Push for Growth

As David Cameron at the CBI promises that the government will push for growth and implement a national infrastructure plan (whatever that really means), these promises need to be set against the backdrop of a subdued mortgage/loan market.

The British Bankers' Association (BBA) reports that the downward trend in mortgage approvals continued in September, along with a low demand for personal loans.

The BBA attribute this to personal economic uncertainties.

Fair comment, however, they should also look to their own members' tightening of credit lines (and extortionate interest rates when compared to the Bank of England rate) as another reason for the fall in lending.

Whatever "push for growth" the government may promise/aspire to, the strength of the British economy is based on debt/property; until these areas are stimulated, eg via greater bank lending, significant growth will not occur during the course of this parliament.

Read More

Credit Task Froce

It has been announced that the CEOs of the UK's leading banks will lead a new taskforce, to help boost the flow of credit to small firms.

The ever "popular" British Bankers' Association's has set up a new group to assess credit demand from firms, and put forward recommendations to boost funding in the banking sector and aid recovery.

The media omnipresent BBA chief executive, Angela Knight, claims that the taskforce (to be chaired by BBA and HSBC chairman Stephen Green) would look to address "pinch points" in the system as recovery and the demand for working capital gradually takes hold.

The taskforce will report its initial findings to Chancellor George Osborne, in early October.

It strikes me that this is likely to be as effective as putting foxes in charge of the hen house, and is nothing more than a "sop" (in the manner of Edward VIII's "something must be done") to try to convey the image that the banks are "concerned".

Read More

Interest Rates To Fall

It looks a racing certainty that the Bank of England will announce later today a cut in interest rates from 1% to 0.5%.

Given that this leaves it little manoeuvring room for further cuts, the Bank will also start the process of quantitative easing (ie printing money).

The objective of both of the policy instruments is to ease the credit drought, to try to bring the economy back to life.

Read More

The Retail Crunch

Things must be bad in the high street if even the Queen's shop, Fortnum and Mason, is having to lay off staff.

Maybe now the bottom is finally being reached?

Read More

Quantitive Easing

Today the MPC of the Bank of England will announce its decision wrt interest rates. The "smart" money is on there being a cut of between 0.5% and 1%. However, some pundits have noted that as the recent cuts have not eased the credit drought, using the same tool again will be pointless.

Either way, it seems that other weapons are needed in order to address the fundamental issue of a credit drought. Hence the solution being mooted in many quarters (and not being denied by the government) of printing money (quantitive easing), and using the money to buy assets ranging from government or commercial debt to private equities.

There is a danger of inflation. However, under the current circumstances a small dose of inflation may be exactly what is needed.

Read More

Banks Refuse To Pass on Rate Cut

Unsurprisingly many banks have refused to pass on yesterday's interest rate cut of 1%. The Times reports:

"Hundreds of thousands of borrowers will be denied the full benefit of yesterday’s cut in interest rates because many banks are refusing to pass on the whole one-point cut to all mortgage customers.

Britain's biggest mortgage bank, which received billions of pounds in taxpayers' money, failed to respond in full to the latest move by the Bank of England. Halifax cut its standard variable rate (SVR) by only 0.25 percentage points, while Nationwide will trim its rate by 0.69 points.

A borrower with a £150,000 loan paying Halifax’s SVR will see payments drop by only £25 a month.

Only Lloyds TSB, HSBC and Woolwich said that they would cut their SVR by one percentage point. However, HSBC and Woolwich failed to pass on last month’s 1.5 percentage point cut."

It seems that the banks have not yet learned that the rules of the game have changed. In the "good old" days they could more or less do as they pleased to their debtors/customers, safe in the knowledge that very few people "that mattered" would kick up a fuss.

However, two fundamental changes have occurred:

1 The banks, as a result of their greed, stupidity and ignorance, have jeopardised the financial system of the the Western world by unleashing a lending frenzy and by gambling trillions on complex financial instruments that they didn't understand. In the event that these deals unravel completely, as they may well do, the losses incurred will exceed the annual GDP of many middle to high ranking economies.

2 The UK government now owns shares in some of the major banks. It has been reluctant, thus far, to call the shots; but as time goes on it will become increasingly interventionist.

Like it or not, no matter how hard the banks may squeal that they are barely able to make a living in the current economic environment and that they must take account of the higher risks, the issue is not simply a matter of capital base and margin differentials between base rates and LIBOR.

The higher risks that the banks complain of are due to the fact that they all but ignored risk in the past, and went on a lending and gambling binge. All very well, but it is not right that the debtors/customers are made to pay for the greed and short termism of the banks.

The issue now is one of politics, culpability and people's livelihoods/homes. The fact that the banks have yet to grasp that point indicates that they are still in denial.

My advice to the banks is wake up now, the rules of the game have changed, or you will soon be on the receiving end of a very nasty wake up call.

