Oct 07 2007
BBC dislikes sub prime
As if constructing a possible diversionary tactic to deflect attention from the botched reform of the Bank of England which lies behind the money problems this summer, the BBC is turning its attention to mortgage lenders who dared advance money to people who otherwise would have been unable to borrow and buy a home.
Apparently they have found that some loans advanced in the UK were risky. What a surpise! There’s no point in just lending to people who don’t need the money. The whole point is to advance to people where there is some risk, and to manage it on a portfolio basis. Sub prime lending is necessary - we can’t all be prime risks on BBC salaries suppported by the licence fee. I am glad some people who would otherwise not have enjoyed a mortgage have one, and many of them I am sure will be proud homeowners who will pay their bills .
The Northern Rock problem was not one caused by an excess of risky lending. It was caused by the drying up of liquidity in the money markets, for which the UK monetary authorites are responsible. That is the problem the BBC ought to concentrate on, to atone for years of trotting out uncritically how wonderful Gordon’s reforms of the Bank were. Clearly many people failed to understand why a Central Bank needs to operate in government debt markets and needs to have up to date information about the stae of commercial banks balance sheets. It can best do that it it has control over banking regulaiton and debt management, the two crucial functions Gordon stripped from them ten years ago.
John Redwood has been the Member of Parliament for Wokingham since 1987. First attending Kent College, Canterbury, he graduated from Magdalen College...
I have written before of the dangers to our democracy of the way in which the BBC has in effect become the Labour propaganda machine. Your posting is simply another example of the BBC conducting that role. It was interesting also to note that Commissar Brown (he seems more like one of the old communist block leaders as each day passes) only made his statement, that he was not calling an election, to the BBC and that Andrew Marr then made the announcement as though he was the Downing Street spokesman. This will of course have the unintended consequence of alienating the other broadcasting media and the press for ignoring them. It is to be hoped that they now treat Brown with far less reverence than they have since he forced Blair from office.
The BBCs coverage of all financial matters has really been dumbed down since Peter Jay left. We no longer can find serious analysis either on Tv or radio. Those running the financial output on the BBC always seem to be looking for the populist approach. This can never tell the full story. The BBC should be telling exactly what happened and if its too complicated for most people to understand then s be it. Thank heavens we have CNBC and Bloomberg to tell us what is really going on in the world of money.
Privatise the BBC.
Subscription only by terrestrial TV when the ‘digital’ cutover occurs.
Split the archive of programmes into a self financing national library of film, free or nominal fee to UK residents, but getting most of its running costs from licencing deals overseas.
Well said, the BBC seem to be running a ’shock’ story that the people deemed by banks to be most at risk of defaulting, have indeed defaulted the most. This is a story ?
“Clearly many people failed to understand why a Central Bank needs to operate in government debt markets and needs to have up to date information about the state of commercial banks balance sheets.” (JR)
This is true but these are pretty complicated things you’re talking about.
You can’t blame the public for eyeing each other up and wondering who is re-mortgaged up to the hilt, wondering baout what these interest rate rises will do to their equity, wondering if it’s all going to come tumbling down.
I know a few young homeowners that have been using their houses as cash-machines.
One is about to sell up and walk away. He’s had a lot of good holidays and a nice wardrobe to show for it, but the BMW is on lease.
Have you seen the ‘house porn’ the BBC, and others, broadcast on a daily basis. House-price hyper-inflation has turned everyone into a ‘property developer’, but very few of these ‘property developers’ actually know anything about houses, building work or dealing with tradesmen. They all go ‘over-budget’ without fail. OK to do that when the house is inflating at 15-20% a year isn’t it?
I doubt they know much about central banking and economics either. I don’t know much about central banking or economics, but just by spending a little bit of time reading about it I’m amased how little all these ‘property developers’ know about such matters.
Reply: Yes, I am trying to explain difficult issues. One of the problems in the modern debate is the government gives a simple but wrong explanation of what is happening and then uses its media muscle to try to prevent any discussion. You cannot understand the Northern Rock and mortgage crisis without understanding just how much damage Brown did to the Bank of England in 1997-8 by taking so much power away from it.
You’re missing that lending money to a higher salary multiple (I’m assuming that is what you mean by “subprime”) also increases the amount that wealthy buyers can spend, as well as poor buyers. In a bidding war during the housing bubble we are in, this it drives up the price of all houses for everyone.
Because of this consequential house price increase, large salary multiple mortgages don’t help anyone poorer get a house that would have done otherwise. However, they do mean that many people are forced to spend all their disposable income on a house if they want to buy one.
This reduces their quality of life, and harms the economy and investment in business, as they don’t have money left over for anything else.
I’m constantly baffled why housing is the one commodity when people cheer when it gets more expensive. Housing getting cheaper is good - increasing house prices is bad.
Average house prices in 2005/2006 were about 200,000, and the median income was just over 20,000 (
http://www.acadametrics.co.uk/ftHousePrices.php
http://www.statistics.gov.uk/cci/nugget.asp?id=334), so that means an average person needs a 10 times salary multiple to buy a house.
Much of this is not due to increased demand / lack of supply - you can tell, as rent hasn’t increased as much. So a limit on lending amounts would benefit everyone.
