How much should banks cut rates?
Spare a thought for those poor misunderstood chaps who run our big banks.
They've been bashed and battered for causing our current mess, by lending far too much too cheaply in the years preceding the onset of the credit crunch in August 2007.
And now they're being duffed up for making a more realistic assessment of the true risks of lending, and therefore failing to pass on all of the 1.5% reduction in the Bank of England's policy rate to borrowers.
I'm not being flippant, by the way. There is a serious point here.
We can't have it both ways. If, which is the case, the cause of our woes is that lenders lost sight of the true risks of lending - and you'll also have heard that diagnosis from the Bank of England and the Financial Services Authority - we can't really react with total outrage when the banks attempt to set the interest rates they charge us at a level that captures the probability that some of us won't be able to repay.
And, to tell you what many of you know from painful personal experience, the risk of a borrower defaulting rises when the economy shrinks in just the painful way that it is doing right now.
But, you'll say, the economy would shrink less if only the banks would lend more to small businesses and homeowners and at cheaper rates.
The banks are surely shooting themselves in the foot by restricting the flow of credit and increasing its cost, because in doing so they are turning our troubling economic plight into something rather worse.
You'd be right.
Where as it's wholly rational for any individual bank to take a much more cautious and conservative approach to lending, it's wholly irrational for all of them to do so at precisely the same time, especially when the economy is so weak.
That's of course why the Bank of England has reduced what it calls its Bank Rate by far more, 1.5 percentage points, than it's ever cut before (or at least since taking control of setting rates in 1997).
The Bank of England knows it can't be certain that the Bank-Rate reduction will be passed on in full in lower mortgage rates or cheaper money for businesses.
It's slashed enough, however, to be confident that a useful proportion of the reduction - perhaps half - will be passed on.
Now the really important point to understand is that the Bank of England can influence the cost of money for the banks, which in turn determines the rates that they can afford to charge us, but it does not set the cost of money for them in a mechanistic and precise way.
If banks were able to borrow from the Bank of England all the money which they then lend to us, then of course the Bank of England could set the interest rate we all pay.
But most of banks' cash resources, what they need to provide loans, comes from elsewhere.
It comes from us, in the form of the balances in our current accounts and whatever savings we have in our deposit accounts.
It comes from managers of hundreds of billions of pounds, who lend to banks for short period and for longer periods.
And it comes from other banks, since banks also look to each other for funds, to smooth out the peaks and troughs in their cash needs - via the now famous interbank market.
To a great extent, what really matters for the banks, when setting the interest rates they charge us, is what all the money raised from all those many different sources actually costs them, when it's all lumped together and averaged out.
Some of that money still costs them nothing or almost nothing. I'm talking about the funds that some of us still keep in current accounts that pay zilch.
But, as I pointed out in my recent note ("Why interest rates aren't falling") the cost of obtaining any substantial funds - especially from those money managers that look after squillions - has been rising since the onset of the Credit Crunch. And the main reason is that money managers believe the risk of lending to banks has risen very sharply, and they therefore want to be compensated for that additional risk.
So what is the average cost of money for our banks?
Well, it's not the Bank of England's 3% Bank Rate. Apart from anything else, that's a rate for borrowing overnight - and it would be foolish even by their standards for banks to set interest rates on loans to us with maturities of three months, or two years or five years on the basis of what they have to pay to borrow for 24 hours.
A traditional proxy for their average cost of money has been the three-month LIBOR rate, which is what banks pay for unsecured loans from other banks of three-month duration.
However, there is controversy over whether that rate is quite as accurate a measure of the genuine cost of funds as it once was.
But, for what it's worth, those who operate in the market believe that three-month LIBOR will fix at just under 5% this morning.
Which would mean that the Bank of England's 1.5 percentage point cut had reduced the cost of money for banks by around 0.75 of a percentage point, perhaps a tiny bit more.
There is therefore an argument that mortgage rates and loans to businesses should be reduced by at least 0.75%.
And if banks fail to do this, well then the Chancellor - and the rest of us - are probably entitled to biff the banks.
That said, the Chancellor is not quite the innocent bystander in all of this.
As you'll recall, he recently rescued the banks with a £400bn taxpayer-funded package of capital injections, guarantees and loans.
A very important part of that was a commitment to provide taxpayer-backing for £250bn of tradable debt issued by banks with maturities of up to three years.
To translate, we - as taxpayers - will stand behind a bank when it borrows from financial institution. We're saying we'll repay the banks' debts if it can't do so.
The Chancellor understandably took the view that if taxpayers are in a sense insuring the money being borrowed by banks, we should be paid for that insurance.
But the cost of that insurance isn't cheap. It's working out at between 1.2% and 1.7% per annum of the amounts being borrowed for most banks.
That's 1.7% that has to be added to the 4 per cent or so interest-rate cost of the funds being raised.
In other, the price of money for banks under the government's own sponsored scheme is somewhere over 5%.
It's therefore very difficult to see how the banks can charge us less than the 5% that the Treasury is demanding they pay for the vital taxpayer-backed funds they need.
Unless, that is, the Chancellor were to decide that the banks should be transformed into loss-making public utilities.
UPDATE: 13:05
Three month sterling LIBOR has in fact fallen just over 1 percentage point to 4.49%. There will be intense pressure on the banks to pass this cut on in full, at the very least in the rates for new tracker mortgages.
I'm 
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They should cut them at all.
We should be cutting taxes
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So banks are damned if they do and damned if they dont, how sad never mind
If they had had the forseight to see this predicament, which judging by their pay scales and bonuses, one would have expected them to have seen this coming then we would not be having this discussion, unfortunatley GREED overcame common sense and now they find that Joe Public expects to see some action for all the Tax Payers money pumped into these organisations presided over by pompus asses in glass towers.
and what action do these banks do, withdraw all the tracker deals on the same day that the BoE cuts the interest rate, brilliant move chaps, so glad you are in charge.
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'loss making public utilities' - great! Lets have more of these. The more this crisis unfolds the more we seem to be in a 70s timewarp.
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Robert, A great and perceptive analysis as always. However, there is the question of culpability and moral responsibility to be considered here too. Many banks are now in receipt of public money and ALL banks are individually and collectively responsible for this mess. If the price of business is currently to make a loss they must learn to do what all businesses have to do from time to time - and eat it.
If they are bothered about that perhaps the time has come to plough some of their obscene bonuses back into their own firms?
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5% plus or minus half a percent is a reasonable rate to be charging for mortages in the current climate. 2% is a reasonable price for risk, and would offer the banks a chance to rebuild capital bases, and repay the taxpayer.
I don't think there are too many people calling for mortgage rates of 3%. No-one wants, or should want, risk priced at 0.
On the other hand, there is no excuse for lenders keeping their standard variable rates at or around 7%. Those lenders who do so should face the threat of legal action for extortion.
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Conceptually, there's a simple answer: the banks should be encouraged - if not forced - to deploy conventional risk management assessments.
So - mortgage for a buyer with a good steady income putting down a very big deposit = very low risk = lowest-possible interest rate
Shaky SME with no order-book beyonf Xmas = very high risk = high rate or indeed no loan.
Because we are in such big trouble - it's self-referential, the 1.5% cut proves it - this is the only answer.
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Do we have state controlled media in this county now?! Looking at all the newspaper headlines this morning blaming the 'bad, greedy bankers' for not passing on rate cuts made me wonder how free our press really is. GB and his government must have influential friends! They know the sums don't match but they want 'the masses' to blame someone other than them. And all this media tosh about GB being a great leader in all our financial turmoil - it's so ridiculous, how / why are the public buying it?!!
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Robert, you say the banks are criticised for lending too much too cheaply - I dont think thats true, surely they loaned too much to people who could never afford to pay back, almost regardless of the interest rates. The so called sub prime market.
By penalising good commercial risk companies and individuals they are expecting us all to redeem their mistakes. They should pass on the rate reduction in its entirity.
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Inflation of asset prices in which households and industry borrow more and more against the rising price of their collateral
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Seems simple enough to me - how can they be expected to lend money at 3%, and pay interest at 6/7%?
Either they needed the bailout to not go bankrupt, or it was to lend out even more money for people to buy overpriced houses.
If they want to stay out of bankruptcy, then forcing them to lend out money, and charge interest on repayments, cheaper than they give out interest on savings, sounds like a good way to be asking for another bailout in short order!
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the banks should convert all trscker mortgages to fixed rates for 2 years, raise their interest rates dramatically, and the government should get the bail out money back and use it for massive tax, vat and paye cuts for anyone earning less than £35,000 a year. Also tangible support for small businesses. Cheaper than all the benefits they are very shortly going to have to pay out.
Alsoban credit cards and unsecured loans - encourage people to save not borrow.
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It's not low rates (alone) that have caused the problems but the banks lending 5 x salary etc for a mortgage.
If there was legislation in place (wake up FSA) limiting how much people could borrow, then we wouldn't be in this situation and house prices wouldn't have risen too far either.
