In my view, the whole Nulab 'economic miracle' was based on the fallacy that house prices can, in the long run, rise faster than incomes.
The Goblin King actually gave this as a reason why Middle England should vote Labour just six months ago: "I think the important thing is that over the last 10 years people in the South have seen their living standard rise substantially. They've seen their net wealth [i.e. house prices] rise even faster than their incomes."*
This whole "bank bail out" is partly just Scorched Earth Strategy, but, AFAICS, they are working on the basis that the last six desperate throws of the dice (throws 1 to 4 documented here a year ago, FFS!, throws 5 and 6 here) failed miserably to stem the house price crash.
When I first heard about this £50 billion bank bail out crap yesterday, my first thought was "I don't know what will happen next, all I know is that whatever comes next will be worse". And cutting interest rates - aka "pushing a piece of string" - was worse.
But if you read enough newspapers, in among all the drivel (spouted mainly by people who don't understand double-entry bookkeeping i.e. don't understand banking) the basic thread shines through:
From today's FT: "The implicit expectation is that banks will have to maintain mortgage lending to customers and loans to small businesses."
From The Evening Standard: "The Bank of England move will bring immediate relief for hundreds of thousands of homeowners on tracker mortgages. The monthly repayments for a borrower on a typical £200,000 London mortgage will fall by around £60."
... or even better, their Q&A:
Q: Will it stop property prices falling?
A: Not for a while...
Q: Where does this money come from?
A: You. £500 billion is equal to £20,000 for every taxpayer. The £50 billion immediately going into the banks is like a cheque for £2,000 from every taxpayer. The Chancellor will not be asking you to write a cheque for this amount but he will get it back in other ways: namely taxes. There is no guidance yet on where the Government's financial commitments to the banks will sit in the nation's books.
But as I said, this is just my view. There may be an altogether more innocent explanation for these seemingly unconnected events.
* As further evidence, there's the admission of Eddie George, the former Governor of The Bank of England, that they deliberately fuelled a consumer boom and the FSA turning a blind eye to the reckless lending practices of Northern Rock. These are my favourite examples, if you have any more, please leave a comment!
Put On Your Big Boy Pants, Maybe?
3 hours ago
20 comments:
mark
I have been blogging for a while on the mortgage mess. Here are a few links if you are interested.
http://thecrownblogspot.blogspot.com/2008/04/why-brown-and-darling-just-dont-get-it.html
http://thecrownblogspot.blogspot.com/2008/04/historic-northen-rock-e-mail.html
http://thecrownblogspot.blogspot.com/2008/04/quadruple-whammy-for-mortgage-lending.html
http://thecrownblogspot.blogspot.com/2008/06/so-what-has-gordon-brown-done-for.html
http://thecrownblogspot.blogspot.com/2008/06/fsa-warns-of-lending-too-much-in-march.html
http://thecrownblogspot.blogspot.com/2008/06/brief-history-of-irresponsible-mortgage.html
hope you enjoy!!
That's going on the 'evidence' file. But how did the gummint persuade the banks to be so reckless, or is this just their natural tendency in the absence of any sort of supervision?
is this just their natural tendency in the absence of any sort of supervision?
well it tapped into a natural (human) tendency, namely that if everyone around you seems to be getting bonuses beyond the dreams of avarice, you want one too, and start to think it must be OK
Take a non-banking example. The big-oil end of the energy industry had been a pretty staid affair since Rockefeller had been reined back; and the utilities even more so. Then came Enron, who showed that sustained 15% growth in this sector was possible, and paid bonuses like an investment bank.
Suddenly every CEO in the sector wanted to be paid like Ken Lay, and started getting similar comp packages, often linked to targets like 15% growth.
And lo ! senior executives at Shell (pillar of respectability etc etc) also wanted big bonuses in return for growth. But how on earth can a company as big & established as Shell grow @ 15% ? Answer: by faking its oil discovery figures
and thus it came to pass that Shell faked its oil reserves; and in 2004 it all came unstuck because, well, because these things always do
multiply this by several orders of magnitude for the banking sector, because the bonuses on offer there have been quite stupendous: and the green-eyed monster whispers to greedy execs (in the immortal words of Dilbert): I can show you how to loot this place and get out of here
There is a clear paper trail of American Presidents trying to bring the" benefits of homeownership" to poor minorities culminating in GeorgeW.He is such an idiot he has left Fact sheet America's Ownersip Society on the Net so implicating himself in the sub-prime debacle.
