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Credit crunch 2.0

Robert Peston | 13:37 UK time, Friday, 7 March 2008

The vicious credit cycle currently ruling our global financial economy has entered a new and worrying phase.

What began in the autumn of 2006 with a rise in defaults on US sub-prime loans is now manifesting itself in growing delinquency rates on US mortgages in general and the growing unease of lenders about ostensibly good quality mortgages.

That was what caused the collapse of the London-based hedge fund, Peloton. The lenders to Peloton demanded their money back after its holdings of mortgage-backed securities start to fall in value.

And an investment vehicle of the substantial Carlyle Group is in schtuck because its lenders are demanding increased collateral against holdings of more than £10bn in US government agency AAA-rated residential mortgage-backed securities.

Only last week Carlyle Capital Corporation calculated it had sufficient liquidity. Now it's warning that it may run out of liquid assets and that its capital may be impaired.

Why does any of this matter? Well it shows that contagion from sub-prime to other assets is becoming serious.

That will further deplete the capital of the financial institutions - the banks and insurers - upon which we all depend for credit.

It also suggests we are still early in the process of returning to the mean from all those years of under-priced debt and over-priced assets.

Returning to the mean, or a sensible level of pricing, was never going to be painless. But the pain - in the form of the impact on the real economy - could be pretty horrible if we overshoot in the other direction and debt becomes punitively scarce and dear.

UPDATE 04:45PM: The US Federal Reserve has taken emergency action today to (in its words) “address liquidity pressures in the funding markets.”

It has identified lenders’ growing distaste for all classes of mortgage-backed securities as a serious source of further strains in credit markets and has announced increases in the size of its credit auctions to $100bn – and it is also making another $100bn available through term repurchase operations.

The Fed has signalled its determination to do all it can to restore confidence in the financial system by saying it stands ready to provide even greater funds if necessary.

The 28-day repurchase agreements will allow primary dealers (banks and broker dealers that trade directly with the Fed) to borrow against all and any class of securities, including the agency-backed mortgages being shunned by many private-sector institutions.

The effect of the Fed’s measures is to supply banks and financial institutions with the liquid funds that they can’t currently obtain on the commercial markets.

Comments   Post your comment

  • 1.
  • At 03:05 PM on 07 Mar 2008,
  • Crash Bang Wallop wrote:

Forgot to mention the most recent US jobs data that was far from rosy... Meaning that things are likely to get worse before they get better. Just HOW worse is the key question

  • 2.
  • At 03:06 PM on 07 Mar 2008,
  • merce wrote:

This has never been just a subprime issue, it is an excessive debt/credit problem.

There is nothing wrong with businesses/funds/individuals going to the wall if they took on or loaned out too much debt.

The current evaporation of credit will lead to less speculation in assets, and therefore much cheaper housing in the UK.

The current unwinding is a healthy process.

  • 3.
  • At 03:43 PM on 07 Mar 2008,
  • Lindsay Allen wrote:

One has to wonder if the hedge funds are about to be found out. Few persons have out performed the markets over time and and rarely with mass marketed products as the hedge funds have become.

Significant hedge fund failures will impact London as a financial centre because of the poor regulatory control over these funds. In addition,many pension funds are heavily invested in hedge funds.

This may be much more significant in the UK than the credit crunch.

  • 4.
  • At 04:26 PM on 07 Mar 2008,
  • GS wrote:

Stating the obvious in the usual melodramatic fashion we have come to know and love, time to get the food supplies together and move into the bunker!... Personally I think this is the beginning of the end, not the end of the world as we know it but more likely the end of the current credit crisis, of course there is more pain to come but unlike the advocates of "Pestonomics" I do not foresee a return to the 1930's . Much of the current hysteria (particularly in commodities) is been driven by emotion and even this will eventually be consumed by it's own flames.

There is a good article in todays FT about the current credit sell off amongst other facts it points out that in 1934 half of US mortgages were delinquent whereas today the figure is 6%, total US and European tier 1 capital is £2,000bn against £200bn of write downs.

It may be ugly but it will adapt and in the new reality there will still be as many people (and banks) trying to make as much money as possible...

Long live capitalism!

  • 5.
  • At 04:48 PM on 07 Mar 2008,
  • Steve, London wrote:

To #3. On what basis are you assuming that "pension funds are heavily invested in hedge funds"? Please provide some real life examples that you are aware of.

I concur with #2. The current retrenchment is a healthy process. Unfortunately the rich get less rich and the poorer are made to suffer.

  • 6.
  • At 04:53 PM on 07 Mar 2008,
  • ted greagsbey wrote:

was it that long ago?
"What began in the autumn of 2006"

  • 7.
  • At 05:42 PM on 07 Mar 2008,
  • Paul Amery wrote:

I agree with Merce. This is a problem of excessive debt - at all levels, government, corporate and personal. For years our economic policy has been focused on supporting consumption at all costs, even if it meant loading debt on debt to do so. There will be a period of painful readjustment to reality if you're in the financial, property or retail sectors, or have overborrowed. Let's hope our economy can return to more productive ways and compete on a world stage again. The deflation of asset (equity and property) prices is good news as people might start to be able to afford a place to live again.

  • 8.
  • At 06:11 PM on 07 Mar 2008,
  • Dave Hambidge wrote:

Whilst I cannot claim to understand the full implications of this, I have long suspected that any news delivered on a Friday afternoon is bound to be grim.

Let's just hope the rugby matches this weekend will lift the gloom for a few hours?

