news and comment
economics

site map
C O L O U R K E 'Y

What the Clown is actually doing is feeding cheap money, via the Bank of England, to the UK banks in order to bail them out. Thus, the mess in the UK economy is being visited, as ever, upon the population in even more inflation. The banks, as usual, are acting as middleman to cover up foolish government ‘policies’.

That is, the rate at which the Bank of England is handing out money to the lending houses is going down, while the rate the lending houses are charging is going up.

“Tue Apr 8, 2008 2:22pm BST
Interest rates can fall because inflation is low, Prime Minister Gordon Brown said on Tuesday, two days before a Bank of England interest rate decision and despite forecasts for higher inflation this year.

“The government does not have the power to change interest rates, as Brown gave up that responsibility to the Bank of England in 1997 when he was Chancellor.

“However, pressure is growing on policymakers to shore up the economy in the wake of the credit crunch.

“Because we've got low inflation we can cut interest rates," Brown said in an interview with the BBC.”
—
“Fears are now rife in the market that the minimum five per cent deposit could grow to ten or even fifteen per cent - as mortgages become rationed as banks are hit by the high cost of inter-bank lending, despite the Bank of England dropping interest rates.” [Quoted from reuters.com]

Meanwhile, the interest charged by banks is rising rapidly:

“Tuesday, 08 Apr 2008 11:38
Abbey is dropping the last 100 per cent mortgage on the market following the parade of lenders to up interest rates or cut mortgage deals.

“Mortgages covering the full value of a property started to disappear from the market in February and all deals are now off - meaning first-time buyers need to raise a deposit of at least five per cent to get on the property ladder.”
—
“ mform.co.uk research also reveals first-time buyers are not only having to raise larger deposits and face higher interest rates, they are also seeing increasing fees.

“Fees at the biggest five lenders have increased by 35 per cent in the last year from £637 to £857.

“The rate on a first-time buyer mortgage has now increased from five per cent last year to 5.8 per cent now - putting average annual repayments up by £920.” [Quoted from myfinances.co.uk]

Repossessions are widely forecast to grow and house prices to fall. Even under the false figures Gordon Brown and his Chancellor Darling are issuing, inflation is expected to grow.

It has taken the UK government ten years of profligacy, but we are now re-entering the usual consequences of socialist ‘New’ Labour ‘policies’.

The real rate of inflation has been running at over 10% in the UK for several years now.

the web address for this article is
https://www.abelard.org/news/economics0801.php#interest_rate_fibs_090408

sub-prime or leverage - worth a scan

“These hedge funds used preposterous amounts of leverage to buy triple-A bond portfolios, which offered slightly higher interest rates than the cheap money they could borrow in the markets for short periods ranging from 24 hours to three months. When banks became less willing to roll over the short-term loans taken out by these hedge funds, they were forced to dump their triple-A bonds on to unreceptive markets, thereby pushing down their prices even though there had been no increase in the underlying probability of these bonds ever defaulting. Although the GSE [government-sponsored enterprises] bond prices fell by only a few percentage points, the hedge funds' leverage multiplied their losses and they quickly went bust. These bankruptcies caused even more GSE bonds to be dumped on the markets and triggered a further slide in their prices. But Bear was among the world's largest holders of GSE assets [...] ”
—
“Until last month, it was still widely assumed that the danger of illiquidity affected only inherently risky assets, such as sub-prime mortgages, complex derivatives and leveraged loans. But this assumption completely changed when the US bond insurers started to be downgraded in January. Suddenly, ultra-safe municipal bond prices plunged to levels normally associated with the riskiest junk bonds. This was not because the Port Authority of New York or the California Water Board suddenly looked like defaulting. It was simply because municipal bonds became illiquid as investors were forced by regulations to dump them into a market with no bids.