Rates are not the real issue here.
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Bankers bashed and battered? Duffed up?
If only.
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Excellent blog. Explains the dilemma very well. It also explains why the BoE made such a substantial cut in intersts knowing that perhaps only half of it, if that, would be passed on to retail borrowers.
I suspect this myth of 'cheating bankers' will fade from even the tabloids soon as people realise that the banks' hands are actually tied for the time being.
Thinking back to the last recession in the 1990s, there was nothing like the media hysteria we have today. People knew times were tough and quietly got on with the job of working their way through it as best they could. And we did get through relatively quickly. This time people are furiously - and understandably - battening down the hatches in response to the media hysteria, which is making matters far worse than they should be.
Here's a thought, then. This recession may just turn out to be nothing like as bad as people think. Looks to me like a great time to be investing.
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Sadly Robert Peston fails to mention the central issue issue here: banks have techniques and technology to identify and measure risks... whether in buying assets, in lending or in borrowing. They've failed to manage these risks properly... hence the credit crunch. What they need to do now is to use this know-how to segment markets which entice deposits and make loans in ways that are helpful to sustained economic growth.
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What you are arguing in effect, Robert, is that the base rate cut, however large and dramatic, is only going to have a marginal benefit on the economy at large.
I could not agree more.
If it keeps some people in jobs they would have otherwise lost and other folk do not get their homes repossessed then all well and good.
It is not a cure for our woes. There are only two forms medicine which are appropriate: time and hard work.
We are going to have to have a lot of both before we see the back of all this grief. I just hope there is enough hard work to go round everyone.
All we need now is a government that encourages it!
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The Banks have to deal with the after effects of inflation of asset prices in the same way that households and industry have borrowed more and more against the rising price of their collateral.
They still have to pay the existing debt off with equity that has shrunk significantly or vanished all together
The Interest rates charged become a blunt instrument that have little or no effect. The question therefdore, becomes futile.
You have to change the thinking away from making the rich richer to making the poorer richer. You must cut taxes to allow the poor /middle class to have SPARE cash to pay off debt and/or BUY goods instead of encouraging to people to lborrow on unstable foundations that the financial institutions are unable to or wont lend to anyway
The Bottom line is always more important than the top line!
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There have been many comments on this site over the months that this would not work. Britain is in the proverbial and Brown is simply pouring BILLIONS of OUR money to save his own skin. Where are all the muppet MP's and HM's Opposition party.
Stop the waste, stop the irresponsible lending and STOP now, this Governments mad, mad, mad spending by out of control departments
Will Brown bring in exchange controls when those "prudent" and hard working people decide to look overseas for an acceptable return on their earned and taxed savings.
Had enough
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If nothing else the global credit crisis has demonstrated in a clear and consise way how complex and confusing banking is. Perhaps it would be a good time to simplify it. This would help us the public and banks understand it!
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This time Robert you have it completely wrong. Prudent lending is about ensuring the borrower has the ability to repay and not allowing them to enter into a commitment they cannot fulfil. At the same time the value of any collateral offered for the borrowing must be accurately assessed. In cases where the asset value of the collateral can vary then an appropriate margin of safety for the lender should be allowed. In simple terms the lender insists on a large deposit (25% or more) when lending against property. Good quality lending means lower interest rates for the borrower because the risk to the lender is less. Banks have been lending recklessly at low rates and thus not pricing in the risk they were taking. In addition the banks have been borrowing short term in the wholesale money market and lending long for mortgages. This is a recipe for disaster - another high risk strategy that was not priced in either. The tax payer having bailed out the banks to save the shareholders who would lose most, they (the shareholders) should be only too pleased to allow their saviours some relief. Moreover, the move is essentially aimed at revitalising the economy. If the banks put two fingers up to it they will only have themselves to blame as they write off even more debt - not toxic debt - but borrowing that even quality customers cannot afford to repay.
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Irresponsible lending and speculation appears
to have caused the crash.
The solution appears to be further partly risky
lending to stimulate demand.
Will this "hair of the dog economics" work?
Perhaps yes in the short term, but I fear the
longer term heralds higher taxes and higher interest rates.
And where does the money supply sit in all
this? Will Governments simply be tempted
to print more in a short term fix?
Savers who supply capital to the system have
barely been mentioned.
How are they to be kept on board with drastic interest rate cuts
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Thump. That was the sound of me fainting. Mr Peston actually being polite about British bankers? Surely some error? is he not feeling well?
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Surely the banks should cut their interest rates accordingly BUT only lend to people/businesses that can afford to repay the loan. Isn't this what they should have been doing all along in the first place and why we are getting into this mess. If they had applied this principal all along then loans would never have been available for all and sundry who couldn't pay them back. Even now I still get mail through the door offering me instant loans for many thousands of pounds from companies I have never dealt with. I suppose some things will never change - sell a loan and make our books look good then we get our huge bonuses.
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All the main parties are WRONG to support lower interest rates.
1) will cause inflation sooner than they might think
2) Will weaken the pound (see (1) )
3) Will discourage saving, which is exactly the opposite of what is needed
4) if too much debt is the problem, how is more, cheaper and easier debt the solution?
It is also misguided to demand that the rate cuts are automatically passed on. The banks need recapitalising, and they need to price correctly the risk of making loans. As Mr Peston says, they got this badly wrong before, and two wrongs do not make a right.
I fear for the economy in 12-18 months time, with high imported inflation, shrinking GDP and collapsing tax receipts. IMF here we come - 1976 all over again.
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Isn't there another issue too? Banks have to cut interest rates for their tracker mortgages when the base rate comes down. Interest rates are now so low that margins on these morgages must be close to zero. This obviously affects their profits, so they have to try and make this up somewhere by keeping rates higher for all other loans.
And don't say that they should make do with lower profits - they're going to have to do that anyway because the volume of lending has collapsed and they're going to have to write off billions in bad loans.
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Bob
You missed the point that in fractional reserve banking they lend the same money multiple times issuing new debt.
In essence they borrow £1000 from BoE at 5% cost £1050
they then lend that £1000 ten times over.
If they charge 0.5% interest they would profit £9000 as the return would be £10050.
The con that all banks perpetrate is that the savings rate or the rate they borrow the money at has anything really to do with their lending rate.
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FINALLY, Robert Peston begins to acknowledge that interest rates are too low.
"How much should banks cut rates?"
The premise of this question is wrong, as clearly illustrated by the actual body of your blog. The banks have insufficient funds and need to attract them ("the cost of obtaining any substantial funds - especially from those money managers that look after squillions - has been rising since the onset of the credit crunch"); ergo, the banks need TO RAISE INTEREST RATES.
Or another way to look at it: lubricant is too expensive, so let's just continue trying to drive this car without any lubrication for the engine, no matter how slow we have to go or how much irreparable damage we do.
And so the financial madness continues...
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To a man with a hammer, everything looks like a nail.
Gordons tool box is too limited.
Banks going bust is not as serious as small businesses and individuals being made bankrupt.
Gordon is trying to fix consumer problems by working with the banks, instead of addressing the consumers directly.
If he wants to do it via the banks (he is wrong to do it this way, but we are where we are) then let the banks charge what they like, tax it off them and give it back to the customer as individual tax cuts.
Simple.
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I know we all blame the bankers which yes so we should. But, we should also blame the greedy estate agents. It is through the estate agents sheer greed and that a lot of people are in this mess by out pricing homes from the first time buyers.
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Did I hear Robert telling us on Today that the credit crisis happened because the banks lent too cheaply? If so, that's today's Pestonism. Surely the key word is not cheapness but responsibility? I have a radical proposal that may help: set up mutual savings and loans companies for house purchase which have a margin of a half percent between borrowing and lending- enough, because there are no shareholders. Ensure that they lend responsibly, with fixed lending limits- and only lend their own money to people who are "members", perhaps with an established saving record. This tends to restrain house price hyperinflation. Allow them to fix rates openly between themselves, remaining responsive to their members and the national interest. A good name for these local groupings could be "Building Society" -reflecting mutuality and solidity.
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It looks like today's blog is trying to soften us up, so that we don't blame Alistair Darling for not doing more when bank's don't pass the full 1.5% cut.
Your final comment on the blog confuses me:
"Unless, that is, the chancellor were to decide that the banks should be transformed into loss-making public utilities."
According to figures quoted elsewhere yesterday, only 10% of mortgage borrowers are on variable rates - 50% are on fixed rates unaffected by the rate decrease and 40% are on trackers which will automatically decrease by 1.5%.
Are you honestly trying to say that banks would become "loss-making public utilities" if they reduced the variable rate which just 10% of mortgage holders pay by 1.5%?
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People in Britain already have low interst rates to pay on a mortgage?
The problem as we all know (or will soon realise) is really with the amount that people need to pay this interest on or in other words, a stupidly high mortgage because of stupidly high house prices.
Gordon & Co are playing catch up as they allowed this mess to happen in the first place through lack of regulation.