Back further is a New York Times story from 30.ix.99 in the Clinton era,which is hard to find (it is headlined "Fannie Mae eases credit to aid mortgage lending".It describes Fannie Mae succumbing to pressure from Clinton on one side the mortgage lenders on the other,to make mortgage credit more available.
Even further back is the Carter era Community Reinvestment Act but I don't suppose this was the beginning of the process.
In the UK the determination of the Conservative Party to create an identity for itself as the homeowners party is very well known.The other parties are nowhere as much to blame though Hugh Gaitskell was calling for the selling of council houses to tenants in the Labour Party manifesto .
DBC, "The other parties are nowhere as much to blame though"
"... JUST as much to blame ...", surely?
The Lib Dems would have to go back to their 1974 manifesto to prove otherwise. They are now the 'Devon pensioners' party calling to replace Council Tax with Local Income Tax.
New legislation is required: Banks should only three times salary multiples for mortgages...
The wheels started falling off when banks started offering higher multiples thanks to "affordability".
"well it tapped into a natural (human) tendency, namely that if everyone around you seems to be getting bonuses beyond the dreams of avarice, you want one too, and start to think it must be OK": spot on, especially if you were to add it to the natural tendency of any large business to be run badly - it's not their own money, you see, plus they are not half a clever as they think they are.
Look, explain why just giving me my £20 back would not be better?
Mrs Lola and I are both taxpayers. Give us £40k - (not of course actually our own money but the tax to be paid by the little Lola's into the future) - and we would pay down debt and save the balance. In both cases the banks get cash. For those taxpayers who don't have debt the cash would either be spent on goodies (more like survival in the current conditions) which would put money into the economy or saved in a bank or invested. Again helping the banks by introdcing cash as a loan or boosting share prices.
Why the bloody Hell should Mr & Mrs Lola and the little Lola's pay twice to bail out banks by paying them interest on borrowing and extra taxes?
Snafu, fine in principle but there are always ways round such regulations. Land Value Tax would be far better at keeping house prices low and stable, as well as enabling other taxes to be reduced ...
Lola, exactly! You get it, I get it, everybody else gets it apart from the gummint. There's scope for cutting £100 billion of waste every year, that makes each taxpayer an average of £4,000 p.a. better off.
New legislation is required: Banks should only three times salary multiples for mortgages...
Oh jeez. This is such fecking nonsense. This takes us all right back to the days where to get a mortgage, you made an appointment with the fat, middle-aged, pompous bastard who managed your local Leeds Permanent (or other) Building Society. You were told you might have an hour of the Great Man's time in a week or two. So you crept back and clutched your hat in your hands while you pleaded to be allowed the privilege of borrowing from this august institution, with whom you'd saved for years.
After convincing the twat you weren't irresponsible, didn't smoke too much, didn't spend time in the pub....... he might, just might, agree to lend you three times your salary in three months time.
Look. This isn't a question of lenders taking responsibility as much as it's a question of borrowers taking responsibility. When they take it seriously enough to sit there and tell the truth, to take insurance against their inability to make payments, to budget properly and to recognise that they, yes they, can in fact get life-threatening diseases, have accidents, be made redundant, need to fund payments at several % more than they just signed up for..... then there's sense and sensibility in lending.
Why shouldn't a single person on £150,000 a year with no debt be able to borrow much more than someone on the same pay with a spouse, children and personal loan for the wife's car?
What's wrong with a 125% loan if it's made on the basis of affordability and common sense and the borrower's clear understanding of what they're getting into?
Why should the emphasis be on regulation to control banks when the problem is with borrowers?
Grow up. Take responsibility. And learn.
Sorry. Having re-read that, let me make it clear that the "borrower's responsibility" bit is aimed at the proposition that there should be regulation determining lending amounts. I'm not an apologist for the banks, and I'm not suggesting they aren't negligent in some ways. But having some bastard in Whitehall determining what's appropriate lending to Joe the milkman, or Mark the accountant, or Fred the F1 racing driver, or Bill who despises benefits and has 5 part time jobs he works his bollocks off at but can't easily prove his income.... no. Won't work. And the mere thought of bastards in Whitehall having even more say that they already have pisses me off sooooo much.