“After the municipal meltdown, forced sellers of top-quality mortgages, and even of government-backed GSE bonds, suddenly could find no buyers. It was this disappearance of liquidity - not a growing risk of default by borrowers in the non-financial economy - that caused the collapse of Bear Stearns.”

see also
bank systemic contagion

the web address for this article is
https://www.abelard.org/news/economics0801.php#subprime_leverage_270308

alan greenspan on managing economic risk - recommended scan

Sample:

“The essential problem is that our models - both risk models and econometric models - as complex as they have become, are still too simple to capture the full array of governing variables that drive global economic reality. A model, of necessity, is an abstraction from the full detail of the real world. In line with the time-honoured observation that diversification lowers risk, computers crunched reams of historical data in quest of negative correlations between prices of tradeable assets; correlations that could help insulate investment portfolios from the broad swings in an economy. When such asset prices, rather than offsetting each other's movements, fell in unison on and following August 9 last year, huge losses across virtually all risk asset classes ensued.

“The most credible explanation of why risk management based on state-of-the-art statistical models can perform so poorly is that the underlying data used to estimate a model's structure are drawn generally from both periods of euphoria and periods of fear, that is, from regimes with importantly different dynamics.

“The contraction phase of credit and business cycles, driven by fear, have historically been far shorter and far more abrupt than the expansion phase, which is driven by a slow but cumulative build-up of euphoria. Over the past half-century, the American economy was in contraction only one-seventh of the time. But it is the onset of that one-seventh for which risk management must be most prepared. Negative correlations among asset classes, so evident during an expansion, can collapse as all asset prices fall together, undermining the strategy of improving risk/reward trade-offs through diversification.”

the web address for this article is
https://www.abelard.org/news/economics0801.php#greenspan_210308

It still seems many don’t follow why ‘the system’ is fearful of ‘systemic’ break down - and how the fed acts is now included in the abelard.org Economics Zone as Bank systemic contagion.

the web address for this article is
https://www.abelard.org/news/economics0801.php#banking_system_200308

on inflation in the uk, and its management

Why should hyper-inflation, as occured in 1930s Germany, happen here? It shouldn’t.
There is inflation and there is inflation. 4% inflation is not 10% inflation, and 10% inflation is not 2000% inflation.

The situation in Britain is vastly worse than in the USA.

The USA is indeed inflating the money supply, but from a long-term situation of control.

Now, the mess that some like Brown the Clown are in is, indeed, fraught.

It’s a matter of how many companies and individuals he can bankrupt without losing enough votes to turf him out of the political playroom.

Brown, and now his finance puppet Alistair Darling, are variously claiming to have borrowed around 50 billion pounds, carefully forgetting at least that much was borrowed to steal Northern Crock and god knows how much buried in PFIs [Private Finance Initiatives] and ‘promises’ to pay pensions etc.

Real UK inflation is solidly over 10%. The more it is cut back, the more people will go bankrupt. If it is not cut back then, to keep the Ponzi scheme going, Alistair Darling will have to increase the inflation. Brown the Clown has completely ruined the strong position the Conservatives bequeathed the following Labour government.

Brown’s, and now Darling’s, socialist ‘policies’ are steadily destroying the productive economy, as socialists’ policies always do.

What is required is contracting the money supply to control the inflation, but that would make people less able to consume and to pay their bills. Brown and Darling have dug a hole and it’s deep. Being a socialist, their answer is to keep digging. What they cannot and will not ever do is to admit that they have no idea what they’re doing.

In this sort of bind, the great Keynes said something like this:

If it’s a choice between the rentiers (those with money) suffering and the renters, he would choose the rentiers - [1]

- but that still has high social costs. Socialism always has high social costs.

It becomes a matter of mitigating those costs where you may, and suffering where you cannot. Being a corrupt dishonest fool Brown the Clown, and now Darling, will do everything possible to put off the reckoning, thus increasing the eventual costs. Darling will, for example, try to borrow still more until no-one will lend any more.

The British are now going to have to pay for the vanity and foolishness of Tony Bliar and Brown the Clown’s socialism. It is just a matter of how much and when.

So - the problem is to contain the inflation (money supply), while doing the least damage. It is vital to feed in liquidity, as America is now doing. But Darling is nearly out of room. As soon as the gum-up, which people are probably calling ‘the credit crunch’, is cleared, the squeeze down on the money supply should continue.