1, The root cause of this is because of cheap money be made available to the general public (who are mostly financially ignorant - sorry but its the truth as they genuinely believed that house prices would continue to rise forever)?
2, Cheap money was available because we had low interest rates.
3, We had low interest rates bacause we had low inflation figures.
4, We had low inflation figures because of the method which was introduced by labour back in 1997 (The CPI inflation calculator which doesn't include house prices - hence why house prices have gone up approx 300% since 1997).
What I now find amusing (or very worrying if I was to be perfectly honest) is that when Labour first got in back in 1997, I remember a certain person saying "No more boom and bust" and "we will not allow house prices to get out of control"?
The way Labour tried to do this was by introducing an inflation calculator which as I have already mentioned, doesn't include house prices or council tax BUT does include DVD players which is very handy as we all buy DVD players on a weekly basis and need them for shelter)???
No wonder our contry is in the mess it is now and has very worrying debt levels......
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#24 and others
It sounds wrong that since low interest rates and cheap credit caused the problem, that low interest rates and cheap credit are the solution.
But November 2008 is not April 2007. In the heady pre-crunch days, the excesses needed curbing. Now the pendulum has swung too far the other way and no one wants to lend any money or buy anything.
What we need now is ways to stimulate the economy, not slamming the credit door shut. That is what caused the Great Depression.
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The one lender that the government does have power over, is of course, Northern Rock- and they have the highest SVR of all the mainstream banks- so we'll wait in anticipation for them to drop their rate by the full amount!!
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Dear Robert
Please explain (in very simple terms) to the people who write BBC News 24 scripts why a cut in the official rate does not mean the banks have been passed a lower rate which they can pass on. Please ask them to stop talking about "passing on" the cut as if the banks were were playing pass the parcel.
Please try to take over as editor of all economics news on 24 so we shall not have to listen to the drivelling nonsense put out by the clowns who currently produce it.
{Perhaps you would also explain that the RPI/CPI does not stand at (say) 4.6% and that neither a year on year increase in an index nor a greater increase than a month ago means inflation has risen; especially in todays turbulent times}.
Surely it would cost less (and create greater benefits) to employ competent staff instead of Jonathon Ross.
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Re: #12 DavidJWest
It's not low rates (alone) that have caused the problems but the banks lending 5 x salary etc for a mortgage.
If there was legislation in place (wake up FSA) limiting how much people could borrow, then we wouldn't be in this situation and house prices wouldn't have risen too far either.
Rates are not the real issue here.
The banks were prepared to lend 5x salary, as you say, because the associated payments were affordable. And the associated payments on a 5x salary mortgage were affordable because RATES WERE SO LOW.
Rates are entirely the issue. While this sort of denial is so pervasive among the population, we stand very little chance of addressing this country's dire financial situation.
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Which is what I've been arguing here for weeks. HMG has lost control over the retail market by which they will be judged within the next year or so, there are two clear layers in the banking industry, separate them. That way there's a clear view of individual credit and corporate credit, and each can be sorted out separately. As HMG already owns a big chunk of the retail sector, and Lloyds are playing poodle for most of the rest, it must make a huge amount of sense, particularly to the Inland Revenue, to finish the job. That will effectively nationalise the black economy as well, boosting the figures back out of recession...at least on a statistical basis.
As far as the corporate sector's concerned, killing some of the bubble-blowers also makes sense. The churn of the markets is so massively ahead of the true trading positions there's little possibility of avoiding such embarassing exposures as happened with Porsch-VW again unless they're reigned in royally, it starts to stabilise the balance sheets which are probably rather reminiscent of Barings' at year-end 1994, when Leeson reported profits of 102m, but was hiding a loss of around 200m versus 350m capital. However, by keeping digging, within the next two months he turned that 200m into 827m losses, uising exactly the same techniques used by the markets as a whole.
The banks can thrash like fury as much as you like, but all they'll do is make the situation worse. It's time Inland Revenue, under NAO management, to audit every single bank's accounts as at 31.12.2008, transfer the audited accounts into a new set of books and then apply the Enron principle to any subsequent dealings in unaudited accounts - life sentences as an option to concrete boots in Canary Wharf.
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Taking a proper assessment of risk is applaudable. However I don;t see how this relates to not passing on a rate fall. The risk is represented by the margin between risk free (or base) rates and those offered. Not passing on the rate fall means this margin has increased, but that has happened becasue rates have fallen, not a new assessment of risk? Robert, you assessment only holds if a highly conicidental risk reassessment happned at 12pm yesterday to incredibly happen to conincide with the new risk free rate? The truth is the banks use delays in passing on rates as a way to make additional margin, the risk assessment is an entrely separate issue, that has already seen the cost of mortgages increase over the past number of months (including a massive growth in the fees cherged).
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Well put, but Ill ask the ? again which CofE
put pressure on the Banks to offer cheap money in the first place
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How about a saver strike? If all of those people lucky enough to have savings were to withdraw the lot en masse from any bank which failed to pass on some of the savings the banks would learn quite quickly. The one thing consumers should have learnt from Northern Rock is that depositors can now dictate terms to the bank, not the other way round and maybe its time we exercised that power.
They are quick enough to reduce interest on credit balances so all they are doing is extending their profit margin while shooting themselves, and us, in the foot.
Same applies to the gas companies. gas is tied to oil , or so they said when they put swingeing increases on so when are we to see the reductions now oil has halved? Don't hold your breath waiting! The fat cats are alive and well and fiddling away while rome burns
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#5 "On the other hand, there is no excuse for lenders keeping their standard variable rates at or around 7%. Those lenders who do so should face the threat of legal action for extortion."
Will the government sue them ?? And how will they prove extortion when the government themselves are the main cause by demanding 12% returns on their "loans" to the banks ??
Perhaps the banks should add the 12% on top of the BofE rate of 3% and charge that 15% as the "government sponsored" rate !!
Gormless Gordon's big mouth has put Darling in that most unenviable of position - between an immovable object and an irresistible force !! What's the betting he may go gaga from the stress ??
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I have absolutely no economics brain whatsoever, but from my background in science this seems to be a classic positive-feedback loop, so far with no sign of anything to correct it.
What are the chances that a mass of savers will start withdrawing funds chasing the best of a bad bunch of rates and trigger a run?
The banks can't afford to reduce rates for savers as they need all the depositors they can get, so there is no way they can pass on the full rate cut to borrowers and still 'reward' savers.
Cutting rates for borrowers and maintaining rewarding rates for savers would be suicide, lowering rates for borrowers and savers would trigger a run. So status quo at best, no rate cut for borrowers and lower rates for savers at worst. And it is open to debate what impact, if any, an increase in borrowing would achieve other than a short respite followed by the points raised in #24.
Seems that we've been pushing a large bolder up an ever-increasing gradient. The further we climb the heavier it gets and the weaker we become. The weakest of all developed economies according to the IMF, as we've been using unprecedented levels of personal debt to lever the boulder higher up the hill than anyone else, the inevitable consequence is that we'll be first back down to the bottom.
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Re: #32 fancythefunkymonkey
4, We had low inflation figures because of the method which was introduced by labour back in 1997 (The CPI inflation calculator which doesn't include house prices - hence why house prices have gone up approx 300% since 1997).
I agree with the other points you make, but the main reasons for the low inflation environment at the beginning of the millennium were twofold: a deflationary effect from the bursting of various bubbles (principally dot-com/stockmarket) and the importing of deflation from developing countries, principally China (manufactured goods), India (services) and new EC entrants, eg. Poland (workforce).
That's not to say that I'm any sort of fan of New Labour or that I think CPI is a particularly good or appropriate way to measure inflation in the UK!
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#31 It is not just the old mortgages that will be affected by the rates and that is the crux of the problem. When many are talking about lending, it is not about just the mortgages *lent* but new loans, be they mortgages or business loans !!
It is these new loans that will bear the SVR and if the borrower is not completely sound or cannot provide sufficient (and sufficiently good) security, the risks involved will be factored in. The days of "self-assessments" are over !! Even grandma's dentures may have to be thrown into the pot as security !!
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Giving the full rate cut to new customers may not be in the best interests of anyone, after all, do we need to fuel yet more debt based growth just to fend off a recession? That is certainly not going to be a tenable position for very long, and at some point in the time the debts have to be paid. However, it would be in both the interest of the banks and their customers to reduce the interest rate for those with outstanding mortgages and loans, as not doing so will in some cases lead into arrears and default, which would serve nobody, not even the banks. Why would they want to be lumbered with depreciating properties they most likely will have to take a loss on?
A worrying things for me is that the fully taxpayers owned Northern Rock is punishing its own customers by giving very high and uncompetitive rates when they need to renew their mortgages in the supposed policy of forcing them to re-mortgage with a competitor, sadly, many if not most of them can't do that, so they end up with punitive rates of over 7.5%, no ability to move and the only option looming on the horizon is defaulting and loosing their homes. How stupid is the Govt. in not sorting this out? What benefit do we as a country gain from doing this? Surely the proper situation would be to offer competitive rates to them or else to actually ensure a move to another bank if they really want to wind business down, not punish their customers, who by dint of being taxpayers are also stakeholders.
