economonkey

Mervy King has revealed, for the first time, that last autumn the Bank of England provided up to £62 billion in short term loans to RBS and HBOS in almost complete secrecy. This just goes to show how dire the situation was, and certainly reinforces the argument for a radical shake-up of banking regulations. If things reach a point where banks require staggeringly huge loans from the taxpayer, but without the taxpayer’s knowledge, no sane person could claim that business should be allowed to continue as usual.

As Edmund Conway points out in the Telegraph, it’s also astonishing that these loans managed to go completely unnoticed by the news media, which at the time was scrutinising the financial services sector and the British economy very closely.

You could argue that it was necessary to maintain secrecy in order to avoid spooking the public and causing a run on two of the country’s largest banks, and there’s no doubt that the government got a good deal out of this, since  the money was repaid with interest of more than 1% over the standard lending rate. But, ultimately, we have to question the ethics of lending vast amounts of public money to commercial entities whilst quite deliberately keeping the public in the dark about it.

Some commentators claim that the Bank’s willingness to now reveal this information is a good sign that confidence has returned to the economy, since it shows that there is no longer a risk of a run on RBS/HBOS. We think that it shows that the British economy was on the brink of collapse last autumn, and if you really believe that the whole situation could have been entirely turned around in just twelve months, then we’ve got a great investment opportunity we’d like to tell you about…

This BBC article does a good job of explaining what the government is planning to do with all the banks that it bought huge shares in with taxpayer money over the past year or so. The long and short of it seems to be that the existing big-name high street banks are to be broken up and a number new players in the retail banking space will be created.

This will, hopefully, increase competition in the market for mainstream financial products such as current accounts, mortgages, savings and investments, which can only be good for British consumers.

There is some talk of the banks part-owned by taxpayers being made to sell off their investment-banking arms in order to minimise risk. However, there still seems to be little interest from the government in introducing any kind of Glass Steagall style legislation which would ensure separation between retail and investment banks.

It has been argued that this kind of legislation would be beneficial, since it means that the banks which provide essential services to the wider economy would not be put at risk by the kind of risky behaviour frequently indulged in by investment banks. It would also combat the problem of these organisations being considered ‘too big to fail’ – since an investment bank which does not have any involvement in more mainstream, high-street banking practices, can more easily be wound down when it goes bust.

It’s good to see a little progress being made, but it seems like the UK financial sector is still a long way from getting the serious reform that it badly needs.

Noticed how all of a sudden the politicians are bending over backwards to convince the public that they’re prepared to make even more severe spending cuts than their rivals? The political agenda seems to have flipped overnight from ‘doing what’s necessary to get economic growth back on track’ to ‘reigning in public spending to face the new economic reality’.

Education currently seems to the big target, with the politicians falling over themselves to hack down on the cost of educating future generations. This is probably because other areas, such as defence and healthcare are, politically speaking, a bit touchy at the moment, whereas nobody really cares that much about schools and universities. Nevertheless, you can bet that savings will have to be found from across the spectrum of public services.

There really ought to be more public outrage about all of this. Not so long ago the government was pumping endless billions of taxpayer money into the banking sector because, we were told, it was essential to ensure the stability of the banks. Pouring this vast sum of money into what are essentially privately owned commercial organisations would, apparently, get everything chugging along nicely again.

Only, it didn’t. So now, after throwing billions of pounds into a black hole with no discernable benefit beyond ensuring that the boys in The City don’t have to do without their bonuses this Christmas, we’re being told that there’s no more money in the kitty for luxuries such as education…

So remember, when you can’t find a place at a local school for your children, or you can’t afford to put them though university, or when you’re forced to pay for health insurance because the NHS it too badly underfunded to help you, or any other public service you’ve grown used to crumbles into uselessness – you’re finally paying the price for bailing out the banks.

And ask yourself if you think it was a price worth paying.

The head of the Financial Services Authority, Lord Turner, seems to be taking a harder line with the banking industry, and we’re loving his newfound bad-assery. Turner’s bank-slapping comments were published as part of a rountable discussion on stabilising the global finance industry, which you can read at Prospect Magazine’s website (subscription required).

In the article, Turner says that the global financial regulatory system needs a ‘very major reconstruction’ to prevent a reoccurrence of the recent turmoil – to dust off an old chestnut: well duh! But he goes on to say that the banking sector has become too big, describing some parts of the industry as ‘socially useless’. We imagine he’s referring to the parts which manage to conjure vast profits out of thin air using dubious financial chicanery without actually providing society with any sort of useful product or service in the process, but you can draw your own conclusions.