Reply: yes, the banks do lend a higher multiple which as you say makes it more difficult for people on lower incomes. In many cases they have switched from offering so many times salary, to looking at the relationship between net income and interest costs. Because a few years ago interest rates were low this allowed a big increase in the amounts people could borrow.
Much hype was made in the media about the BoE’s monthly meetings and how thanks to Brown making it independent they were setting their own interest rates ensuring ’stability’. The government has been completely negligent in failing to warn a generation, that had only ever known low interest rates, the disproportionate effect an increase of a few percent has on monthly mortgage costs. It can’t be left to banks to educate consumers, it is not in their commercial interest to do so. Perhaps the FSA, which looks more useless by the day, could have required that banks provide mortgage quotes showing how monthly payments would increase if the base rate went up three percent. And also regular warnings on statements as to what the payment will increase to when any fixed term deal finishes.
There is an issue with how sub-prime borrowers became fragile home owners. I think a lot of problems stem from the government’s ill-considered legislation to assist entrepreneurs and the self-employed (which it hasn’t really done) that has been misappropriated by the financial services industry to generate commissions and fees. Example one is self-cert mortgages, designed for the self-employed, entrepreneurs and city bonus recipients. In reality widely used to facilitate, the hourly-paid or salaried in securing mortgages their pay-slips would not suggest, to a lending institution, they could afford. Whether it’s the fault of the commission hungry broker or the hapless wishful thinking applicant I don’t know.
The other example is IVA’s, these were supposed to be a diluted form of bankruptcy to help entrepreneurs back on their feet if their business succumbed to adverse circumstances. These were misappropriated to allow shopaholic consumers a soft landing from their foolish spending and earn a broker a hefty fee.
I’m not suggesting that the above are the whole picture of the current consumer credit imbroglio, but I think they have had a negative effect that an allegedly perspicacious and ‘prudent’ chancellor could have avoided.
Regarding the media’s negative attention on the sub-prime market in this country, they’ve merely assumed that we’ll have the same problems as the US. I worry that the, more unique to us, buy-to-let market could be the unexploded bomb in the UK property market, I fear its got enormous potential for a domino effect. I would personally prefer that greedy buy-to-let landlords were hung out to dry rather than first-time buyers who struggled hard to get on the property ladder. Although some of the buy-to-letters are only ordinary people trying to secure a nest egg after Brown taxed their pensions to oblivion. Oh dear so many problems seem to lead to the same person.
Reply: Yes this mint may have a hole but it can still be a tasty mint. The good news is many more people have gained mortgages. More mortgages will fail, and some buy to letters could get into difficulties if interest rates rise too far or stay too high for too long. The power to decide rests with the Monetary authorities who have to decide how much pain to inflict.
This is the big supply/demand issue in housing. Demand seems to be a combination of both money supply and people wanting to buy propety which is rooted in our homeowning culture. there are more people, more wannabe ‘property developers’ and more money chasing our housing stock.
I’m sure the best economic minds in the world could argue between each other whether it is more the effect of people and competition on the property ladder (or consumer behaviour) chasing housing, or the greater supply of money and low interest rates/easy money that has, and how these relate to each other, and to what degree, and still disagree with one another to eternity.
It seems obvious it is a combination of the British obession with owning property, and Gordon Brown through the Debt Management Office / self-certified mortgages printing more money that has caused the hyperinflation, and the deflationary pressures cause by gloabalisation and competition in the rest of the market for consumer goods that has restricted the inflation by and large to house purchase prices.
How long will the herd mentality and easy money keep it going? Will the easy money stop with the credit crunch? Will the investor decide UK housing is a ’sell’ or weather the storm. How leveraged are the ‘property developers’ and ‘buy to let’ brigade?
According to this Isle of Mann-based prospectus the ‘Student Accomodation Fund’ (that has made $44.2% in the last 3 years) is closed to new investors, was always closed to folk who have less than $1,000,000 to punt and carries a liquidity warning (not easy ot kick students out mid-cintract I guess)
Going back to the ’subprime’ and the derading of the BBC for ‘dissing’ poorer folk having an opportunity to make cash:
Why do UK and US financial regulations prevent ordinary folk having a punt on the short sellers or such property funds? I’m allowed to play roulette or just pick a share - the FSA don’t protect me from punting on shares, why do they ‘protect’ me form buying a share in unregulated collective investment vehicles?
Surely there is a gap in the market for folk to buy in and divvy up the investments into smaller shares for people that want a punt on a particular fund? The FSA and their US equivilent prevent them from promoting it to anyone who isn’t a millionaire.
The funds are all based in UK or US tax havens but managed from London and New York!
Is this another flaw with the FSA? Who are they looking after exactly?
Reply: You are quite right that regulation “protects” you from some possible losses but not from others. You can bet on a horserace but cannot buy certain kinds of investment funds direct. You can, of course, bet on movements in the property markets through property futures, property shares, and property index funds but under our regulatory system I must not offer advice and have to tell you to go to a properly regulated investment professional to do so.
http://www.friendsprovident.co.uk/doclib/fundprice.pdf
I’m glad you see where I’m coming from and will take it upon myself to keep reading.