has been the most illuminating conversation I have seen for years on the subject of money.

Stan. Brisbane.

Reply to
Stan Pierce

Perceived assets also - degrees. Securitisation of toilet paper degrees, toilet seats of learning.

1989 saw a 40% reduction in the syllabus of A levels. 1990 saw coursework, once absent, grow significantly to create "work mules". 1993 saw uni staff resigning over refusing to reduce course content yet again, even students were bored & unchallenged, then rebellious as they saw "poly" standard intake. 1994 saw disclaimers added to prospectus's re vested interest sell- side. 1994 saw grade inflation explode, universities who had never awarded a 1st on a course in 10yrs awarded all 1sts - when postgrads furiously demanded why "because they will not get jobs otherwise".

That was a supposedly times top-10 university.

1994 saw vast numbers of corporations completely write off a degree as entry or selection qualification. Universities had existed on the presumption that entrants were mostly the top 5% by virtue of A-level selection. Universities therefore had to add very little, and for the most part did just that. With that selection process gone, universities were suddenly naked emperors - dated courses and now to devalue further, dumbed down. Manipulation of degree marking rife, external examiners recalled to repromulgate results in such a mess, if one person had a job and the other did not, the one without a job got a 1st despite lower marks, the one with a job got a 2.1 despite higher marks. Academic staff became "recruitment consultants" managing a "portfolio", companies merely let people rot for a bit to get people discounted (Logica notoriously) - companies recruited to deny another company an individual.

Many corporations got burnt picking at times the most bizarre crap as they wrestled with "foolproof" prometrics. Most corporations went to ground, as did the salaries, with once graduate pay simply moved up the spreadsheet hierarchy. Some companies sprouted 8 managing directors, flat structure, over skilled manual labour & graduate labour at the bottom, a recipe for their eventual migration to hungary, sweden, spain, and so on (directors relocate, staff replaced by locals discounted).

1994 IBM - stated most universities were holiday camps, the expansion of the university system from 1986 was merely to hide structural unemployment. 1995 Arthur Andersen boasted how most were "engineered out of society" I guess as a prelude "New Socialism" and that the requirement for the top 5% would decline to under 4% as globalisation & outsourcing dominate. Business process re-engineering was merely the mapping of jobs most easily transferred - to companies already prepared in waiting. CEOs of many top UK companies (eg, BT) also stakeholders of recipient outsourcing companies. Bonus on the cost cutting in the West, bonus on the growth in the East - reinforcement, double-entry. 1995 saw Greenspan initiate the biggest credit bubble of all time, a bubble of course can only be defined by its bursting - the problem is therefore that it burst. 1999, 2000, 2001, 2003, 2005 saw it float higher. 1997 Blair begins the university expansion - I recall he actually pinned his whole economic policy on it. What many american consultancies openly call "what thatcher did to the miners, major & blair did to the graduates". Sadly that accelerated the brain drain - the top graduates got on planes just like the more skilled miners, the bottom went into teaching, and the middle for the most part into "cash-dog" of the cloverleaf society. Many companies suddenly found themselves without applicants, critically those those each generation gifts. Notices appeared around campuses inviting applications, but what they did not know is that the brightest were increasingly a) applying abroad b) not going into "graduate" occupations at all on grounds of pay.

New Labours legacy is the creation of mules to hang debt around. Companies expect parents to subsidise offsprings jobs from their jobs, or from house inflation, credit expansion. Debt replaced earnings and indeed people confused bank money with assets & cash. It is Japanese

100yr mortgages by the back door - 50yr education mortgages.

I recall one recruiter complaining that the problem with so many graduates (2005) was that the actual average earnings for hours worked, less travelling, was closing on minimum wage. The net result was that churn was increasingly simply because people were changing job for £0.10 an hour difference simply because they had identified the job was going nowhere but that a change even for a marginal benefit had at least unknown opportunity. That is the problem of marginal pricing, until they get on a plane (and a vast number have done).

Tonight I'm sure Brown announced the need for another 200,000 graduates a year. I guess he means a need to move 600,000 over the next 3yrs off the unemployment statistics.