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Rather than bailing out greedy, moronic, dullard bankers, the Government should have created a Taxpayer bank; preferably with someone having actual business nous heading it up, i.e. not Gordo!
Most banks have, over the past few days, removed every trace of tracker mortgages, and so far (I think) only one big bank has cut its SVR. Fees for fixed rates are now exorbitant, making some of the rates themselves utterly pointless, as the fee costs more than the extra interest. This is not good business practice however you look at it. It's synical, short-sighted, shambolic and they should all be brought to book!
There should now not be a mortgage rate of more than 5.5%, for those who represent little risk to the bank. Headline rates should likely be somewhere between 4.5% and 5.0%, but, as it should always have been, each mortgage should be assessed case-by-case by a competent advisor, not someone with nothing more than a couple of months training behind them.
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Surely the problem was not the interest margins that charged but the ridiculous loan to values that the Banks lent on.
There is no rationale reason for there to be a greater differential between 3m libor and base rate today than there was yesterday
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So if I read this correctly the BoE rate is meaningless! They might well of cut it to 0%, or less, it makes no difference. So what exactly is the point of MPC if rate setting is not only not followed, it is not even expected to be followed. Jeez.
As for the interest issue from the banks perspective are you also telling me that underwriting all that these clearly idiot banks borrow is worth just 2% interest? Oh that the bank would lend to an insolvent individual at 2%.
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All we are seeing is the fact there is no quick fix. If there is a very big hole it is difficult to fill and the taxpayers money remains light against the true size of the problem. There remains an amount of political posture which ignores the reality of the situation. A lack of progress at the rate the politicans want will come back to haunt them.
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Increase Interest rates and decrease taxes
MAKE people SAVE for their SUPPERS and not SPREAD their small salarys over years of high interest rates in a lower base rate economy.
People do not have the ability to borrow
on
1. Their assets (houses)
2. Their careers(strudents)
3. Their fraud
4. Their salaries
Banks can not have the ability to lend on
1. Cheap interest rates
2. Large multiples
3. secure jobs
4. Sound balance sheets
You have to change the model. Period
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Re: #33 sal196
#24 and others
It sounds wrong that since low interest rates and cheap credit caused the problem, that low interest rates and cheap credit are the solution.
But November 2008 is not April 2007. In the heady pre-crunch days, the excesses needed curbing. Now the pendulum has swung too far the other way and no one wants to lend any money or buy anything.
What we need now is ways to stimulate the economy, not slamming the credit door shut. That is what caused the Great Depression.
You finally hit the nail on the head in your final paragraph. But lower interest rates won't increase the availability of credit, and therefore won't stimulate the economy - even Mervyn King publicly acknowledged this several months ago. Look what happened to the banks last time they increased the availability of credit at ever lower rates. As Einstein said, insanity is doing the same thing over and over again and expecting different results. So no, the cause of the problem cannot also be the solution.
Higher rates will lead to increased credit availability (albeit more expensive credit). Lower rates will lead to reduced credit availability. Go back to my engine lubrication analogy in post #27.
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Let see if commercial banks can reduce interest rates:
If you run a bank you have a fixed overhead. (or nearly fixed) You need to at least cover the cost of this overhead and return to your investors the return they demand.
If interest rates are lowered and you are unable to increase liquidity (this is important) then you earn less money and so have less to cover your costs.
So the higher the interest rate the better off you are. Now, if you could increase liquidity it would not matter you could just lend more to each person to maintain your income - but THIS IS EXACTLY WHAT GOT US INTO THIS PROBLEM!
It seems that the Treasury, the Chancellor and the Prime Minister do not understand how a bank works, yet again. Nor have they learnt anything from the Credit Crunch.
(PS If you reduce interest rates to savers you compound your problem of needing liquidity as savers will take money away!)
In the short term interest rates may go down a bit but there must be the very clear understanding that rates must be very much higher if the economy is not to continue collapsing with another property bubble and far more serious credit crunch. That would be insane - but highly likely given the standard of intellect of the people at the helm.
My guess is that a mini boom will be engineered long enough for Gordon Brown to get himself re-elected and them the real trouble starts.
Why can't we have a National Government now rather than breaking the fundamental rule of when in a hole, stop digging?
Lowering interest rates = digging a bigger hole!
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The fact that bank interest rates are reduced to 3.5% does not oblige the banks to lend to everyone who asks (regardless of their ability to repay). The point is that those who can reasonably be expected to meet repayments should benefit from the reduction on interest rates. The banks still have a responsibility to exercise judgement (and obtain accurate income information) before lending at whatever rate is in existence
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Anybody here fooled by Abbey Santander that they are reducing their rates. this from the bank that put them up intentionally the day before.
Vote with your cash people. Abbey santander should be boycotted and all money withdrawn immediately. especially those of you from the B and B that were forced into the group.
I know this mean a salary decrease for "our" Lewis, but lets face it he's got a bob or two anyway.
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The main control mechanism which the "Government" has for the economy is interest rates. If these are disconnected from the real economy then the true controllers of the economy are the banks.
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#40 "How about a saver strike? If all of those people lucky enough to have savings were to withdraw the lot en masse from any bank which failed to pass on some of the savings the banks would learn quite quickly."
How brilliant !! Just what the banks want !! When the savers withdraw all their savings, the banks will gleefully point to this and demand more money from the government !! Meanwhile they will say that they have no more money to lend because those nasty, greedy savers have taken it all away !! It will also give them an excuse to jack up the interest rate of the old loans because there is no more cash !!
Meanwhile, muggers and thieves will have a field day with all that cash floating about !! And when they spend their ill-gotten loot, they will revive the economy !!
Solves the problem at one stroke !!
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This makes very interesting reading. I suppose the paradox is that, in taking a stake in the banks, we appear to have taken control of the means of production, but that the market is now so complex that no government is in a position to set the price of anything. After all, if the Government is going to borrow hundreds of billions of pounds, its role as a lender has to be seen as more than little diluted: beggars can't be choosers.
In any case, it all comes back to one central problem: we depend upon the market; all our business models are based on the idea that we can and therefore should grow through debt. So we need to mend the market - but that market, as we understand it, only functions when making the kinds of decision which brought us low in the first place.
The end product of that is always, in every cycle, traumatic - and perhaps more so if, as is the case now, the end of the cycle is delayed: we have more fat to burn off, and are less accustomed to slimming.
Frighteningly, the answer may be to accept that there is no answer; averting a slump now may just be a way of magnifying the next wave.
By the way, I have a good deal of sympathy for the thinking behind the idea of banning excessive borrowing. In some ways, however, you could argue that, in a capitalist society, access to credit is absolutely crucial to social mobility, whether in terms of launching a business or buying a house. Without big loans, no-one can become a home-owner, or own a business, who has not inherited the cash.
Debt, in other words, is democratic.
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So the truth at last. It is about time that trying to run the economy through a geek committee fiddling with interest rates is seen as folly.
The Government needs to take wide radical fiscal and regulatory measures to recover the economy and avoid mass unemployment and increased poverty.
Tax cuts for low income families, increase minimum wage, reduce VAT to 15%, and balance by bringing in 50% and 60% marginal rates for the highly paid.
Try credit unions for local small businesses, pump primed and underwritten by the Town Halls
Hey it’s the 21st century not the last but one!
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Re: #45 HovellingHermit
A worrying things for me is that the fully taxpayers owned Northern Rock is punishing its own customers by giving very high and uncompetitive rates when they need to renew their mortgages in the supposed policy of forcing them to re-mortgage with a competitor, sadly, many if not most of them can't do that, so they end up with punitive rates of over 7.5%, no ability to move and the only option looming on the horizon is defaulting and loosing their homes. How stupid is the Govt. in not sorting this out? What benefit do we as a country gain from doing this?
Errr... house price deflation? Inflation is a BAD THING, wherever it exists. Lower house prices will be incredibly beneficial to the country's economy in the long term. Everyone seems very keen to pay less for everything they buy... EXCEPT HOUSES!!! I'm sure it's some sort of insanity...
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By delaying the cuts they are undermining the underlying assets that they are worried about PEOPLES HOUSES. If rates were cut there would be a smaller chance of loans being defaulted on and with prices already down 18% and cheap mortgages available property would start to look attractive again. If that was the case and people came back into the markets the banks underlying security would raise in value and be less of a millstone around their necks.
Finally if Northern Rock cant see that keeping their SVR almost 1% higher than the rest of the prime market is causing them a greater headache with repossessions then its going to be a long dark haul. At least the one bank in public ownership should be forced to cut their rates (even if it is run at arms length)
The Bank of England is autonimous but still managed to listen to the governments message loud and clear
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Do GB and AD read what Robert says I wonder.