It’s like going down a very steep hill without burning out the brakes.

Unfortunately, Darling is already in much deeper trouble. The hill is already steeper than in the USA and he doesn’t even know what a brake is. He and his puppet-master are so incompetent and, therefore, arrogant that they even believe they know better than the Bank of England.

No-one can ever advise a fool. Darling, and Brown the Clown before him, are incompetent fools.

Their only hope is to hang on and hope they can get the votes next time around. Brown’s best last hope was to go for the election he chickened out of.

Now to just watch Brown slowly drowning in his own excreta.

end note

1. “Thus inflation is unjust and deflation is inexpedient. Of the two perhaps deflation is, if we rule out exaggerated inflations such as that of Germany, the worse; because it is worse, in an impoverished world, to provoke unemployment than to disappoint the rentier. But it is necessary that we should weigh one evil against the other. It is easier to agree that both are evils to be shunned. The individualistic capitalism of today, precisely because it entrusts saving to the individual investor and production to the individual employer, presumes a stable measuring-rod of value, and cannot be efficient—perhaps cannot survive—without one.” [Quoted from Essays in Persuasion, p. 75 - Social consequences of the changes in the value of money, 1923]


the web address for this article is
https://www.abelard.org/news/economics0801.php#uk_inflation_140308

how a mortgage lender works, with reference to northern crock

With a mortgage, the bank or other mortgage provider is, in fact, a middleman between the buyers and those lending money. Thus, the portfolio of mortgages held by Northern Crock is only worth the profit the Northern Rock Bank can make from the difference between the mortgage interest paid by property buyers [mortgagers], and the interest the bank is paying to borrow money from various sources. Those sources include other banks and deposits made by savers.

From this profit must be subtracted Northern Rock’s running costs, that is staff, administration, office space etc.

Talk of £100 billion being the amount involved is coming from those who do not understand the business. The alleged £100 billion does not belong to the Northern crooks.

The £100 billion belongs, in most part, to those originally lending the money to Northern, with any surplus belonging to the mortgagers. It does not belong in any fashion to Northern Rock. Northern Rock merely administers the process.

It is quite/highly possible that the Northern Rock, on behalf of the real lenders, have lent out more money than the backing of alleged £100 billion of assets, which are the properties that are being bought with the mortgages. If local house prices drop, that will create a gap, or increase any existing gap, depending on the valuations in the current housing market. The mortgaged properties are merely security against the borrowers being unable or unprepared to continue with their mortgage payments.

At such a point, those seeking to buy the debt (not the real assets - the mortgaged properties), will value the debts at below the nominal value claimed by government and the Northern Bank.

They will value the debt according to the profits they believe they can make from the cash flow/stream coming from the regular payments from the mortgagers minus the amount going out to service the capital borrowed.

This is why those who had been proposing to buy Northern Rock want subsidised money guaranties from the Clown and his circus, and are not prepared to buy the wreckage without large guarantees of cheap (subsidised) money from the government. This all indicates the market regards the rust-bucket as a liability, not as a profitable concern. That is, it is bankrupt, and worse in current market conditions.

So now, Gordon Brown the Clown has stolen the wreck, so far illegally. Thus, he’s going to change the ‘law’ to make his theft ‘legal’ - he hopes. But it is quite likely that the law courts and/or his masters in Europe will tell him he cannot, either on grounds that it is theft from the stockholders, or that it is business subsidisation contraventioning competition laws, or both.

Gordon the Clown is an empty suit. He lives on bluff and image and lies. He is terminally incompetent, and in a job far beyond his ability. He is a child playing with an expensive watch he doesn’t understand. The Conservative opposition will, as usual, have to try to patch up the mess once he has been removed from the playroom.

It is useful to point out the conditions that drives this debacle

1. The socialist Labour government has been inflating the UK pound by over 10% for several years. In an inflationary economy like this, any alert person will realise that it is profitable to load up on debt. As long as the interest remains below the capital gains, and also below the rate of inflation. This will be a very profitable proposition, especially where there is no tax on first residences.
2. The Clown broke the link and responsibility between the Bank of England and the Financial Services Authority.
   