Read More

Pissing In The Ocean

The government, in a rather piss pathetic attempt to reanimate the corpse of the housing market, has announced that it will exempt properties worth less than £175,000 from stamp duty (the current exemption is £125K).

Given that the average house price in the UK is around £200K, this will have next to little effect.

Additionally, statistics show that the number of property deals that are already exempt from stamp duty has fallen almost as much as those liable for the tax; in other words the exemption is irrelevant.

The fundamental issue facing prospective house buyers is the lack of mortgage funding, not so much shaving a few thousand pounds off the price. This measure does not address the liquidity issue in any shape or form, it is pissing in the ocean.

Read More

Darling Surrenders

Alistair Darling has all but given up trying to keep Britain out of recession, by announcing today in The Times that Britain could be heading for its worst economic downturn for 60 years.

Darling also admitted that he had no idea how serious the credit crunch would become.

This is man who has clearly given up, and who is likely to be out of a job in the next month.

Regrettably the British economy and British voters are stuck with Labour and the disastrous tripartite regulatory system that Brown created for another two years, the damage that Labour will do to the economy in that time is incalculable.

Every Labour government ends in economic failure.

Read More

What A Whopper

The Times quotes Professor Kenneth Rogoff, a leading academic economist, as saying that there will be worse news to come from the worldwide credit crunch.

"The US is not out of the woods. I think the financial crisis is at the halfway point, perhaps. I would even go further to say the worst is to come.

We're not just going to see mid-sized banks go under in the next few months, we're going to see a whopper, we're going to see a big one — one of the big investment banks or big banks."

Heartwarming stuff!

However, before people start jumping from window ledges, it is worth remembering that financial crises come and go; additionally, the crunch is as a result of the banks' greed and stupidity.

What goes around comes around!

Read More

Reposessions Up

House repossessions in Britain have risen alarmingly to levels not seen since the last recession.

The number of mortgage repossession orders posted by courts in England and Wales between April and June this year rose by 24% to 28,658, compared to the second quarter last year.

The figures are in line with the number of orders made in mid-1992, at the height of the recession.

Unlike the last recession, repossession figures show that "second charge" repossessions feature strongly in the figures; indicating that many have unwisely used their property to secure an extra line of credit.

Shelter forecasts 9,000 more people will lose their houses to "second-charge" lenders.

Meanwhile the Treasury and Bank of England argue over what to do ease the liquidity crisis; with Mervyn King Governor of the Bank sticking firmly to his principles, and insisting that it is not the Bank's role to provide credit.

Read More

£1M Wiped Out Per Minute

PriceWaterhouseCoopers (PWC) have published an analysis that shows that £1M per minute (£600BN) has been wiped out from the UK's total wealth, since the credit crunch started a year ago.

PWC estimates that £400BN has been written off residential property, and £200BN written off the stock market valuations of the banks and other financial institutions.

PWC estimate that this will lead to a reduction in expenditure of around £12BN to £16BN over the next 12 months.

As if that were not gloomy enough, PWC add the rather worrying caveat that the report is "conservative" and that this is its best case scenario.

Read More

HSBC 28% Profit Collapse

HSBC revealed some lousy results today, much as expected. The ongoing credit crisis (caused by the banks' irresponsible lending) has knocked £5.1BN (28%) from its first half profits to £5BN.

HSBC will not comment as to whether the losses from its toxic US loans have peaked or not. However, its provision for US consumer finance now stands at $6.8BN (85% higher than the same period last year).

HSBC chairman, Stephen Green, maintained a stiff upper lip and noted that the outlook was challenging.

Quite!

Read More

Retail Sales Slump

Statistics from the Office for National Statistics show that retail sales growth has dropped by 3.9%, in the three months from April to June.

This is the largest fall since the department began collecting the statistics back in 1986.

As noted yesterday, the dearth of mortgages and the seizing up of the housing market is now negatively impacting the rest of the economy.

It beggars belief that the Bank of England and the Treasury are not pulling out all the stops to free up liquidity. Instead there is a possibility that the Bank will in fact raise interest rates next month.

Utter folly!

Read More

Increase Liquidity Demand

Today some of the UK's largest banks are lobbying the Bank of England to extend the terms of its Special Liquidity Scheme (SLS), to increase liquidity in the money markets.

The Telegraph reports sources that say that the SLS has not restored confidence to financial markets, as banks continue to avoid lending to each other as well as to customers.

This fact can be attested to by anyone seeking a new mortgage or credit facility.

Finance directors of the banks, and heads of the banks' Treasury departments, will attend a meeting with representatives of the Bank of England. They are likely to press for the Bank to accept mortgages written this year as collateral.

As said many times before, this entire crisis can be defused if confidence is restored within the system. In order for this to happen the commercial banks need to start lending to each other, and the Bank of England needs to kick start that process by showing some proactive confidence boosting leadership.