  • 9.
  • At 06:16 PM on 07 Mar 2008,
  • tpaine wrote:

As someone said in the 'Money Reform Party' The Billionairs will just have to adjust to being Millionairs

  • 10.
  • At 06:19 PM on 07 Mar 2008,
  • David wrote:

Where is the Fed getting all the 100's billions of $'s to use in its auctions? Are they simply printing it? And is there an increasing risk, not least because the M3 figures of the global Dollar supply in the world was suspended my Mr Bernanke, that the value of the dollar could crash spectacularly?

  • 11.
  • At 06:29 PM on 07 Mar 2008,
  • Paul wrote:

The credit crunch 2.0 will manifest itself when the realization comes that we have more than double the proportion of subprime mortgages here in the UK as in the US (around 9%)!

In addition, we have the euphemistically termed "non-conforming" mortgage (accounting for 30% of all mortgages in the last four years).

When that poisonous stuff starts leaking, then the UK will be in Credit Crunch 2.0.

  • 12.
  • At 06:44 PM on 07 Mar 2008,
  • Keith wrote:

Today's problems at Carlyle Capital hardly mean that the credit crunch has shifted to AAA securities.

Sub-prime loans were high risk and high return. Betting with 5% of your own money and 95% of the banks' was a great way to turn AAA into the same thing.

That some investors underpriced risk at the fag end of a bull market is hardly shocking. The interesting question is whether regulators did the same thing - and the rate at which they are throwing money at the market suggests they, at least, now think they did.

  • 13.
  • At 07:44 PM on 07 Mar 2008,
  • David Wrixon wrote:

Yes, and when Bernanke drops the interest rate another 1%, all that money that the Fed doesn't have in the first place will just get Carry Traded to Asia. The Fed is about to turn a Crisis into a Calamity. The Americans should do what they preach and that is to let the market decide!

  • 14.
  • At 08:03 PM on 07 Mar 2008,
  • Eric wrote:

Isn't 'liquidity' a euphemism for 'money'? Which would suggest an inflationary response by the Fed.
I suppose 'money' is what people use. 'Liquidity' is theoretical money. Since, it's theoretical, it can't be inflationary. Theoretically.

  • 15.
  • At 08:04 PM on 07 Mar 2008,
  • D Greenhow wrote:

The current credit crunch is just as much about the victory of tangible resources over intangible ideas i.e. financial sophistry Look at nature if you want to see how natural resources are the real currency. Yes its time to get an allotment, a couple of chickens and a goat to milk! Debt is a promisary note but at some point human hands will do the taking and stop believing in empty promises. What do you have in store if your plastic stopped working tomorrow?

  • 16.
  • At 08:18 PM on 07 Mar 2008,
  • David C wrote:

I too agree with Merce. And I repeat what I've said in comments on this blog (not all of which seem to have passed the moderation process): by reporting Northern Rock and similar as a consequence of subprime issues in the US, Robert P has misrepresented the situation and misled his audience.

It's just flat wrong to talk about "contagion from sub-prime to other assets ... becoming serious". It implies that bad lending in one area is contaminating good lending in others. Not so. Lending was over-exuberant in every sector; it just happened to get noticed in one area first.

  • 17.
  • At 08:21 PM on 07 Mar 2008,
  • Milton wrote:

Some of these hedge funds are just private versions of Northern Rock, massively geared and relying on nothing going wrong with the value or liquidity of their assets. Grand model. Of course, the traditional sucker ploy is to market to the masses whatever asset class or management style has been successful in the last few years, thereby delivering seductive performance statistics. Caveat!

  • 18.
  • At 08:37 PM on 07 Mar 2008,
  • Keith wrote:

The Fed (and over here the ECB / BOE) can try all they like, but they can't get over the fact that the truth has finally come out: the Emperor has no clothes.

The banking system is being exposed for what it is - a sophisticated confidence trick. Banks do not have, and never did have the capability to pay back all their creditors. So now when the fraudulent lending practices they sold now start to default, this inability to repay their creditors is now causing collapse of the entire system.

  • 19.
  • At 08:43 PM on 07 Mar 2008,
  • Steven Turner wrote:

So the investment houses are taking their money from shares and bonds and into stocks, such as oil. What will happen if the demand for oil dips with the slowing economies of Europe and the US, will there be too much oil available? Then will the investors have to get shot of the oil stocks quickly cause, I'm sure at some point someone in an oil tanker is going to ask where they want it delivered. This could reduce the value of oil. I expect steel will be similar. Then would that not reduce inflation and give room for the central banks to cut rates further making credit cheaper?

  • 20.
  • At 08:43 PM on 07 Mar 2008,
  • Ray wrote:

Any consumer-driven service economy based on cheap abundant credit, driving rising residential house prices depends on the one thing that is sure to fail in a post-industrial world - secure employment of the mortgagees. As many generations of farmers have learned through centuries. One natural disaster or another, the banks always end up repossessing your land.

Over the long term anything else but completly re-industrialising Western economies will prove to be disasterously cosmetic fiscal tinkering. With unprecedented global commodity demand, and socially destabilizing price hikes and shortages, the 'long' term now looks worryingly short.

  • 21.
  • At 08:55 PM on 07 Mar 2008,
  • david wrote:

The ongoing correction is very much needed and has been long awaited. There have been economic, environmental, social and even moral consequences for the easy credit environment which had prevailed prior to the credit crunch.

Easy credit provided easy money. it also allowed the financial and banking indusry to mushroom and for those woking in this sector the easy credit era meant the ability to accummulate enormous wealth in too short time and with too little effort.

Globlly the model allowing easy money to circulate also required increase in consumption. The environmental consequences are now clear.