He is the only one who:
1. Appears to understand what is happening
and
2. is able to explain it in simple language!
It is worrying that neither politician seems to grasp that what they are doing simply wont work. No one can spin themselves out of this mess.
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Do the MPC know something that we don't?
Not really - you can understand the cut if you change your frame of reference.
The MPC have previously set Bank of England rates with a view to moving other interest rates and inflation. In the current climate LIBOR is running off-set from BoE rates. The excess bit of the 1.5 % cut is the MPC compensating for the difference between LIBOR and the Base rate.
This 1.5 % cut is aimed at moving the cost of credit back to affordable levels in the real economy. This will take the squeeze off small businesses that now find themselves on the edge of folding and therefore will lessen the effects of the downturn on our economy as a whole.
Well done MPC!
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To all of you that say LIBOR is the reason the banks haven't / won't drop their interest rates; you're right, but as more people have begun to see and hear these terms, the banks have started using them as a smokescreen. 3 Month LIBOR used to be around 25 basis points (0.25%) above the BoE base rate, it's now somewhere between 1.75% and 1.95% above base; a huge increase in the cost of borrowing for the banks. However, haven't we all, thanks to our Government, guaranteed inter-bank lending to the tune of £250 billion (or whatever the figure is). Surely then, there's no reason why there should still be so much risk priced into inter-bank lending, and LIBOR could drop back to something like 3.25 to 3.50 percent. This would create far greater liquidity, enabling banks to provide finance to low-risk business and individuals and lower rates.
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CHARGED LENDING RATES IE WHAT INTEREST IS ACTUALLY PAYABLE NEEDS TO BE AT LEAST 10%
BANKS WOULD MAKE A MARGIN & NOT HAVE TO DO SILLY DERIVITIVE TRADING ETC.
SAVERS WOULD RECEIVE A SENSIBLE AMOUNT CIRCA 6 to 7%.
NO ONE SHOULD HAVE A CREDIT CARD WITH A LIMIT OVER £1000.
BANKS SHOULD BE BANNED LENDING FOR HOLIDAYS (LIFESTYLE PERKS TO BOOST PERSONAL INCOME) IE PEOPLE SHOULD LIVE WITHIN THEIR MEANS.
MORTGAGES SHOULD REVERT TO 2.5 TIMES FIRST INCOME AS A MAXIMUM.
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Of course the banks should view mortgage and loans applications with a realistic view that the debt can be managed.
The problem that I and others have is that the banks should not be allowed to increase prices, provide mortgages and loans at higher rates, increase charges to businesses etc. IN ORDER TO get their profit margins back to the same high levels that they were before the credit crunch.
The banks should be penalised by having their profits capped at a realistic level, thus there will be no incentive to overcharge for basic services.
The banks should not be allowed to penalise people and charge high rates for services when their greed caused most of the problems in the first place!
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At 12:54pm on 07 Nov 2008, YummyCarolKirkwood wrote
Everyone seems very keen to pay less for everything they buy... EXCEPT HOUSES!!! I'm sure it's some sort of insanity...
No its years of being brainwashed into using houses as already filled up piggybanks and edifici that return better yields than pensions.
I know people that tapped their piggy four or 5 times to supplement their spending and have a mansion room of furniture rotting outside their newly rented caravan
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Do we have one too many banks? Let one fail as an example to the others, make them realise they need to start lending otherwise their main raison d'etre no longer applies.
What is the point of MPC if no regard paid to them?
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Re: #63 HackedOrf
However, haven't we all, thanks to our Government, guaranteed inter-bank lending to the tune of £250 billion (or whatever the figure is). Surely then, there's no reason why there should still be so much risk priced into inter-bank lending, and LIBOR could drop back to something like 3.25 to 3.50 percent.
No reason? Hmmm... unless, of course, the problems the banks face are far in excess of £250 billion...
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HOUSE PRICES?
TAKE SALFORD IN GREATER MANCHESTER
1997 AVERAGE TERRACE £12 to 15K
2007 AVERAGE TERRACE £90 to 130K
OVER THE DECADE THE CONDITION OF THE HOUSING STOCK HAS DETERIORATED FROM AN APPALLING STARTING POINT.
IF YOU BOUGHT A NEW WASHING MACHINE IN 1997 WOULD YOU EXPECT TO GET SEVEN PLUS TIMES WHAT YOU PAID FOR IT IN 2007?
I DONT THINK SO.
VAST AREAS OF SALFORD IN 1997 JUST NEEDED A BALL & CHAIN,THEY STILL DO IN 2007.
SO PLEASE MR CLUNKING FISTER TELL ME WHERE THE VALUE IS????
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#59 - The market is deflating house prices nicely, I am talking about a small percentage of the market which is NOT going to have any major impact on the general movement of house prices. However, if these people can't pay the extortionate rates, they loose their homes and in the end it is going to be the taxpayer who ends up with the cost, not only the tangible one of helping to sort out a now homeless family, but also of the extra costs in terms of probably relationship breakups, the impact on children etc.
I am more than happy for "commercial" banks if we still have any to do what they think right for them, but when you have a taxpayer owned bank like Northern Rock putting up rates which might be intended to reduce their customer base and not be competitive with their rivals so as not to offend Brussels, then the human cost is simply not morally right.
If they give this hight rate to NEW customers only, then I wouldn't give a fig, but its existing customers who are coming up to the end of their current mortgage arrangements and need to renew and are finding that they are being punished for the bank now being nationalised.
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With this bail out in full swing with public money. I dont hear of any fat salaries being reduced!! or am i not reading the right papers. surely it was the fat bonuses and high salaries that contributed to the mess we are all in. we should not allow those who caused this to slip silently into the mist.
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Sorry Robert but your wrong. The main reason we are in this mess, was not because we were all given credit too cheaply. It was caused by the big bonuses on offer for the sub-prime loans. In the sub-prime market in the states, mortgages were approved without checking the true value of the property or the ability of the borrower to pay the repayments. This in turn was turned into stocks and our banks bought into the bad debt with less checks on their investment than if I'd called into my local branch for a £20,000 loan! They we're happy to take their big bonuses for being so bl**dy clever but now it's all gone sour it's someone else's fault! Don't you dare sugest the average British bank customer had any part of this mess. The finger points firmly at those in charge. And speaking of those in charge: why are they still in a job?
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Isn't it strange that with all the importance attached to LIBOR (which we are now beginning to understand), there is no information about it in the BBC's Market Data pages?
How about a rate, and graph, for overnight and 3-month sterling?
That way it will inform us what's going on and - you never know - it might make the market more transparent.
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The LIBOR rate is for 3 month UNSECURED bank borrowing from other banks. Why on earth are they borrowing expensive unsecured money when the BOE has guaranteed that loans taken on by the banks will be repaid??? They should be getting all or most of their money at secured rates.
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Re: #65 michaeld99
The banks should be penalised by having their profits capped at a realistic level, thus there will be no incentive to overcharge for basic services.
But don't we all benefit from the profitability of the banks through corporation tax receipts? And doesn't competition mean that proft levels are controlled?
Which leads me to wonder: what will happen when Lloyds and HBOS have merged...
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MESSRS DARLING AND THE CLUNKING FIST ARE THE AUTHORS OF THIS LATEST WHEEZE THATS SO OBVIOUS.
THE ECONOMY HAS NEVER REALLY CHANGED OVER 11 YEARS JUST BORROWING HAS SPUN OUT OF CONTROL TO CREATE A MIRAGE.
TRUE UNEMPLOYMENT IS AS BAD AS 1997 IN MANY WAYS WORSE IE 2.74M ON INCAP BENEFIT 600K NOT IN EDUCATION OR EMPLOYMENT 1.7M UNEMPLOYED ABOUT ANOTHER 1M OFF THE SYSTEM IE OVER 55,
THERES ANOTHER 1.3M LONG TERM UNEMPLOYED,A FURTHER 800/900K IN PHONEY EMPLOYMENT.
THEN IF YOU FACTOR IN THE PEOPLE WHO DISH OUT MEANS TESTED BENEFIT TAX CREDIT PENSION CREDIT ETC THE VARIOUS BOGUS AGENCY OPERATIONS IE CRB THE NEW ID PROJECTS I COULD GO ON & ON.
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Re: #67 dbglossop
Let one fail as an example to the others, make them realise they need to start lending otherwise their main raison d'etre no longer applies.
Exactly! After all, it's not as if lending was what brought the entire sector to the brink of failing...
8-)
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This should be an opportunity for us to apply some common sense. We have seen almost evryone blamed but ourselves. How many people, when offered the chance to make outrageous profit (or bonuses) would have refused? How many of us, when told we could have as many credit cards as we wanted, or a mortgage for five times our salary, said 'no thanks, i'll just stick with what i can afford to pay? I realise that it would be difficult to fund the high life on an average salary, but we have been duped into thinking we can fund it by borrowing. the responsibility for the crisis lies with us, and we can regulate the banking industry ourselves, by the simple expedient of only borrowing what we can safely afford to pay back. This would inevitably lead to a drop in standards for some, but surely this would be better that this constant cycle of crash and burn, and us having to pick up the tab?