   These set in place very strong motivation for ambitious and careless operators, like those at Northern Rock, to take the exuberant risks which ended in the first run on an British bank for 150 years. This also motivated a huge panic to scramble on the ‘housing ladder’, or to up-grade to more expensive property.
   
   This was not some inscrutable accident, but the highly predictable outcome of irresponsible political behaviour.
   
   It was not due to the ‘sub-prime crisis’ or to ‘a down-turn in the American market’, or to a ‘credit crunch’, or any of the other scapegoats cited by an incompetent UK government. This is a homegrown crisis, generated by an irresponsible socialist government.

related material
Sunday afternoon - panic in nu-labour treasury chicken coop
Bubbles, debt, borrowing and inflation in the uk
The mechanics of inflation: the great government swindle and how it works
The sum of a geometric sequence: or the arithmetic of fractional banking

the web address for this article is
https://www.abelard.org/news/economics0801.php#mortgage_primer_200208

the cost of cars in labour-hours over the past century [40-page .pdf]

“In 1908 a typical factory worker had to toil more than 2 years to buy Ford’s Model T, one of the nation’s first affordable cars. A 1997 Ford Taurus costs today’s worker just 8 months. Of course, few of us would pay even $850 for a Model T today, at least not for everyday transportation. Today’s cars are just so much better. Going back only one generation, we can see an enormous improvement in the quality of cars and trucks. Today’s vehicles last longer. They require less maintenance, with some 1997 models traveling 100,000 miles before their first tune-up. They’re more comfortable because of air-conditioning, power seats and adjustable steering columns. They often include such extras as power windows, sunroofs, tinted glass, cruise control and compact disc players. They’re safer with the addition of air bags and antilock brakes, which have contributed to the decline in traffic fatalities from 7.6 per 100 million miles traveled in 1950 to 1.9 today. As with housing, part of the increase in auto prices stems from better quality. So although buyers are shelling out more money than they once did, cars have never been such good values. (See Exhibit 6: Kings of the Road.)

“Drivers may grumble when they pull into a service station, but a gallon of gasoline required just 5.4 minutes of work in 1997, compared with 6.6 minutes in 1970, three years before the Arab oil embargo caused prices to surge. If we consider the 60 percent increase in average miles per gallon since 1970, the work time to drive a typical car 100 miles has been nearly halved over the past quarter century-from 49 minutes in 1970 to 28 minutes today. The price of an automobile tire has risen from $13 in the mid- 1930s to about $75 today. However, today’s steel-belted radials last more than 42,000 miles, a big increase from the 16,000 miles for the nylon tires of the 1950s or the 2,000 miles for the 31/2- inch, cotton-lined tires of the early 1920s. Based on work time per 1,000 miles, tires are now cheaper than ever. [Quoted from Report p.10, .pdf page 12]

“Paint stores supplied early-model automobiles their first pints of gasoline in the late 1800s. A quarter century later, only about one in four American households owned a car, and gasoline went for 30¢ a gallon-over half an hour’s work. Today a gallon of gas costs less than 6 minutes of work time. With household vehicle ownership exceeding 92 percent, the average U.S. family consumes roughly 900 gallons annually.” [Quoted from Report p.11, .pdf page 13]

“Henry Ford sold his first Model T for $850 in 1908. At the equivalent of more than 2 years’ wages for ordinary factory workers, only 2,500 cars were sold. By 1920 Ford had incorporated numerous improvements into his sedan-including an electric starter, demountable rims and an enclosed body-yet cut its work-hour price by nearly two-thirds.” [Quoted from Report p.21, .pdf page 23]

related material
Henry Ford, mechanical man - Model T, modern times

the web address for this article is
https://www.abelard.org/news/economics0801.php#price_evolution_260108

email email_abelard [at] abelard.org

© abelard, 2008, 26 january
all rights reserved

variable words
prints as increasing A4 pages (on my printer and set-up)