For the country the easy credit and mushrooming of financial services changed the economy from one that is prodction and manufacturing based to one that is consumption and service based. There are implications for self sufficiency and dependency on other nations and thus for the national economic security. There are also social implications with devaluing of traditional work and impovershment of the woking class and of those in the middle class who are not associated with the bankig and financial sectors. The illusion of wealth which seems to extend to all through rising house prices is just an illusion.

The moral consequences stem from this social change but also from the effect of availability of money that has not been earnt through a proportionate amount of work. The pattern of consumption and spending is different and distorts the normal patterns of behaviour. Speculation, careless attitude to real value and unrealistic inflation in prices are consequences. This type of behaviour does not easily accept traditional values or religious ideals. Britainn's moral regression and worsening moral standards in public life but also on prsonal and community levels can be explained on this basis.


  • 22.
  • At 08:57 PM on 07 Mar 2008,
  • John Evans wrote:

"is now manifesting itself in growing delinquency rates on US mortgages in general and the growing unease of lenders about ostensibly good quality mortgages.

That was what caused the collapse of the London-based hedge fund, Peloton. The lenders to Peloton demanded their money back after its holdings of mortgage-backed securities start to fall in value. "

WRONG!

Get your facts straight Robbo. The fund deteriorated because the spread on its holdings became uneconomical. This is not because of their default rates, but because of the severe dislocation currently occurring in credit markets. For example, some sectors of the CDS market are showing implied default rates exceeding 100% - which is of course impossible. The banks did not 'lend' to the fund in the traditional sense, i.e. lend it hard cash, instead they will have lent them secured securities, i.e. repo ABS / swaps. Peleton got into trouble because its ABS positions moved against it, and it didn't have sufficient liquidity to meet its margin calls. This is also because banks are become stricter with their collateral / CSA terms.

This article yet again shows your disturbing lack of understanding / knowledge / education of financial markets.

  • 23.
  • At 09:45 PM on 07 Mar 2008,
  • Spencer Cox wrote:

We are in an ECONOMIC WORLD WAR
Nearly every country is fighting to salvage their economies at the expense of all others.

Gold at record highs in spite of Country's releasing Billions onto the market (Rich always invest during troubled times forcing price up).
Gas and Coal are being used as push other countries around (blackmail and/or extortion).
Oil at record highs (OPEC Price Fixing or what?).
Property markets crashing or about to (The enormous bubble had to burst at some point).
Economies collapsing (Can't keep borrowing forever).
Rapidly increasing inflation from China to UK (People need more money and can no longer borrow it so they put up their prices).
Euro and Dollar exchange rates at record levels (EURO Countries to vying for dominance).
Food Price increasing at an unsustainable rate (More people, more food required. Simple really!!!)


P.S. Does Gordon Brown realise that for 5 years the average person has borrowed each year the cost of their Council Tax which means that if people can no longer borrow, where will the money for the entire country's Council Tax be coming from? I sure hope he saved lots of cash. HaHa!!!

  • 24.
  • At 09:52 PM on 07 Mar 2008,
  • jaykay wrote:

The overpriced UK housing market is the consequence of underpriced debts. The UK house prices have doubled in the past 5 years.

  • 25.
  • At 09:59 PM on 07 Mar 2008,
  • John Aspray wrote:

It is very easy to get blaze with the immense figures being mentioned. Much like another 100 or so killed in a bombing in Iraq. There is something BIG going on which is being kept very quiet. ALL the politicians know about it. A project named NOAH 12 may be the answer, and it costs a LOT of money. Crack the Northern Rock/Granite cover-up and the flood gates will open.

  • 26.
  • At 10:59 PM on 07 Mar 2008,
  • p.kelly wrote:

First off, the poster 'ted', #6 is right - 'began Autumn 2006'. Well is that a fact. Come off it. This blew up in public, with Bear Stearns last July(2007), not 2006. Please spare us the self-justifying 20/20 hindsight. Yes we all know now that the US housing market topped in 2006, and there were commentators who called it then and predicted it precisely long before. Likewise, the UK housing market - outside of dodgy billionaire London non-doms - topped 'bout a year after America in mid-2007. The further we go on the clearer this will become.

Now what planet is 'GS', comment #4 on? the geezer's quoting 1934 as comparative proof that the 2008 US housing market ain't too bad by way of defaulting payers. Has GS heard of John Steinbeck? The Grapes of Wrath? 1934 was the height of the Great Depression. Give it four to five more years GS and see how the US housing market stands then buddy. For godness sake, the current president of that country does not even accept that America is in a recession let alone a 'Great Depression' type depression yet. FDR was elected in 1933 precisely to 'new deal' America out of its worst ever slump. So please cut the nonsense of 1934/2008. If you must, compare 2008 with 1929, maybe 1930. Okay? Get back to me in 2012 on the market then - good luck - you'll need it.