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Call me cynical but the banks are sitting on our money to make their balance sheets look good, better balance sheet = bigger bonus!
It's time to move on from crisis management to how we got a £652 billion bubble ( Roberts post Oct 10th ) while the FSA snoozed.
It's disappointing that so few senior figures have had the guts to resign so far, we need a wide ranging public enquiry into the Banks conduct, some of those who made 'bonus' driven choices should be going to jail.
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Can someone pick up on post 26 regarding fractional reserve banking and how the actual rates are irrelevant and discuss this please.
It seems to make perfect sense to me but then again i may not have the knowledge of many other posters...
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ON THE SUBJECT OF BROWN & DARLINGS DICTATORSHIP STYLE OF GOVERNMENT.
I DID 5 TRADES SHORTING HBOS STOCK AND MADE OVER £38 MILLION,NATURALLY OTHERS LOST TO FUND MY GAIN.
NOW I AM NOT ALLOWED TO DO THAT AGAIN WITH BANK STOCKS.
IT WAS A GREAT BOOST TO HELP SEE OUR BUSINESS THROUGH THE BROWN CLUNKING FIST DEPRESSSION.
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Re: #70 HovellingHermit
If they give this hight rate to NEW customers only, then I wouldn't give a fig, but its existing customers who are coming up to the end of their current mortgage arrangements and need to renew and are finding that they are being punished for the bank now being nationalised.
Sorry, I don't quite understand: why should people with mortgages have some sort of entitlement to cheap borrowing? In particular, why should they automatically have access to further low interest rate lending when the INTRODUCTORY low rate period comes to its end?
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Tired of reading all these comments on the problem. Can everyone please read the following solution and just get on with implementing it.
First, convert all commercial debt in to long-term sovereign debt by obliging all banks within the reach of English and/or Scottish law to buy 10-year 10% government bonds for the full amount of all outstanding debt on their books. They can declare as much of it as bad debt as they like, but they still have to buy bonds for the full amount, except at 5% for the bad debt.
'At a stroke', the government will have recovered all the taxpayers money it has thrown down the drain, and a bit of spin will enable it to be sold as a political masterstroke, gaining public support, credibility and control. All banks instantly become 'Good' banks.
The economy must then be managed over the next ten years so that the 10% payout is effectively nullified by inflation. Classic zero-sum solution. Every one a winner. If it doesn't work, today's bunch of politicians will have gone anyway, so they have nothing to lose by trying it.
Why will it work? Because time is factored in to the solution. Now if we could factor in responsibility and integrity, we could also stop the problem ever reurring in the future. Utopia.
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Did lending not always used to be BoEr+2% more or less before the credit boom i.e. the SVR.
Will this rate reduction help if people are on fixed rate, so do not get the benefit of the rates coming down. Plus don't some of the tracker deals have a fixed bottom 2.75%BoEr plus 1% to ensure a profitable return for the bank. Therefore 3.75-4% must be the absolute minimum lending rate, why would a saver or institutional investor provide the capital when you could get a better yield in an defensive FTSE 100 company plus have some upside potential in capital gain. Plus if the new equity loan ratio is poor because the value of the price has fallen the 125% brigade are stuck on the SVR of the existing lender.
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I can see a lot of sense in the approach of leaving interests rates relatively high (1-2% above inflation?) and instead boosting the economy via tax cuts/handouts to those on low/middle incomes. That would have a much more immediate and direct effect on consumer spending.
However it is problematic to keep interest rates higher than our competitors. That's essentially what we've done for the past three decades, causing Sterling to be chronically overvalued, killing off our manufacturing industry, making us dependant on imports and in general explaining why this recession will hit Britain harder than most countries.
There really needs to be some global agreement that the way out of this is to directly boost the spending power of those on low/middle incomes (paid for in part by borrowing, in part by increasing taxes on the Rich as Obama is proposing).
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Thanks. I've been commenting that I thought the banks were being sensible. Glad to see you writing about that.
If the 1% drop in Libor is passed on to customers, that's fair enough. Hope the Bank of England puts rates up again, to look after PRUDENT Savers, when the margin between LIBOR and the BoE base rate has narrowed further...
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#70 "If they give this hight rate to NEW customers only, then I wouldn't give a fig, but its existing customers who are coming up to the end of their current mortgage arrangements and need to renew and are finding that they are being punished for the bank now being nationalised."
This is because the government is like Janus. One face says, the "people" must be given all the money they want and the other face says the banks must pay exorbitantly for the loans they get from the government !!
NR bosses are only obeying government orders. Therefore, the ultimate responsibility lies with the government for ordering the current mortgage holders to be turfed out !!
The government could just as easily order them to keep lending at unrealistic rates and make whacking great losses !!
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This comment was removed because the moderators found it broke the House Rules.
CLUNKER BROWN GET YOUR COAT YOUR PULLED.
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So where up the creek without a paddle
The us of a has,nt sneezed but as a very
bad case of flu. as we are set to be hit
twice as hard as them by this tusami, it
really is the end of this once great nation
as we know it.
GB will go down in history, but not for
saving the banks, but for bringing us all
down to our knees
TIME FOR THE RAG AND BONE MAN
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It's all very well for the Monetary Policy Committee to change the Bank of England Base Rate from 4.5% to 3.0%.
Unfortunately, the Banks have a difficult choice. If they reduce the rates at which they lend, they must also reduce the rates at which they borrow from their depositors/savers!
Gordon Brown may huff and puff about banks implementing cuts in lending rates but he says pretty little for the benefit of savers! Governments, of course, are not much good at saving, only spending, so they have little sympathy for those who rely on savings interest to pay their way!
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Banks have priced in credit risk in the past, whether they have charged enough for that risk is another matter. The crux of this is that whereas the world was awash with cheap credit 18 months ago, so that enterprising lenders like Northern Rock were able to pass on to customers as very reasonably priced mortgages, those "happy" days are replaced now by a time where credit is scarce and inevitably more expensive and more selectively available. And Northern Rock wasn't irresponsible in its lending - look at the evidence given by the FSA to the House recently. Northern Rock was left exposed by the BOE with its fixation on "Moral Hazzard" when the credit markets dried up - I wonder if they'd take the same view now if the same circumstances arose?
The banks have been recapitalised to a high level with taxpayers money. however the taxpayer is charging 12% for that rescue. The Government is being disingenuous in demanding the Banks cut lending rates when they know only too well the massive risks the banks face as we enter a recession. A recession, by the way, that the Government told us wouldn't happen as they'd abolished boom and bust. The government know too that the cost of obtaining funds from the retail and wholesale markets is still very high. But foget the detail, ignore the facts, carry on with bluster and spin - its Gordon's way - and if you say it often enough some will actually believe it. That doesn't make it sensible for the banks to kowtow to the government - in fact they'd be fools to do so.
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BTW Robert, this is a nice explanation of what's going on. One missing piece of the jigsaw though. "...money managers believe the risk of lending to banks has risen very sharply, and they therefore want to be compensated for that additional risk".
OK, that makes sense, but only if there is somewhere else safer where they can put the money instead. So where are they putting it? Presumably not under their matresses. Is it all going into Government Bonds (which governments are selling in order to finance the bank bailouts)?
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Question:
How does one get a bank to do what their told?
Answer:
Under the ‘Treating Customers Fairly’ banner of the FSA , threaten to revoke their banking licence!
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"Spare a thought for those poor misunderstood chaps who run our big banks!!" ...............You have got to be joking....... they are far from poor, most are on 6 & 7 figure salaries, and have earned that, for being totally inefficient at their jobs. Unfortunately Mr Brown and his government, also key contributors to the situation we are in, will not step in and remove these people, even though billions of taxpayers money is now proppong up the banks. Amazingly we are supposed to sit back now and let these same money grabbing men get us out of this situation ...... they should be on the dole now ...........no golden handshakes!!
Unfortunately we have a country run by people who like to keep their heads in the sand. The country has been in recession for at least 18 months, and the credit crunch has been on the cards, to all but a blind man, for the last 3 or 4 years. You can not just keep handing out credit to people who have no hope of repaying, just to keep the economy boosted. The people I feel sorry for, are the ones who have been cautious with their money. They took a mortgage they could afford, they brought things when they'd the money to pay for them, and lived within their means. Sadly they have to sit back now and watch the rates on their savings plummet, and see thousands of people get their self made debts being written off!! The government and banks should be offering the cautious people some sort of incentive as well!!!
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This rate cut is nothing more than a political smokescreen so GB and Darling can deflect the heat away from them. They and the BOE know very well the banks can't pass the rate cut on when it bears no correlation to their cost of funds.