In order to prevent banks from getting too big, and salaries from growing too large, Turner claims to be considering a tax on the banks’ transactions. The main tool the FSA plans to use to reign in the banking sector is increased capital requirements – that means that they will be required to hold much larger cash reserves in order to be able to engage in the kind of risky, highly leveraged trading activities that led to the current crisis.

But he says that if this alone doesn’t work, the FSA could restrict the profits available to banks by placing a tax on their transactions, making it more costly for them to do business if they grow too large.

This is all well and good, but the suggestion seems to have been met with universal condemnation from politicians of all parties. Alistair Darling, Nick Clegg and Boris Johnson have all voiced their disapproval.

The banks, naturally, are screaming foul – with a spokesman for one bank saying “Should this stupid idea ever be taken to heart or see the light of day by any government now or in the future then it really would be time to turn out the lights in the UK.”

This really needs to stop – as soon as anybody suggests anything which might bring the banks under control, everybody in power starts bleating about the damage it could cause. What could possibly be more damaging than the massively destructive situation already created by banks which were allowed to become too big to fail? We tried it their way, and they screwed up beyond measure – now it’s time to try something different.

Sadly, however, we’re not convinced that Turner’s ideas will ever be allowed to happen, because even after everything that’s happened, most of our politicians are still wildly and blindly in love with the city-boys.

Is anybody really surprised to hear about the Chelsea Building Society’s £41million of losses to mortgage fraud? It’s hilarious that the building society is painting itself as an innocent victim, claiming that the fraudulent loans were acquired by syndicates of unscrupulous buy-to-let landlords running a scam with crooked mortgage brokers and surveyors. As if Chelsea, along with all the other lenders, wasn’t complicit in the whole grubby scheme…

Banks and building societies were all handing out money hand over fist to anybody who wanted to buy property, all helping to inflate the bubble just a little further. Any financial institution which really believed it could carry on doing business like that is guilty of incompetence at the very least, but there can be little doubt that they weren’t turning a blind eye to all of these dodgy dealings, convinced that a booming property market would gloss over the cracks for years to come.

Unfortunately for the Chelsea Building Society, when the music stopped, it was left without a chair. Passing the losses off as fraudulent smacks of little more than a transparent attempt to mask the building society’s poor business choices during the property boom. What’s especially laughable is that despite these £41million losses, and a further £12million lost in the first half of 2009, Chelsea claims that its underlying performance is still strong.

The most telling thing about this story is that nobody has yet been prosecuted or convicted of this alleged fraud – it’s all just a convenient explanation designed to put a positive spin on some dire news. I wouldn’t be surprised if, once the story has blown over, the whole issue is quietly dropped and no convictions are ever made. And I’d be even less surprised to see other mortgage lenders trotting out the same excuse to explain away their own losses.

KPMG, the professional services company which helps obscenely wealthy clients find clever (and sometimes illegal) ways to avoid paying their taxes, claims that governments are planning to increase taxes on the rich in order to pay for economic stimulus packages.

In a bleating press release today, the company said that although the overage worldwide top-rate of tax actually fell by 0.3% between 2008 and 2009, it’s likely that this figure will increase in the near future as governments try to cover “stimulus funding”. The UK’s top rate increase from 40% to 50% next April is cited as an example of things to come.

So what’s the problem? The filthy rich bankers and captains of industry created the economic meltdown with their greedy and reckless pursuit of unsustainable profits, whatever the cost to stability, it seems reasonable that they should help pay for the bailouts.

Let’s face it, they’re still going to be rolling in money because a little tax hike isn’t going to make all that much difference to them. Ultimately, the most of the cost of their avarice will be paid for, as always, by those much further down the economic food chain.

Naturally, the press release trots out the tired old argument that higher taxes on the wealthy will make it harder for countries to recruit the best talent, as if all of the industrialised world’s overpaid bankers will suddenly decamp to some previously undiscovered capitalist paradise on an island somewhere in the Bahamas just because they have to pay a little extra tax.

There’s nothing more tiresome than the sound of rich people whining, especially when they’re whining about a mess they created in the first place.

I promise that I had no idea about this story yesterday, when I wrote my previous post about why the recent increases in house prices were based on very low volume and would not last very long at all. As if by magic, today we see a report from leading property website, Rightmove, which claims that average asking prices dropped by 2.2% between July and August.

Obviously, you have to take this stuff with a pinch of salt since it’s only based on the asking prices of properties advertised on the website, but it’s still an interesting indicator – if things were really improving, seller confidence and asking prices would be climbing.