Now, as for the rest, Robert Peston's at it again like all the mainstream media econ. pundits. 'Oh look, yippee, here comes the nice Fed people to handout $100 billion more free money in return for worthless trash - MBS/ABS/CDO etc, etc. Er, Robert, it ain't free. It's called INFLATION! Where do you think $106 barrels of oil have come from. Yeah, that''s right, 3% rates and 'liquidity' injections for worthless mortgage-backed securities. This is what caused the bubble in the first place for goodness sake, and now the Fed wants to bail out its buddies on Wall Street and The City with lots of cheap money, stoking up another bubble in commodities to replace all the busted assets in housing. You might not give a damn Mr Peston about such behaviour, but must ordinary folk do, when oil goes to $150 a barrel or £7/8 pounds a gallon, or £2/3 for a loaf of bread. The whole thing stinks. It's crooked, criminal even. There ain't no Market, no free market place. As soon as the big boys lose a few bucks, the central bankers bail 'em with funny money, which means one thing - INFLATION - which f**ks over the little guy worse than any tax. Tell me Mr Peston, why is it when times are good, the bubble so to speak inflating nicely and all the big players are rolling in dough, all one hears is self-regulation, minimal interference and don't try bucking The Market, but once the bubble bursts all one hears is incessant whinging from the bankers and their hired scribes, bellyaching for more and faster rate cuts and cheap, plentiful money at 'discount windows'? What's the matter, don't you trust this Capitalism thing after all? Or is that just plain naive to ask?

  • 27.
  • At 11:09 PM on 07 Mar 2008,
  • Eric Smith wrote:

The finance markets are to a large extent driven by emotion based on market numbers and the opinion of influential commentators.

Why then has the BBC let loose a reporter who combines the predictive style of Nostradumus, the soothsayer of 'Beware of the ides of March' fame and the author of the Book of Revelation ?


Is Robert about to tell us that George Soros is the antichrist ?

  • 28.
  • At 11:19 PM on 07 Mar 2008,
  • Colin Smith wrote:

Um. Our money comes from debt. That's where money is created. You take out a loan, you create new money.

Less debt means less money. Of course, there's still the interest to pay on the debt, regardless of amount of money around. Only 3% of our money is real physical cash, all the rest has been spiralling up from debt. That is... It's a long way down.

At the moment, low consumer confidence does not equal low confidence about employment prospects - but it's certain that there will be increasing numbers of job losses here in the UK in the coming months and years.

So, some of us are going to experience a return to the '30s. Maybe not here, but possibly in the US. Perhaps we'll relive the 70s - and have the right outcome this time (hint: I'm not thinking of Thatcher...)

  • 30.
  • At 04:18 AM on 08 Mar 2008,
  • Danny wrote:

Well in the Aon survey of pension funds in 2006, 17% added hedge fund exposure and 50% property exposure.

It is certainly a well-known sell indicator in the city when pension funds pile into a certain asset class. Somehow pension funds seem to have difficulty with "buy low, sell high", they get confused about the order....

  • 31.
  • At 11:04 AM on 08 Mar 2008,
  • Alan wrote:

The financial system is a positive feedback loop. Unfortunately there are insufficient negative feedback loops in the system. When the money supply is increasing this naturally leads to asset bubbles. Securetisation added another bow to the positive feedback loop.

We are now in a downward spiral - the excess is unwinding. And it will continue to go down unless it is reversed. To date reserve banks around the world have thrown the kitchen sink at the problem and it is still spiraling down. At what stage does panick set in?

At the big picture level, countries like the USA and Australia are in so much debt it looks unlikely that they will ever be able to repay. Every month foreign debt rises - and much of this driven by consumption not investment.


We now have an unhealthy situation where the USA and China are deep into an addict/ pusher relationship - another positive feedback loop. (read "China the writing on the wall" by Will Hutton if you want to understand the dynamics of this one)

If this relationship crashes, down goes the world into a mega recession. Yet it can't continue either. The longer it goes on the bigger the future fall.

So the equalising mega crash is coming. It can't be avoided. We are already using the words renewable resources at an unsustainable 139% according to some observers yet we are hooked on growth and the global population is growing.

The short term focus of politics and the markets - more positive feedback loops - can't look at this or won't - the value systems can't compute long term and the powers in charge are worried that admitting the problem will lead to a panic.

If we escape the big D on this one we will have simply set in place the preconditions for an even bigger crash in the future. We live in a finite world. The "rulers of the universe" have raided the piggy bank. I am not "blaming" them. They were simply in the "right place" at the right time. They were set up by the structure of the system.

Maybe we should heed James Lovelock's advice and recognise that it is all over bar the shouting and just go out an enjoy ourselves while we can.

  • 32.
  • At 12:57 PM on 08 Mar 2008,
  • Simon Stephenson wrote:

From Comment 26 : p.kelly

"Tell me Mr Peston, why is it when times are good, the bubble so to speak inflating nicely and all the big players are rolling in dough, all one hears is self-regulation, minimal interference and don't try bucking The Market, but once the bubble bursts all one hears is incessant whinging from the bankers and their hired scribes, bellyaching for more and faster rate cuts and cheap, plentiful money at 'discount windows'? What's the matter, don't you trust this Capitalism thing after all? Or is that just plain naive to ask?"

I think this is a pretty fair question to ask, don't you?

Of course, the fortune-makers have spent the whole of civilisation seeking to establish the idea that :-

(a) their being allowed to make fortunes, and keep them

and

(b) the general prosperity of society as a whole

are no more than two ways of talking about the same thing.

So I suppose there's bound to be a bit of confusion about the actual motive behind calls for fortune-friendly policy. Isn't it a bit strange, though, in all this confusion, that no one ever seems to mention self-interest as the justification for supporting such policy? Quite uncanny.

Almost as though the omission is deliberate, and not the result of confusion at all.

  • 33.
  • At 01:18 PM on 08 Mar 2008,
  • Pete wrote:

Classic 'Pestonomics' in action. A problem here which might cause a problem there and if that were to happen, something else could really go wrong and we're all doomed. All that is needed is Shelley Winters and it could be the greatest disaster we've seen in history.

The real problem in the markets is that no-one seems able / willing to reevaluate the true risk in light of events so that the market can then re-price accordingly. At some point, this needs to happen but until then there's good old Robert to fill the gaps and us to agree or put forward our own conspiracy theories.