Read More

Confidence Hits 16 Year Low

Business confidence in the UK has hit a 16 year low, as the effects of the ongoing credit crunch and rising food/energy prices are felt.

The Business Trends report, published by BDO Stoy Hayward, shows that the measure of business confidence over the next quarter declined to 97.7 in June from 98.3 in May, the lowest level since 1992.

Peter Hemington, BDO partner, is quoted in The Times:

"We've not seen short term business confidence plunge this low since Black Wednesday in 1992, indicating that UK businesses of all shapes and sizes are struggling to see any light at the end of the tunnel.

With confidence at a 16 year low, an interest rate rise next week aimed at curbing inflation could be crippling for business, and could worsen the effects of the economic slowdown. Our figures suggest that the MPC will be left with little choice next week other than to leave interest rates unchanged."

We have nothing to fear but fear itself, the gloom and doom will become self fulfilling prophecies if we are not careful.

Read More

Credit Untion Rules To Be Relaxed

As the mortgage and credit drought worsens, the government is desperately trying to look as though it is doing something to ease people's burden. The government announced today, via the BBC, that it will unveil an initiative to help people, eg those on low wages, beat the credit crunch by relaxing the rules on credit unions.

Credit unions are community based savings and loans organisations. They act as low-risk savings and loans providers, usually for the less well-off.

It is an ugly fact of financial life that those most in debt, and least able to borrow more, are at the greatest risk from loan sharks.

Currently any area or organisation can form a credit union; however, they have to operate within their own communities (the Common Bond). The Treasury will broaden the Common Bond, allowing the sector to expand.

The government envisages that by this time next year, people will be able to access cheap, secure loans.

All very well, but the need for low cost credit and an easing of cashflow is now; not in one year's time.

The loan sharks are going to feast themselves sick over the coming months, on the rotting corpses left behind by the government's mismanagement of this crisis.

Read More

Loan Sharks

The ongoing drought of cheap loans and mortgages is forcing already heavily indebted people into the arms of loan sharks, who charge interest rates up to a staggering 1000%.

Known as "pay day loans", they are taken out by the hapless debtor to provide short term cover until pay day.

The Times reports that the number of deals taken out in the UK has risen by more than 130% since last August.

Payday UK, Express Finance and Pounds Till Payday offer loans of up to £1,000. Payday UK demands that £125 be repaid for a £100 loan, or £937.50 for a £700 loan. The loan is usually paid off within a couple of days, as soon as the borrower's wages are paid into their account.

Payday UK has a typical APR of 1355%.

Needless to say, by borrowing money at such extortionate rates of interest in this way, the hapless debtor is in fact making his/her situation far worse than it already is.

Read More

Building Slump

Bloomberg reports that UK housebuilders will be cutting tens of thousands of jobs as the housing slump continues.

Stewart Baseley, chairman of the Home Builders Federation, said:

"There isn't a builder in the land who isn't considering overheads and job losses.

Job losses will be in the tens of thousands.

I've never seen a downturn escalate as quickly as this."

The slump is being caused by the mortgage drought, rather than unemployment or inflated borrowing rates. However, if the slump is not corrected this will have an adverse impact on the rest of the economy.

That being said, it's not all gloom. Those of you wishing to hire builders, plumbers and related tradesmen now have an ideal opportunity to negotiate hard on the price tendered.

Read More

We're Alright Jacques

Jean Claude Trichet, the president of the European Central Bank, warned that the credit crunch will worsen, and that there would be a "very significant market correction".

Despite this, Trichet and the ECB have steadfastly refused to lower European rates in concert with the Fed and Bank of England.

Trichet is of the belief that there are no risks of a recession in Europe.

Would that all bankers and economists have his gift of "perfect" foresight!

Notwithstanding Europe's alleged immunity to recession the ECB, by its inaction, has ensured that the credit crunch will be deeper and more protracted that it needs to be.

The world needs a co-ordinated response by the central banks, not an isolationist "we're all right Jacques" response.

Read More

Broke

The credit crunch is going to severely dent the British economy over the coming year or so.

This news should come as no surprise to those who have followed the ongoing meltdown of the banking system, and the knock on effects on consumer expenditure. However, it would seem to be "news" to the government and Alistair Darling.

The National Institute of Economic and Social Research predicts that there will be a £16BN shortfall of tax revenues over the next two years.

Jim O'Neill, chief economist at Goldman Sachs, who forecast the collapse of the US property market, said that Britain was likely to be the worst hit of the world's economies.

Mr O'Neill is quoted in The Times and said that Britain, with its heavy reliance on financial services, was "in the eye of the storm of a deleveraging world economy".

He added:

"The UK mortgage market is effectively frozen . . . House prices are going to go through negative changes . . . It's going to be a challenge for UK policymakers."

It certainly is going to be a "challenge", the question is are our policymakers and government up to the job?

Read More