We have moved from rows of people in manufacturing to rows of people in service, but that has created a cost chain stuffed to the limits to hide mass unemployment sustained by easy-spend easy-credit. The east has a cost chain which is the exact opposite - yet we added huge overheads as only socialism can with the result that education is devalued to contemptable levels. Quite sad when most graduates actually find on the socioeconomic matrix that a degree is actually classified as "Unskilled" with every "Skilled" earning far above them, the point Arthur Andersen was making through the usual A-B-C grouping.

In the West a panel press for a car maker will cost an order of magnitude beyond 100k, in the East that will set up a car manufacturer. That is the cost structure, we went the wrong way. Cycle time of the Wests sausage machine is much too long.

Instead of driving education attainent per age downwards, we now take

4yrs to educate more people to what was once A level - and charge them for it.

Green War has replaced Cold War as the "solution" in terms of spending, with of course the "requirement" to maintain high energy prices to subsidise a "manufactured economy" in all but name. Centrally planned economies do not have a good history, New Labour could make that apocolyptic.

So the credit bubble is not detached from the education bubble. Initially a means by Major to hide unemployment and reduce labour costs through oversupply, into a monster which is increasingly a tool to hide unemployment of a vast army of academics. Greenspan meanwhile recategorised burgar flipping from service to manufacturing, something the Office of National Statistics should do not itself considering its past performance.

Perhaps the great plan is people will live longer, thus work longer. Unfortunately that has resulted in offspring delayed until 35+ and earnings often vanishing. Every day from age 18 the liability of a pension compounds, you can save £2k/yr at 18 or you can save a shed load more at age 35 until 65, the choice is yours. With the return on most pension funds mirroring that of equities from 1983-2008 (bugger all), the result is ugly.

Inflation of course will merely compound the future liability, and reduce the ability of the cost-chain of the West to compete with that of the East.

It is an odd way of competing against the East. The East has the law of numbers. The East can afford to educate based on social status and employ only to the limit of social class. Numbers bail it out of any distortion the upper middle class can devise. The West however has a stuffed cost-chain, compounding cost and can conversely NOT afford to educate only as far as social status & employ only to the limit of social class. Trying to push more through in the

1990s simply resulted in the upper middle class stamping them back down - you may have a degree on your CV, but as many found try using it or stopping a recruiter deleting it. The famous "we do not want to see them".

The credit bubble will not pass in a year as many believe. The more you prop up a bubble, the greater the base over which it extends.

It is pretty clear who Brown is going to hang the debt around - in the guise of "education".

Many believe it will not be a Japan - because Japan hid a lot of bad debt & propped bad companies. Unfortunately we have to rely on Meddlesome to choose which companies to prop up. Unfortunately the West is enamoured by off balance debt accounting and there are many such tricks.

So whilst on the surface "this is not Japan", the iceberg is of unknown size captain. Other dominoes are wobbling and of unknown foundations.

The market will always take advantage of manipulation. Just as it did of Greenspan, the "Fed Put" which the market was happy to rely on.

The worry is when Brown sees himself as a prisoner not to his talent, but to where it finished. That is when he will set about protecting his ass today at the expense of the economic system tomorrow. I suspect that has already occurred, and the result will be devestating to that "engineered out of society" group in particular. They will stop hiding in a bottle when they realise their numbers are eventually sufficient to banish New Labour from the face of the earth for... quite some time.

It will be interesting to see who is willing to take the biggest gulp of medicine. Will it be the "Post Turtle" Obama Bin Debten? Chosen to prevent riots by colour whilst sufficient medicine is suffered, or chosen to prevent riots by preventing sufficient medicine being taken? Will it be Brown who wishes to be seen as the "saved the world today" before he can be proven to be he that "burned the world tomorrow"?

Will the US$ default, or will Sterling default? US$ is backed by oil whereas the Euro is not. However the Anglo-West has many disadvantages than Euroland - one of the is education cost & quality. Private schools are merely a different conveyor, the majority of which "do not teach" and that bodes for more socioeconomic infighting as the "top

5%" requirement declines (top 5% of Asia & China wins by numbers).

In all wars certain businesses to very well out of death. In economic wars the same is true, and the low interest rates for the rich will create trillionaires. The problem is without debt, what will the rest replace earnings by, dear Brown?...