The problem with Pestonomics is not the reporting of the issues but the constant prophecies of implied doom without any solid predictions so that whatever happens in the markets, the BBC can claim that he was ahead of the curve.

The comparison with Nostradamus was truely inspired.

  • 34.
  • At 03:17 PM on 08 Mar 2008,
  • Mr Mole wrote:

Number 26 is a bit harsh on Peston's motives for writing what he does. Apart from that, Number 26 is absolutely correct in my view!

  • 35.
  • At 04:33 PM on 08 Mar 2008,
  • malcolm wrote:

I think all the people out there hoping for a property crash will be sadly disappointed as they always have been, since william the conqueror came to these islands property prices have continued on they upward path, nothing has changed banks will continue to lend money and people will buy property before any other class of asset.

  • 36.
  • At 05:50 PM on 08 Mar 2008,
  • Mike wrote:

Comment #26 - P. Kelly.

You are my hero!

I'm out the UK once my current contract comes to an end. Moving to the sunshine in one of the best spots in Asia!

Britain's had it!

  • 37.
  • At 01:27 AM on 09 Mar 2008,
  • D. Stevens wrote:

The hard money addicts producted the last great depression. Even the current B of E czar, a hard money believer is ever there was one, has adjusted his approach.
Almost any price is reasonable to ensure the patient will live, and a depression of the 1930s style is tantamount to the patient dying. The pain and disruption of the 1930s 'death' can be reasonable construed as the prime cause of WW2, in that it provided the opportunity for the National Socialists in Germany.
Thus, I say, within limits, print money, create credit, have the governments / central banks accept doubtful bank debt as security for funds, do what's required to steady the ship. Yes, we'll pay the price later, but it'll be worth it.
Thus some combination of decreasing asset prices and increasing liquidity till we find a new equilibrium

  • 38.
  • At 05:21 AM on 09 Mar 2008,
  • Europa wrote:

To formulate the problem in the simples possible terms, the financial world has been underestimating risk for too long a time.

Let us throw away all the financial lingo and speak in layman's terms about the American economy. An average American that makes 40,000 dollars a year could afford to live in a 300,000 dollar home, watch a 50-inch plasma TV, and drive a new Toyota Camry thanks to easy credit provided unabashedly by profit-hungry banks. Simple reasoning can show that a 40,000 dollar income cannot sustain this way of life. In other words- for too long a time Americans lived a life that they could not really afford.

On the flip side, richer Americans wanted to get richer and became increasingly hungry for high-return and therefore high-risk investments. They bought repackaged debt recklessly and they plunged themselves into an abyss of risk. Again, simple reasoning (and statistics) will tell us that you can only take so much risk before the negative consequences blossom.

Both sides underestimated the dangers. So where do we go now? In my opinion, there will be a long period of adaptation. Though economic indicators may improve by the end of 2008, there will (and should) be a general restructuring of the way Americans live. We will have to learn to drive cheaper cars, live in homes that reflect our real earnings, and pick the Lenovo rather than the Dell.

  • 39.
  • At 11:21 AM on 09 Mar 2008,
  • rod wrote:

I find it a little difficult to have much sympathy for Carlyle Capital or the markets. They took on excessive risks with very little in the way of their own equity, often only a few percent of the overall value. They also often listened (as others have said here) to so-called experts who no doubt benefited from the bubble, so were going to do little to burst it.

Also it seems to me that much of the panic is due to implied risk, rather than fact. This has also led to a situation where people who were able to keep up their mortgage payments suddenly find their repayments increasing by 200% or more, of course people are going to struggle in that case - even if they are in exactly the same income situation as before. To me it points to banks and other institutions simply being greedy, however the greed is now coming home to roost.

Financial services are nothing other than a pyramid scheme and now this simple fact has hit home.

  • 40.
  • At 12:42 PM on 09 Mar 2008,
  • Jon Worden wrote:

Abraham Lincoln said that whenever you see ANYTHING happening in politics, you had better understand that it was all planned that way. ITS TIME TO WAKE UP! The bankers and aristocrats are manufacturing this mess, and that's why to YOU it seems like things are going badly wrong - but to THEM - they know EXACTLY what they are doing.
Do your homework on the 1920's crash and how the elite manipulate the markets instead of running around like a headless chicken trying to figure it all out.

  • 41.
  • At 02:05 PM on 09 Mar 2008,
  • phil brough wrote:

it seems like i am on another planet here in western australia it is boom boom the rest of australia is going down so few people here so many resources needed to be got out of the ground glad i left the coal mining of staffordshire thanks to you margaret thatcher i hope i am safe

  • 42.
  • At 02:19 PM on 09 Mar 2008,
  • robbie t wrote:

I dont see why everyone is bashing Mr Peston about his comments on the US govt injecting money into the system. From my reading he is simply stating what is happening and not making any political judgement on it.

Keep up the good work Robert! Sometimes it is best to hear an economist simplifying certain highly technical economic happenings rather than pontificating on minutiae that the layman is not able to relate to.

  • 43.
  • At 02:19 PM on 09 Mar 2008,
  • Jane Wisniewski wrote:

Glad to hear you are leaving P Kelly, Bitain, has had it - with whingers like you.

i don't understand

  • 45.
  • At 04:38 PM on 09 Mar 2008,
  • H. Busch wrote:

I am not an economist but what P. Kelly (# 26) has to say seems to ring true.