FT, I completely agree, but this whole 'reckless lending/reckless borrowing' only happens in a bubble market (house price bubble/credit bubble - they are two sides of the same coin).
Under Land Value Tax, you'd only pay for the bricks and mortar (about two to four times your income, depending) plus a token amount for the land*. So neither banks nor borrowers would be gambling on price rises to bail them out.
And, to be fair, ten years ago, when I got into BTL, the bank would work backwards from the potential rental income, knock off 30% for costs, assume an interest rate of 9% (i.e. 3% more than what they were actually charging) and then lend you the balance. In those days, this was quite sufficient for a 75% or 80% mortgage. Nowadays, using that calculation, it would do for a 30% mortgage or something.
* In other words, prices would be permanently pegged at the levels they were in the mid 1990s.
Mark, I'm already a convert to the cause on LVT. And I do (believe it or not!) understand about banks looking at BTL propositions. I cringe every time I hear someone droning on about how they don't bother with a pension; they put all their money in property. Next thing is the idiot who thinks putting all their money in ICI shares is a good thing.
The reason people sell their souls and lie through their teeth is because they've fallen for the belief that owning property is like getting money for nothing. Oooooh look! The house went up £30,000 this year! For nothing! Everyone wants money for nothing (including me, maybe, especially me) but making it happen is different again. A period of (dare I say) re-education is necessary to break the idea that property is an investment. When people get back to the view that property is something that keeps the winter weather outside - full stop - we'll all be better off.
That's why I'm up for property taxes and LVT.
Miserable git, aren't I? :-)
FT, you are already appointed as Pensions Simplification Minister, but you are welcome to help out on the LVT front as well.
As to "everybody wants to make money" I am a one-man Hedge Fund, but the realisation has dawned on me that it is easiest making money when The State interferes in The Markets, making it a one-way bet.
I just wnt to modify my previous post. In fact it is only those people working in private business that should get the tax rebate, and as about 50% of people are directly employed by the State the rest of us should get get £40,000 each. The state employees get nothing.
The reason is that no state employee pays any income tax. Reason one is that income tax is just a rebate to the rest of us and reason two is that even after they rebate their tax to us we then support their pension scheme by the equivalent of about 30% of their pay.
All state employment is purely overhead. It is an expense on the rest of us. If you think of society has consisting only of people and things and that limited companies and governments are just administrative conveniences by which we can better organise our lives it becaomes clearer who actually creates and owns wealth.
So where's my £40,000?
On the topic of the post of pensions simplification minister offered to FT, I am afraid the post has already been filled by me. I have already put in place policies and actions in micro-economic way that have aided many people to look after their own old age. I have not yet managed to achive power on a national scale to implement the full policy, but times like these might jst give me the opportunity. If FT would like to work with me I would very much welcome his assistance and input. Two heads are better than one.
Lola, only about 25% of workers are employed by the state, and even of those, possibly half are doing something useful (teachers, nurses, coppers etc plus as much again for back up staff = 4 million).
As against 50% of people who derive most of their income from the state (which includes public sector workers, pensioners and welfare claimants).
Sorry mark, calculation error - but teachers and doctors etc are state employees. They are not in private business. They are an ovehead. Akthough they are useful they do not actually create wealth. As an employer I would have to provide health care and education if the state didn't. I would more than likely outsource this to another private business. But whilst it is a state monopoly private business is crowded out and they become a pure overhead that needs its costs controlling - and as state employees they make no positive financial contribution personally.
(Must end - got to get to work)
On the topic of the post of pensions simplification minister offered to FT, I am afraid the post has already been filled by me.
There you go. Proof positive that the merest sniff of political power corrupts absolutely. The knives are out already!
Post sentries. Look out for a newly ennobled vampire stalking the corridors....
FT 08.53 - Sorry shouldn't have said 'offered'. As I am dictator I have decided that i will be pensions minister. So there!
I really enjoyed these posts and couldn't agree more.
I will be taking over from you all shortly as there can be "only one"
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