The bottom line is that unemployment is high and mortgage lending remains restricted, this situation is not going to drive property prices up or even support them at their current level. There’s still a long way down to go.

In our opinion, no. You’ve no doubt read stories about prices rising over the past few months, so you might be forgiven for assuming this means the worst of the housing market downturn is over and we’re getting back to business as usual. We don’t think that’s true.

The most important thing to understand about this situation is that the behaviour of the property market over the past decade was anything but ‘business as usual’ – so it’s foolish to expect a return to the days of sustained 10% or even 5% annual house price rises. It’s insane that anybody even thinks that’s a desirable situation. If the average cost of a home increases at a rate that heavily outpaces the growth in average earnings, it’s obvious that you’ll soon have a situation where nobody can afford to buy homes any more – only a complete twit would think that’s a good thing.

If you live in a world where the cost of putting a roof over your family’s head is disproportionately high, your quality of life is terrible and you are, to all intents and purposes, little more than a slave to your mortgage lender. Sure, everybody likes the idea of having a nice place to live, but why should one of life’s basic necessities be so costly – the past ten years of booming prices amount to little more than a scam by the banks to make sure more of our money ended up in their shareholder’s pockets. None of us are better off because of it.

But that doesn’t alter the fact that prices have been rising over recent months. The reason for this is simply that at present so few properties are on the market that, even though there are far fewer buyers than a year ago, there are still far more buyers than there are available properties. A handful of buyers with ready funds are pushing up the prices as they try to outbid each other for the few properties which are trickling onto the market.

That’s the important point to understand, these recent price rises are based on a very, very low volume of property sales. Consider the following:

• Most people aren’t selling homes at the moment, because they’re hoping to sit-out the downturn of the past month, hoping prices will bounce back.
• Far fewer people are able to buy, because banks have heavily restricted their mortgage lending.
• Unemployment is at a 15 year high, with no sign of improvement in the near future.
• The number of homeowners defaulting on their mortgage repayments is at a 12 year high.

So here’s how we see things playing out over the coming months: Homeowners who have been riding out the downturn before they sell will be given confidence by recent reports of price increases. This, combined with a growing number of repossessions as unemployment bites harder will result in a far higher number of properties coming onto the market.

But, since mortgage availability is still tight, the number of buyers will not keep pace with the number of properties on the market – more sellers than buyers simply means prices will have to fall, and distressed sellers (i.e. those who absolutely need to sell their property) will be forced to accept lower prices, which in turn will force discretional sellers (i.e. those who want to sell, but don’t need to) to accept lower prices or take their properties off the market.

It’s easy to see how more properties will come onto the market as we move forward, but very hard to see where more buyers will come from – and remember that we’re talking about qualified buyers, not just those who ‘want’ to buy, but those who are able to get a mortgage of the required value.

Despite the recent price rises, as far as the long-term outlook for the UK property market is concerned, the only way is down.

So, that was it. The worst recession in living memory is, if you believe the latest government think tank reports, now over. The recession that Alistair Darling said would be the worst for 60 years (and he recently revised that estimate upwards to 100 years) has passed with nary a whimper in real terms.

True, if you lost your job in the last year or so then you might not see it as being a particularly benign period of history, but really, as these things go, this has been ‘recession lite’, a recession for the generation that doesn’t do recessions.

Which, of course, makes me and Lance look a bit silly. Having correctly predicted that the recession would actually occur (in marked contrast to 99 percent of economic commentators in the mainstream media), we also predicted that it would be long, deep and painful; a necessary correction to the years of insane excess.

Silly old us, eh?

And yet…

Rather than rant, I’ll simply state my position and vested interest (everybody has one), and where I believe we go from here.

It has long been apparent to me that much of the last decade’s ‘growth’ was predicated on negative real interest rates, which were based on inflation measures that excluded certain asset classes (e.g. houses) and ignored the growth in the real supply of money in the economy. The cheap money was leveraged up further to bid up house prices and other ‘assets’, then extracted from the perceived equity as additional debt and spent on cars, holidays, fake nails and so on.

Some time in 2007 (arguably 2006), the markets began to notice that the emperor had no clothes on. House prices in the US, the UK and many other industrialised countries couldn’t simply keep rising exponentially forever, boom and bust had not been eliminated, and giving huge and often fraudulent loans to people who had no means of paying them back was not good risk management. In short, it was not different this time.