Can anybody help me with some advice? If we are facing substantial inflationary pressures, is it a bad move for a young couple in their 20s to buy a 1 bedroom flat in one of London's outer suburbs for around £ 210K? I am talking about my daughter and the sum freightens me, but on the other hand, how else are they ever going to get their own place?
Or should they just wait?

  • 46.
  • At 05:30 PM on 09 Mar 2008,
  • Yummy Carol Kirkwood wrote:

Re: #26 p.kelly


Here, here! Very well said.

  • 47.
  • At 07:15 PM on 09 Mar 2008,
  • john colinswood wrote:

I dont think that any of the comments made above by the so called intelligent people who beleive that they actually have a clue as to whats happening DONT? and hears a clue i dont either but at least i dont pretend to?

  • 48.
  • At 07:25 PM on 09 Mar 2008,
  • ACL wrote:

@35 Are you saying that island property prices will continue to inflate at this decade's pace or are you just talking about Britain.

If you're talking about all islands' property prices then please look up "Japanese asset price bubble".

If you are talking specifically about Britain's property prices then I think you are a bit mistaken in thinking that the credit crunch would affect everything else here but property.

  • 49.
  • At 08:15 PM on 09 Mar 2008,
  • Allan Gregory wrote:

Warren Buffet has it spot on. He calls hedge funds the latest "Ponzi scheme". Highly leveraged and a case of heads I win tails it's a draw. An accident waiting to happen and now it's happened. Derivatives that nobody without a PHD understands. What a joke-Ben Bernanke having to have lessons in August on financial derivatives and what they actually are. This is the start of meltdown-get in to gold now, paper money is finished.

  • 50.
  • At 09:07 PM on 09 Mar 2008,
  • Kv wrote:

I don't think it's a case of Hedge Funds being found out. They've been on the go for many years now. The problem was that every man and his dog who made a few quid in the bull market has started a fund and it will be they who are found out and have to go back to the day job.

  • 51.
  • At 10:01 PM on 09 Mar 2008,
  • Nick Gotts wrote:

GS said "Long live capitalism!"

When the market-worshippers start saying things like this, you KNOW we're on the edge of a really disastrous slump!

  • 52.
  • At 10:40 PM on 09 Mar 2008,
  • rod wrote:

Carlyle Capital is not contrary to popular opinion just another highly indebted, did I say leverage company? Oh, no its private equity. Anyway to see how the experts do it here are some hards facts from the world of CC (Private equity).

On 31st December 2006, they had 7,300m in assets and only 271m (all USD) in shareholders funds, having actually been in loss making situation.
Till 31st March this changed to 17,300m (assets) and only 621m in shareholders funds, having turned in a small profit and probably sold some shares.

So regardless of which year you take they only had a few percent of actual equity in the company.

I have minimal sympathy for these types of fund manager.. They knew the (high) risks!

Do you think any normal person would be able to borrow on those percentages to invest in anything? I think not...

  • 53.
  • At 12:17 AM on 10 Mar 2008,
  • jim wrote:

There seem to be some anti-establishment pessimists doing the round on this blog.

If we look at growth rates, globally it is clear we do not live in a zero-sum world. Markets are turbulant. Behavioural economics when we look at imperfect information and non efficient markets, also non credible central banking gives decent reason. The world economy needs some technological imputus; China's Solow Growth did not occur by chance. The American economy isn't as insulated as when Reganonomics took storm. The tsunami will pass. Sensible central banking, realistic inflation expectations and decent credit ratings will all be invaluable in these dismal times.

Isn't the credit crunch a symptom of the Asian rise & Atlantic decline?

Asia produces more, the US consumes on credit, capital flows from Asia (& the oil economies), recycled in London & New York, building a fictitious capital pyramid.

  • 55.
  • At 09:57 AM on 10 Mar 2008,
  • adam wrote:

my belief is that western economies will start to undergo a lengthy c.10 year unwind marked by a protracted bear market for equities and property.

  • 56.
  • At 10:06 AM on 10 Mar 2008,
  • Anonymous wrote:

"The Gods of the copybook headings"

Kipling...read it

  • 57.
  • At 12:03 PM on 10 Mar 2008,
  • Eddie ORiordan wrote:

Where has all the money actually gone surely not vanished into thin air - also what are the governments to doing to arrest people who have swindled lied and cheated house owners out of their property surely this is illegal ?

  • 58.
  • At 01:17 PM on 10 Mar 2008,
  • Timothy Bagot wrote:

I wish it would hurry up! I'm living at home waiting to buy a house! Get a move on and crash!!!

  • 59.
  • At 01:21 PM on 10 Mar 2008,
  • rod wrote:

It´s also worth keeping in mind that around 400bn in private equity debt funding is "in the pipeline" to quote some senior bankers... So the current problems at CC are only the tip of the iceberg.

I don´t think there will be a total collapse of the UK economy, but we are in for some hard times. Also hopefully it will lead to tighter regulation (to avoid another NR type situation) and more emphasis put on productive aspects of the economy, not just the pyramid world of financial markets. Even Mr Buffet is not fan of many of the complex instruments in use today, and I would say he is a fairly successful investor.

  • 60.
  • At 02:48 PM on 10 Mar 2008,
  • John wrote:

Am I missing something here - or are the Fed acting like muppets? Slashing rates out of cycle, throwing tax rebates everywhere, increasing the availability of central bank lending. Excuse me but my elementary economics tells me this is hugely inflationary as they are dramatically increasing the money supply. It might not work anyway, but the consequences could be dire and extensive. I am really glad to see the BoE is not panicking in the same way.