Buried in the BOE's recent Financial Stability Report was the bombshell that even after the recapitalisations, the UK banks will still need to deleverage by 17 per cent - wait til that hits the real economy - how many businesses will find that when their facilities come up for review in 2009 there is no money - and what is available will be at a v high price.
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It would seem that the government is trying to gain political mileage by encouraging this bank bashing.
They know full well that banks can no longer go by the Bank of England rate but continue to tell us the public that they should.
I agree that there should be a fall in interest rates but the banks need to be extremely cautious about who they lend to.
There are many individuals and businesses in deep trouble who will only leave the banks with more bad debt.
Not a situation to be encouraged or this recession could go on forever.
The more politicised this recession becomes the worse it will get.
Pity we can't take the politicians out of the equation altogether.
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In the old days when Bank salaries were lower than other salaries, the banks provided very cheap mortgages to their employees. I am sure that todays top bankers not only get huge salaries, huge bonuses, generous pensions and still get the subsidised mortgages. These people are totally insulated from the real world, just like our Shadow Cabinet who cannot exist on 60,000 pounds a year plus expenses. It's time for Bankers to reenter the real world. The thought that some redundant bankers are turning to teaching is a source of real pleasure. Enjoy.
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Could we not have a profit making public itility, simply by lending the money direct to the public through already nationalised banks like Northern Rock?
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"Where as it's wholly rational for any individual bank to take a much more cautious and conservative approach to lending, it's wholly irrational for all of them to do so at precisely the same time, especially when the economy is so weak." - Robert Peston
Explain this unsubstantiated assertion. Many readers have good reason to view it as false. Dropping such an obvious non sequitur into a piece of journalism demands a robust defence.
Also, rates quoted to lenders and borrowers depend on credit risk more than on a central bank's TARGET rate or actual cost of funding, that is why there is always a spread. While it is good of you to even mention there is a difference between them, you assume that moving a target rate will move the actual cost of funding for all institutions by roughly the same amount in the same direction, and that the credit risk inherent in all borrowing, particularly depreciating nonproductive assets such as housing, could possibly remain at the very least constant.
This is not the case. Evaluation of credit risk on residential property lending has been the subject of complacent neglect for far too long, and estimates of what it is are increasing one quarter after another. The true cost of mortgage credit is far higher than it is today and there is nothing the Bank of England can do about it. Nor can it do much to lower the cost of funding for institutions whose creditors demand higher renumeration all at once and are willing to shop around for better offers.
It is simple business sense: if you cannot offer your creditors competitive rates, they will take their business elsewhere, if you cannot charge your debtors enough to cover your risk exposure, you will sink once enough of them default. Both are going up. These target rate games are almost beside the point.
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#82
The rest of my post gives you a number of reasons why.
I have no sympathy for people who are in trouble because of their stupidity, BUT if we as taxpayers are bailing out the mistakes of the banks, something I personally don't think we should be doing, then from a moral standpoint, we should be helping those who are struggling because for them to become homeless is MORE of a burden on society and the taxpayers than to ensure they get a competitive interest rate.
I hope that filled in any blanks from my last post.
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I am from the generation that was encouraged to save and never be in debt. Having worked all my life and accrued, as I thought, enough capital to give me a worry free retirement, I now find that I would be treated much better if I had borrowed up to the hilt. As it is, having been largely self employed, I am on a basic state pension, and have already had to spend a considerable part of my capital over the past two years to maintain a modest standard of living. This huge interest cut and my resulting drop of £2000 per annum, will mean that I shall have to cut even deeper into that capital simply to survive.
Rewarded for borrowing more than you can repay, but penalised for saving - there must be millions more like me, angry at the sheer injustice of all this. SallyPG
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Both Northern Rock & Bradford Bingley could offer aggressive rates both to savers and borrowers- possibly forcing the hand of the other players.
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Both Noorthern Rock and BB could offer aggressive rates both to savers and borrowers- possibly forcing the hand of the other players.
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you have this neu labour government telling banks to cut there rates but if the banks decide not to what can the government do?
nothing this government is a neutered wimp and will back down becouse any action they take could cause any idea of a recovery they hope they are achieving would be scuppered.
sadly a toothless leadership is almost as bad as no leadership.
they are having to placate the banks to lower there rates with under the table sweeteners.
thus this country is in the hands of the bankers and again its the normal citizen who will suffer.
the by election win of this governments has given them the feeling that the people endose there actions and now we will have to endure more of these crazy policies untill something happens.
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sometimes you must write rubbish to provoke. well done.
Tracker mortgage rates were BOE minus 0.5% in July 2007. In November 2007 they were still similar.
Recently before the October 0.5% cut in BoE they were typically BoE PLUS 0.8%. Already a substantial increase in cost to the client and lets assume that the reason was the cost of money on the international markets. Fair enough!
However, after the October 2008 rate cut they increased to BoE plus 1.3%.
The question is that if it as possible and presumably profitable for lenders to charge plus 0.8% one day then how come the cost to lenders changes in a split second the same day that the BoE reduces the rate by 0.5%?
Lenders are behaving in a herd mentality at the moment and could be accused of operating a CARTEL. On the day after the October 0.5% cut 2 or 3 lenders reduced their products for new clients by the full amount. This is a normal event and if 2 or 3 lenders could do it then why not them all? As these lenders were in the minority they suddenly felt expose to a potential increase in new business because of their obvious competitiveness against the other lenders that abstained from passing the rate cut on . Believe it or not but lenders don't want too much business at the moment due to funding and serviceability reasons. Therefore, what happened? These lenders withdrew the full rate cut they passed on and reverted to the herd mentality sent by the majority. This is an uncompetitive business environment and , to me , is evidence of a cartel being run by lenders so that they can all get their even share of new business at a cost that is benificial to them and indirectly in collusion with each other. I think that this has got more to do with the way banks are costing mortgage products than they are letting us know.
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Having read Rob's blog today I was not sure if I had been transported to planet Zog ! Where on earth would you find anyone who sympathises with the banks?!
Lending cheaply is not a crime I would say they are guilty off. They have been Greedy, by lending at a high rate to people they knew could not payback in their life times ie) + 30 year mortgages !! Thinking they (the bank) were 'safe' and 'smug' in the knowledge that should the borrower default, the bankers can reclaim all assets to offset against the loan and still ask for the shirt of their 'customers' back for any shortfall. However, now they find they have over exposed themselves due to the over inflated 'asset' being reduced in value due to the downturn in the property market, so double wammy!. Boo, hoo !! but never mind cos' Daddy (Govt) will give them more pocket money !(£400bn)
Only this time there had better be conditions attached !!.
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Robert, I think you have shown in you blog how you have started to lose the plot. Banks got a huge bailout from the Taxpayer to deliver, if they do not save for Lloyds TSB and Abbey then the deal is off and they should be nationalised for 1p a go.
You can't have a contractual agreement then see it broken within days and do nothing. the taxpayer must be represented and not sent around in circles.
I suggest as I have done before if banks do not do as they agreed then their licences to practise are taken away from them.
Goldman Sach's taking of taxpayers mioney then paying out massive bonuses is slightly more obvious than UK banks actions but not much.
Bank senior executives condoned the actions of their employees because they saw huge 'paper' profits and bonuses. Now the banks staff and shareholders must be made top pay not the taxpayer.
It is clear the banks have no care what so ever about the economy or the upset they are causing unless they carry no risk. Sorry but everyone wants that but its not feasible.
Those who have not acted in the laudable and professional way of Lloyds TSB and Abbey must hand over management control so what must be done is done and not stuffed under the cover.
The taxpayer and population deserve better and must get it
I repeat if they don't do as they agreed to do then freeze their assets and take away their licenses!
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Post #102 reminded me, forget all this fairness stuff, help the economy etc. The correct answer is to borrow as much as you can and spend it enjoying yourself, because when you get older and need care those who were frugal and saved pay for themselves. Those who blew the lot as fast as they could get the same care but it's paid for by the council out of other mugs money.
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26. At 11:59am on 07 Nov 2008, Pot_Kettle wrote:
Bob
You missed the point that in fractional reserve banking they lend the same money multiple times issuing new debt.
In essence they borrow ?1000 from BoE at 5% cost ?1050
they then lend that ?1000 ten times over.
If they charge 0.5% interest they would profit ?9000 as the return would be ?10050.
The con that all banks perpetrate is that the savings rate or the rate they borrow the money at has anything really to do with their lending rate.
---------------------
Pot
is it not quite amazing that you can post the real point and have everyone totaly ignore it.
why dont we leave these forums behind and start are own bank.
Am thinking of offering a fixed 30 y term savings account at a whopping 0 pc return rate.
we could hold reserves of say 10 pc.
oh and offer our savers a loan for a 30 year term at 0 pc providing they hold enough in there savings account to cover our reserves.
OK we wont make any money but who cares if it exposes the system for what it truely is.
now who wants one of my savings accounts then.........
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I posted the following on another site last night:
MLR down?