You know the rest, or at least part of it. What should have happened (and I don’t mean ’should’ as in ‘I wanted it to happen’, though I think it might have been a better outcome for all concerned) if the markets were independent, is that the failing institutions with such moronic lending practices were allowed to die, with safeguards in place for deposits, so that the dead wood could be shaken out as quickly as possible, recovered capital could be put to new and better uses and the economy could truly start to recover on a firm basis.

What actually happened is that interest rates were slashed even further below inflation (CPI has remained above target throughout this recession), several of the major central banks started printing money with no firm plan to stop doing so and failed institutions were bailed out and semi-nationalised with taxpayers’ money.

This action has, inevitably, had an effect. With the government now owning large swathes of the banking industry and also buying up government debt in the form of gilts, the situation has apparently stabilised to an extent. But it’s a false dawn, a fake recovery. We’ve simply moved even further from a true free market towards a command economy where the government decides which companies succeed and which fail, and where moral hazard has been introduced to such a great extent that already we are seeing house prices start to rise again, though at the moment that seems more blip than trend.

In other words, nothing appears to have been learned. Excessive debt was the fundamental cause of this recession and excessive debt is being used to ‘cure it’. A cursory glance at some of the economic indicators would have you believe that the worst is now over, but since no practical action – spending cuts, efficiency improvements, tax breaks for efficient businesses, recycling of dead capital – has actually been taken, it seems highly likely to me that all that’s really been achieved is a postponement of the day of reckoning.

So the UK and US governments have borrowed from your children and your children’s children in order to prop up their economies at a level which never was and never will be sustainable.

There are several possible reasons for this. No government wants to be remembered as being in charge when the deepest ever recession occurred. Very few people are capable of taking a little pain today to ward off a lot of pain tomorrow (like going to the dentist when you first feel a twinge in your tooth, rather than waiting for the full abscess to develop). And, as the MPs’ expenses scandal is proving, there are plenty of vested interests in high places wanting to keep the debt gravy train on the rails.

My personal vested interest is a desire for a sensible economy based on real productive growth rather than debt-fuelled boom-bust cycles, for real wealth rather than illusory house-ATM debt and for a stable environment for my children and their children. The anti-thesis of the previous decade’s ‘get rich quick’ pyramid scam, in other words.

Even if the current ‘recovery’ is sustained, it will still not lead to a return to a sensible, equitable economy and society. Unfortunately for some people I think it is likely to fail, which means that not only will we have to suffer the second leg of a major recession, but we’ll have wasted billions of pounds of our children’s and grandchildren’s money in order to pay for a brief respite from the inevitable pain.

This is, of course, merely my opinion. I could be wrong this time. But the last couple of weeks have seen some new tremors starting, this time in the bond markets, as investors in government debt start to either move to more attractive, risky markets or price in the possibility of deliberate sovereign default through debt inflation.

There are always consequences. The bill still has to be paid and it’s growing all the time.

(c) Alex Cruickshank

The author doesn’t like financial Soma.

You’ve got to hand it to the Telegraph, the famously right-leaning broadsheet has played its hand brilliantly over the past fortnight. The expenses scandal was a great story and they could have blown their wad all in one go, after all, the receipts were due to be released to the general public under the Freedom of Information Act.

But instead of going for a one-off killer story, the Telegraph deftly laid out its devastating revelations piece by piece, ensuring that this bad news just wouldn’t blow over for the Prime Minister. Perhaps if the story lasted under a week he could have ridden it out, but this scandal has been at the top of the headlines for long enough to pretty much bring down the government. At this stage it looks like nothing short of a miracle can save the current Labour administration.

That is the second piece of dexterity from the Telegraph – while this scandal engulfs the entire government, on all sides of parliament, there have clearly been some behind-closed-doors shenanigans to ensure that the Labour Party bears the brunt of public anger. Obviously a few Tories had to be sacrificed so that things wouldn’t be too obvious, but the Conservative Party seems to have escaped the scandal largely unscathed and David Cameron is left smelling of roses.

For all the talk of the electorate lurching towards UKIP, BNP and other marginal parties, it seems highly likely that the next general election will be won by the Conservatives. Something which will come as no surprise to anybody who does a little reading about the relationship between the party and the Telegraph’s owners.

Nobody imagined that the Labour Party could possibly win the next election, but this coup has ensured that they will remain unelectable for a long time, and put the Tories in a relatively strong position. It might even ensure that they reclaim power sooner rather than later, if it forces Brown to call an early election.

None of this is necessarily bad. This terrible government has been painfully limping along for too long, and a swift end would be welcome. But it does raise interesting questions about what sort of collusion went on between the Conservative Party leadership and the Telegraph, and whether these shady dealings are at all healthy for our democracy.