  • 61.
  • At 03:12 PM on 10 Mar 2008,
  • LouiLoui wrote:

When I was at school I got into an argument with the teacher around the merits of a planned economy. His fatal (for me) argument was that a planned economy would stifle innovation and enterprise and that no system could ever work due to the fundamental human trait of greed - a la Animal Farm. Someone would have to run the economy and they would always take advantage. These last few months have opened my eyes to see that the same undefeatable argument for the collapse of socialism or communism is the same cause of the downfall of the free market economy. Greed is, was and will always be the downfall of every economy. We may not be there yet, we may not see it this time, but in the future the greed of the few will collapse the world economy - and who will still be in the race when the free market economies are burning their worthless currency to keep warm? - that's right, the planned and closed economies. Step forward comrade Peston.

  • 62.
  • At 05:18 PM on 10 Mar 2008,
  • Tpaine wrote:

Hi post #57 fraud yes but not 'illegal. as defined by the central banks' you've not heard of the credit multiplier system? ( or fractional reserve banking as the US calls this undemocratic game of smoke and mirrors' it was created out of thin air it was never real in the first place.It doesnt grow on trees as my old mum says.
Here's a thought if a bank forcloses on a mortgage loan would it not be possible to argue legally that they didnt have the money to begin with they didnt have anything to exchange?

  • 63.
  • At 05:45 PM on 10 Mar 2008,
  • robert marshall wrote:

Is it just possible that so called Bankers of reputation and clout all belong to the same Masonic soceity?
And, can someone please tell us all why banks alone should be preserved when any other business that over geared or got involved with dubious customers so ending up the creek with out a the proverbial paddle and left to hang and die.
Banks have screwed up big time and must pay a major penalties. Governments must not allow them to cover their errors by fleecing the public any more and as for the £30k tax on earnings, in is inconsequential when put against their base and bonused earnings for any one year to date.
A Hilary Clinton commented on Obama, "Shame on you" Gordon Brown and Tony Blair for the mess you as First Lords of the Treasury and Chancellor have caused to this Country. You will be damned and rightly so for your legacies.
Please don't tell us that if folk leave here for Switzerland all is lost, for every 10 that leave there are hundreds of UK folk who could easily replace them and do just as good a job.
Isn't it about time the Authorities looked seriously at the Masonic Societies and worked out who belonged to what and which bank they also worked for?.
But then, silly me, how can they when we are unsure what police, judiciary and other forces of power silently support each other to the last at the expense of the hard working middle classes.

  • 64.
  • At 07:19 PM on 10 Mar 2008,
  • john white wrote:

Robert,

Please keep your eye on the Rock. Earlier today Tubby Isaacs gave me the nod that Ally D was far from happy as he tucked into a plate of whelks. Seems that the news from the FSA is causing him serious problems sleeping. A handful of minions have been fingered to take the rap for the lack of oversight of the Rocks affairs but the press are still calling for the Gaffer to bite the dust. Now Mother B is going ape and making all sorts of noises about why she is surrounded by yes men and incompetents who cannot find a suitable cupboard to house the body. Never mind credit crunch 2 we may be entering the phase when the Gaffer is forced to do the honorable thing and resign before Mother B has to ask him to leave the knees up.

  • 65.
  • At 09:10 PM on 10 Mar 2008,
  • Jaykay wrote:

The current UK housing market is overpriced by atleast 50%. Thanks to irresponsible lending practices by banks and active participation of speculators.The buy-to-let morgage policy has encouraged speculators to borrow upto 125% of the property price.Also banks have huge stock pile of cheap money(thanks to low interest rate policy). Unless the excess money is soaked from the system, the UK housing market(bubble) will continue to rise.

  • 66.
  • At 09:16 PM on 10 Mar 2008,
  • Philip Pilkington wrote:

I think its finally time for people to face the fact that these issues may stem from inherent structural problems within the contemporary manifestation of capitalism. In the past few years a number of decent books focused on economic history - a discipline shunned today due to the apparent odours of Marxism emanating from it - and yet their message doesn't seem to be getting beyond specialist publications. The pinnacle is Brenner's book on global economic turbulance.

It can be reasonably argued that the global economy has been in a state of crisis for at least the past 30 years and that both the wild speculation and the real economic decisions which it drives that we've grown so accustomed to, and indeed almost begun to praise as "innovative entrepreneurial activity", is in fact symptomatic of an overly speculative current running far ahead of the actual, material economy in order to keep the rate of profit from going into decline. The effects seem to be over-capacity and over-production - not to mention the havoc wreaked upon those in less fortunate economic circumstances... - which ensures that resources become grossly mismanaged and a sort of economic "entropy" (a wonderfully ambiguous word...) ensues.

Perhaps we should consider dropping the absurd radical capitalist ideology touted by many today and recognise that a new age of regulation and government intervention is perhaps what is neccesary; this considering not just the economy itself but also the impending enviromental and possible energy crises...

