Surely given the enormous amount of government borrowing in the UK and US and the fact that the Chinese are now more reluctant to fund it, we actually need higher rates not lower. Or better still a big reduction in government borrowing!

Sterling is just a sign how investors perceive the UK economy and because of globalisation caused specialisation weak sterling will not help so much the whole UK economy as the UK doesn’t have a lot to offer. One reason why the UK doesn’t have a lot to offer is a failure of Business Link to help good idea business to grow – it was more service oriented and service supply is not easy to increase fast (needs educated personal, and that needs time and good salaries).

This tells you all you need to know about Labours understanding of the situation.

As more and more problems emerge the banks will be very careful about future commitments.

Only when they are convinced they they have delt with it all will anything like normal service commence.

Why does the government not understand this.

Q. Why do the government not give loan guarantees to the banks.

A. As just like the banks they do not know yet the full extent of the problem.

So the government is behaving just like the banks.

http://uk.youtube.com/watch?v=_3__kZScZV4

http://uk.youtube.com/watch?v=AwIncF3yrpQ

Reply: You have pointed to another contradiction.

I think your analysis of the problem is accurate; – banks have impaired loan books, damaged capital adequacy ratios, limited opportunities to raise fresh private capital, and a loss of appetite for further loan risk. Their ‘business as usual’ model is broken. As the banks rein in their commission agents and stop writing loans, their client base starts to die of thirst in the credit drought.

So, banks sup with the devil and turn to HMG for help. UK.gov morphs from supplicant to savior like some 21st century Shylock, advances the money, then demands their pound of flesh.

Your solutions to free up the banks to lend more easily are as wrong headed as those promoted by HMG. Banks cannot ‘work’ the way the used to – ‘free’ money was part of the problem.

The elephant in the room is the fact that the boom was fools gold – houses were never ‘worth’ 5 times average earnings, about 3 times that benchmark has been the mean. We will now see a reversion to the mean, and for that to happen house prices have to drop below 3 times earnings for a while until the mean is reestablished.

Every initiative to ‘unlock’ credit to make houses more ‘affordable’ is designed to make sure they stay expensive by driving down the cost of borrowing. Quixote is tilting at the wrong windmill – the dragon is overpriced housing, not lack of credit. Similar issues affect many business models that relied on credit to expand, or credit to sell.

This boom was built on a sea of cheap credit and funny money, little real wealth was created. The bust is just recognising that reality. Mitigations will only ensure that the dead still walk amongst the living. Broken business models have a right to die – it is not necessary to send them on a stretcher to Switzerland – they can expire here if they are denied morphine and left to fade away.

Many normally sound business models will be swept away in the firestorm that will eventually purge the system. Real people will suffer real hardship. It will be bloody, awful, mayhem. The mess is unfolding now – Canute cannot hold back the tide of woe that is coming our way.

It is time to start thinking about how to organise the future, not revisit the past or resist the present. The choice for the executive, the legislature and the electorate is denial or deliverance: House prices like 2007 are over for a decade or more. EZ Credit is a thing of the past.

Get used to it.

1) Stabilise house prices – use NR and B&B. Nobody wants just bought car to wreak their home. Northern Rock and Bradford & Bingley are doing exactly that! wrecking the whole market after the pyramidal scheme they created collapsed (With 125% mortgages, 6+ annual salaries – they wanted to get as many customers as possible and didn’t ask about the consequences. Even worse, they knew it will run for long enough as people were forced to buy properties to live as it is very simple for a landlord not to extend a contract).

2) Cut expenses – military budget, benefits, salaries in the Government and Government related services. Local governments should also follow the lead. Possible savings – up to £100 billions annually (more than £16 billions on military budget, 30-40 on benefits, the rest on salaries and pension costs).

3) Invest savings in infrastructure (transport, power-plants (Golf stream plants, wind-plants)) and technologies like high speed computers. That will also create jobs and provide needed investments at the moment when it is needed.

4) Cut company taxes – that will leave more capital and be an incentive for companies to invest wisely, hence employ more people.

Is this the guy who allegedly walked into work one day and informed his staff that the $50 billion hedge fund they thought they were working in was really a bankrupt ponzi scheme?

I would have thought the first thing regulators should do about collective investment vehicles was check that they are not ponzi schemes?

Is this not common sense or am I missing something?

During a period of falling house prices taking a charge over a house is riskier every day. To add to the problem, recession risks jobs which risks the value of the borrower’s personal covenant to repay. That covenant is the first line of security relied on by every lender, although it is rarely referred to as such.

The natural course of events is for banks to limit their lending to the very best risks until their business is stable and then push at the edges to see whether slightly more risky loans can be justified. This necessarily means that new lending will be restricted below historically safe levels, perhaps for quite some time. All steps taken by government must be assessed against that background.

If lending both for house purchase and for business is to recover from its present low levels it will be necessary to persuade banks to take risks they would not otherwise feel comfortable taking at the moment.

The general thrust of the Conservative’s approach must, I think, be correct. As I understand it they propose giving guarantees so that banks can make loans of a type that have been considered safe in the past even though they contain more risk than the banks consider prudent in current circumstances.

My concern with this approach is that it can mask problems which really need to be out in the open. For example, there can be no doubt that house prices were inflated way above their true value and a significant bubble element still exists. That can only be removed by restricting lending to a sustainable multiple of the borrower’s income, say 3 times main income or 2.5 times main plus 1 times second income. Allowing greater latitude than that will keep prices above true value and store further problems for the future.

What they actually mean is that my Halifax SVR has been increased from 2% above BOE Base Rate to 2.75% above BOE Base Rate.

A 37.5% increase in their margin!!!

In other words they have only passed on a fraction of the Governments recent 33% reduction of the BOE Base Rate (3% to 2%)to the customer and increased their margin by a whopping 37.5%.

What is particularly annoying is that their correspondence is worded in such a way as to make this huge increase in cost to the customer very unclear.

Of course some will respond that this is negative thinking, we need to slash rates to 0%, print money etc etc. In the end it is just another way of bringing the economy back into equilibrium and whichever way you go you will be poorer, its a zero sum game!

Lending will only resume once risk, asset prices and general price levels are back in line! The sooner they get there, the quicker the recovery.

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It’s called less lending, lending to higher quality borrowers, RBS increasing capital which means charging more to borrowers and paying less to savers. The option of more capital injections from the private sector went out the window with the threat to nationalise.