Reply to
js.b1

Back of an envelope calcs quickly demonstrate an amazing potential for higher education to lower unemployment rates. Three years out of a working life of 45 years for 50% of the population. Not forgetting the University of the On The Sick which runs courses lasting decades for people who are not sick.

That nasty 10% unemployment rate can be halved without a single job being created.

Reply to
MikeinCamden

So maybe the rules for commercial insolvency need to change. It is already illegal for a company to trade while insolvent. There must be a single transaction[1] which changes the status from solvent to insolvent. So why not make it illegal to perform this transaction and instead force the company to immediately cease trading and pay all their creditors in full?

[1] One which either reduces the company's assets to be less than its debts, or one which increases its debts to be greater than its assets.
Reply to
Graham Murray

Much as I agree with the majority of posts in this thread I think this particular comment is unjustified. It is totally infeasible for an individual to insure against everything that could possibly happen. Redundancy and other kinds of employment insurance is very expensive IMHO and many would deem it too big an outlay.

Reply to
Mark

On Tue, 13 Jan 2009 17:45:39 +0000 (UTC) 'M Holmes' wrote this on uk.politics.misc:

Agreed. I do believe that Greenspan played a big role in creating the US bubble. IIRC he started after the Asian currency collapses and added to it after the dot.com bubble burst. He appeared to admit much of that indirectly in evidence to Congress. At the time, I always assumed he didn't want the economy to go south on his watch, so kept on feeding it with cheap money.

That said, Brown's duty was to manage Britain's economy in our best interests and he failed big time.

Reply to
aracari

On Tue, 13 Jan 2009 13:53:28 -0800 'Jason P' wrote this on uk.politics.misc:

Which is to be expected. That is how markets and people operate, but the duty of govt is to recognise/understand it and provide effective regulation and oversight to ensure continued health.

But Brown's policies were aimed at feeding that natural exuberance, thereby creating a huge bubble, which produced him with rising tax revenues to throw around like confetti, claiming that he'd abolished boom/bust. ho ho.

Just because the first breech occured in the US is no excuse for his own massive incompetence and puffed up arrogance.

Seriously unregulated exuberance!

Reply to
aracari

ps...just so's you know your efforts are appreciated! thanx for an interesting series of posts in this thread

Reply to
abelard

I've seen several articles lately claiming that there are 600,000 empty homes in the UK. Meanwhile immigrants are leaving for where they can still make money; fewer couples are splitting up as money gets tighter and they can't afford to; young folks are moving back with their parents (or in with friends) and renting out their flats in an attempt to prevent repossession.

FoFP

Reply to
M Holmes

Ummm, the UK banks *are* the zombie companies that we're keeping going as they accumulate more bad debt. Now we're talking about bailouts for car companies in Labour marginals; 20 billion of bailout guarantees for small businesses; two year mortgage holidays for deadbeat borrowers; and god knows what else. Not only is Brown emulating the Japanese in not allowing deadbeats to go under, he's trying to outdo them.

I'm much less sanguie about this than you are.

Thing is: a couple of years ago none of those economists had any idea this would happen.

FoFP

Reply to
M Holmes

You don't need to tell me. We're giving degrees to folks who can't write a paragraph free of spelling and grammar mistakes. I know because I see their CV's when they apply for jobs.

FoFP

Reply to
M Holmes

Sure, but for those you don't insure, you agree to bear the consequences. If you won't, then don't take the risk in the first place.

The they should keep renting, not try to lord the costs of their risk-taking on to those of us who do take care.

FoFP

Reply to
M Holmes

much of the problem with that argument is many of the 'homes' are not where they're wanted....

i know people who've been doing this over several recent years.... some of them highly driven and struggling to get a stake....

there's a long term trend of breaking up larger houses into smaller units and many preferring their own little space rather than share

regards

Reply to
abelard

How can you "not take the risk" of redundancy? (Apart from not having a job).

How does renting make any difference? They still lose a place to live in if they can't pay the rent.

Reply to
Mark

On Wed, 14 Jan 2009 14:39:14 +0100 'abelard' wrote this on uk.politics.misc:

Agreed. Some of the best analysis of this situation I've seen anywhere. It clarifies many of the thoughts going on in my own mind over the past few months.

Reply to
aracari

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