  • 67.
  • At 10:01 PM on 10 Mar 2008,
  • Yummy Carol Kirkwood wrote:

Re: #37 D. Stevens

The hard money addicts producted the last great depression. Even the current B of E czar, a hard money believer is ever there was one, has adjusted his approach.
Almost any price is reasonable to ensure the patient will live, and a depression of the 1930s style is tantamount to the patient dying. The pain and disruption of the 1930s 'death' can be reasonable construed as the prime cause of WW2, in that it provided the opportunity for the National Socialists in Germany.
Thus, I say, within limits, print money, create credit, have the governments / central banks accept doubtful bank debt as security for funds, do what's required to steady the ship. Yes, we'll pay the price later, but it'll be worth it.
Thus some combination of decreasing asset prices and increasing liquidity till we find a new equilibrium


Unfortunately, they've already used that bullet when they decided to avert a 1930's-style depression following the bursting of the various bubbles at the turn of the millennium (amazing how short people's memories are...) So they've tried the approach of unprecedented low interest rate levels and massive liquidity only to find it has resulted in the even greater problems that we face today (they might actually have pulled it off if they hadn't kept interest rates at ridiculously low levels for such a long period of time). Such an approach will not work a second time round, and the inflationary paradigm being adopted by the Federal Reserve (and which the Bank of England seems to be under immense pressure to follow by all the major players in the current UK Ponzi-scheme economy) will this time simply see the destruction of the US Dollar (that particular car crash is actually currently in progress for anyone that would like to watch) and the subsequent near-collapse of the US economy.

Fortunately, I think this time we might avert a world war (unless instigated by the USA's desperate attempt to retain its global economic pre-eminence) thanks to the rapid development of China, India, etc, who between them will take over the role of global economic engine.

  • 68.
  • At 11:31 PM on 10 Mar 2008,
  • Jel wrote:

Once, London operated on the principle that "my word is my bond". Then the Americans invented the Rating Agencies. At long last that particular pigeon is coming home to roost with a vengeance.
The thought you can measure everything is a perculairly American concept. It lost them the Vietnamese War. It'll lose them their economy. You can't measure honesty, you can either eliminate anything other (the old system) - or see open markets disappear as nobody believes anything about anyone any more.
When Captain Hull invented the Pine-Tree Shilling, many moons ago, he was trusted with a 5% commission - and paid his daughter's dowry in her weight of them. That kind of turn's insufficient for today's traders, and the equivalent trust's disappeared alongside it. The runs will be unstoppable not this time, but the next, once the Government's credit's shot.
One aspect of Carlyle is that it's like Halliburton, a Bush protectorate in the Texan Mafia. That period's coming to an end, and the vultures are gathering.

  • 69.
  • At 09:18 AM on 11 Mar 2008,
  • adam wrote:

pile into those put options, lads !! it's gonna be downhill all the way...

  • 70.
  • At 03:23 PM on 11 Mar 2008,
  • Martin Wright wrote:

Has nobody noticed that it was the easy and cheap availability of credit that caused this mess in the first place, so encouraging yet more excessive borrowing is not going to solve the problem, even if they try to call it "pumping liquidity into the system".

At this stage the solution is the exact opposite of what the central banks and politicians are advocating, namely what we need is for interest rates to be raised, probably substantially. Only this will encourage people to save (rather than build up debt beyond their means, which has been the policy in the past), and only savings will take the banks balance sheets off the critical list.

Yes it will be painful and yes this will be difficult fot the economy, particularly the British economy which is based almost entirely on consumption and speculation rather than production.

But I have news for the bankers and politicians - it's going to be painful whatever happens, in which case we'd be better off doing the painful thing that has a chance of working rather than something that at very best will not work and more likely will make matters much worse in the long run.

  • 71.
  • At 05:02 PM on 11 Mar 2008,
  • John Constable wrote:

It is now very serious.

I assume the latest flood of money from the Central Banks is related to last weekends meeting of the G10 in Basle.

I'm beginning to wonder if very soon, my newly acquired allotment will turn out to be the most valuable thing I own!

PS. Anybody know what 'the rich' are doing right now ... they usually find a way to protect their wealth when recession looms.

  • 72.
  • At 06:21 PM on 11 Mar 2008,
  • B the broker wrote:

Why is it that people who accurately predict the future once are assumed to have some special insight. Even idiots can get guesses right occasionally. Stop panicking about macro stuff and focus on the micro stuff you can control. There is no point worrying about the things you cannot influence and no point gambling on systems nobody can fully understand.

  • 73.
  • At 01:08 AM on 12 Mar 2008,
  • Yummy Carol Kirkwood wrote:

Regarding today's announcement of the huge injection of liquidity by various cenytral banks around the world: if the Bank of England has lent any money to any UK bank or building society, then (based on the Northern Rock precedent) that borrowing institution must be nationalised immediately. Failing to do so will give former NR shareholders plenty of legal recourse to challenge the actions of this most financially incompetent of Governments.


(BTW, Martin Wright: yes I for one have noticed that the excessive, cheap credit of the past few years is the cause of our current woeful situation - see http://www.bbc.co.uk/blogs/thereporters/robertpeston/2008/03/credit_crunch_20.html )

  • 74.
  • At 12:35 PM on 12 Mar 2008,
  • Stephen North wrote:

I read terms like banks unwilling to lend to each other because they do not trust the other bank to have have sufficient assets. If a bank is unwilling to lend to any other business on this basis they would be classified as insolvent.

Are the banks insolvent?

  • 75.
  • At 11:15 AM on 13 Mar 2008,
  • Ganesh Pai wrote:

Robert,
Could you please tell me in which sector would the next bubble pop up. IT and Housing is ruled out.

  • 76.
  • At 08:22 PM on 13 Mar 2008,
  • Richard Hartshorne wrote:

Should we worry that many big corporations have high gearing ratio's? Anyone like to comment?

  • 77.
  • At 12:32 AM on 18 Mar 2008,
  • Yummy Carol Kirkwood wrote:

Re: #75 Ganesh Pai

Could you please tell me in which sector would the next bubble pop up.


My money would be on commodities. IMHO they are just a few years into a MAJOR bull run. This will see large rises and falls along the way, and invariably it will eventually turn into a bubble.

But I don't expect that to happen for many, many years yet...

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