Winners are:
Anyone with a loan linked to base rate (does this include the bailout funds?)
Landlords (renting becomes people's only option when they lose their houses)
House builders-they need to build council properties very quickly or we will have tent cities like the USA
Exports
Losers are:
Anyone with a fixed rate loan
Anyone with savings
Sterling on the currency markets (euro here we come)
B of E - totally redundant once we have the Euro as our currency
Imports
Result on economy-
No 'tracker loans'
Increasing food and energy costs therefore fixed rate mortgagees will not be spending money.
Majority of us unable to change mortgage or get loans
Savings vanish abroad
No foreign investment
Exponential increase in repossessions and bankruptcies
Exponential increase in divorce, domestic violence suicides and deaths of the elderly unable to keep warm and eat properly
Exponential increase in unemployment
Cash rich banks with no savers, credit defaults and noone to lend to (very few will be left with 25% equity by now
Exponential increase in state benefit claimants
A rate increase would stabilise sterling by attracting investments, but would be hard on the those holding base rate linked loans.
What should happen is:
A rate increase
Raising of lower and middle tax bands
Reintroduction of MIRAS (I had almost forgotten that term!)
Cap credit card interest and ban them
Forcing of lenders to extend terms and thus reduce repayments
Tax and NI holiday (at the very least a significant reduction) for employers
The money loaned to the banks withdrawn and given to all people and companies in work as a tax rebate
Capping of all energy charges or a windfall tax if charges aren't returned to last year's prices
A reduction in petrol taxes and car tax ( for 1.8 litre engines or less)
A clearing of credit history older than 2 years
Immediate prosecution of all bankers and politicians responsible for this mess
Instant return to sensible mortgage lending
Decent pay awards for nurses, teachers, police, fire brigades,security services
Removal of massive perks and bonuses for obscene salaries and politicians-best done by big taxation
Big taxes for those investing overseas
Immediate return to UK based call centres and manufacturing (tax incentives would be good)
Mmmm-sorry if I sound a bit like am ad for Mr Obama-but, as usual, most of the people in this country will not benefit from a drop in minimum lending rate. A rate cut or a rate rise is useless without a raft of other measures at the same time-and who in their right mind would buy a property at the moment as prices are still going down?!
House prices need to come down even further to a level people can afford. First time buyers will get the housing market moving again when they can get mortgages and have saved a deposit.
I'm no expert, but there are enough of us on this blog that prove that we apparently know more about sorting this mess than the so called professionals, prime minister and treasury secretary!
PS. and guess what? The IMF has been bad mouthing and spanking the UK again-how irresponsible is that? HOW DARE THEY cause a further run on our currency?
We will see a massive increase in redundancies just before Christmas (always seems to be a popular time to lay off staff).
Oops! Forgot to also include we should have house prices included on inflation figures...
Also forgot a mandatory transparency order to all financial institutions-full public disclosure
Perhaps GB should get a summarised list from bloggers-far more ideas which will work on here than he seems able to think of or implement!
Leave the interest rate alone, get the bail out funds back and give everyone the 16k which rebate equated to-at least we'd be able to have a decent meal on the table, warm homes, savings and happy Christmas!
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The higher rates do not simply reflect increased risk as the banks claim. They are also trying to achieve larger margins in order to replace the capital that they lost through reckless lending in the past. This rebuilding of their capital bases is reducing the effectiveness of the government's attempts to reverse the downturn.
It is a pity that the government did not use the method that the Heath government used to successfully rescue Rolls Royce in 1970. Let them go bankrupt and then buy them from the administrator without their debts, except for guarantees to personal savers, and recapitalise them and make a fresh start.
Shareholders and those with large deposits in the banks would have lost out, but quite frankly they should have noticed the warning signs and got out earlier.
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Can anyone tell me WHEN will the Government's capital injection to the various banks actually take place ?????
I believe that this has not yet happened.
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agree wityh post 108 (as I posted earlier) 100% !!!
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Re: #72 lowinterest
Sorry Robert but your wrong. The main reason we are in this mess, was not because we were all given credit too cheaply. It was caused by the big bonuses on offer for the sub-prime loans. In the sub-prime market in the states, mortgages were approved without checking the true value of the property or the ability of the borrower to pay the repayments.
Sorry, lowinterest, but you are putting the cart before the horse. Or in other words, you need to think cause and effect. Without ridiculously low interest rates and the subsequent free availability of cheap credit, the sub-prime market would have remained negligible. It was because of the low interest rate environment that the sub-prime market ballooned because investors were desperate for the higher yield offered by this sector of the market.
Low interest rates are ultimately the fundamental CAUSE of our current financial situation.
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#26 and #110
EXACTLY!
Please see my post #80 trying to get people to discuss this.
Such deafening silence is making me think i may be misguided. (FWIW i dont believe full reserve banking could work but also see the inherent flaws in FRB)
somebody out there please try and explain why pot kettle is wrong in post 26
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I phoned HSBC this morning to find out whether there was a collar on my base rate tracker.
Before I was put through I had to listen to a recorded message of a nice woman telling me that pretty much every HSBC mortgage holder (I think she said 97%) not on a fixed rate would get the full 1.5% cut very soon.
Someone needs to do a piece on why HSBC has been totally ignored by the media and doesn't seem to have been at all affected by what is happening. I would love to know.
I am certainly glad to be an HSBC customer as I imagine are many other people - my tracker has no collar and I get the cut within ten days of the rate change. So hello low interest rates and hello £150+ per month, which I'll be spending in my local independent shops and businesses.
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I can hear laughter from Highgate cemetery!
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I am desperately sorry for all those people and small businesses who are struggling just now but I DON'T want interest rates cut. I has no loans and no mortgage. I am a saver and it feels as if I'll be paying the banks to look after my cash before long. We keep getting told that we have lived on credit for too long and we should be saving up for things. I am doing just that but it feels as if I'm being punished for being careful as possible. When are savers going to be remembered?
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I have reached an age when my endowments are about to mature and pay hardly anything, the bottom has fallen out of my Bank shares and now I will receive peanuts on my savings.
Why didn't I spend it all on wine women and fast cars.
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Re: #78 bluesfan33
How many of us, when told we could have as many credit cards as we wanted, or a mortgage for five times our salary, said 'no thanks, i'll just stick with what i can afford to pay?
I for one. And having had to suffer the inconvenience, expense and insecurity of NOT owning my own home during the last 10 years of madness, I fully intend to enjoy the schadenfreude from seeing those stupid enough to pay en masse ridiculous prices for property - thereby causing such great inconvenience to me - experience a bit of inconvenience, expense and insecurity when they lose their homes.
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Pot Kettle and southern agent 1972
I have a very good question for you both.
If as you say in FRB banks make up money from thin air, why did the crock B&B and the rest require wholesale funding? Surely they could have made these loan up to each other and charged at 0%
Valid question is it not? Why would the crock require wholesale funding if it could create money?
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With seven times as many savers as borrowers why is this huge cut in interest rates a good thing? All it does is encourage more people to get into more debt. Those relying on their savings for an income are in for a hard winter!
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Re: #101 HovellingHermit
The rest of my post gives you a number of reasons why.
No it doesn't, hence my request as to exactly WHY anybody has some sort of ENTITLEMENT to cheap credit. I don't believe it is enshrined in any sort of human rights legislation.
I have no sympathy for people who are in trouble because of their stupidity, BUT if we as taxpayers are bailing out the mistakes of the banks, something I personally don't think we should be doing, then from a moral standpoint, we should be helping those who are struggling because for them to become homeless is MORE of a burden on society and the taxpayers than to ensure they get a competitive interest rate.
Well, I see you have fallen for the New Labour spin. We have not bailed out the banks. What we as taxpayers have done is to prevent the banking sector from total systemic collapse. Believe me, despite the massive cash injections from the Government, the banks are still VERY close to the edge. We are nowhere near to getting back to "normal" conditions, and won't be for quite some years.
I hope that filled in any blanks from my last post.
Nope, it filled in none whatsoever.
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I am no fan of those banks and bankers who often preach, to others, the virtues of being prudent when it comes to borrowing and lending but fail to adhere to those principles themselves.
However I do symathise with them in their efforts to try and satisfy all the conflicting demands of a financial system with policies that encouraged things to go so disastrously wrong and economy that is still very much out of control and in danger of collapsing in on itself.
This is a global problem largely brought about by greedy and over indulgent western economies and we are all to blame, not just the banks and bankers (although they did lead the way) because over the past couple of decades too many of us were busy enjoying a lifestyle that we could not realistically afford. It now appears that all we ended up doing was to mortgage our future.
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Generally I find Roberts assessment nonsense (and I use that term because the mods would delete the use of more appropriate language): the risk of lending has nothing to do with the interest rate. If someone is considered a risk then don't lend them any money at all. lending at 7% rather than 4% does not limit the risk, indeed it marginally increases the risk of default. If proper risk assesments were done they wouldn't need the insurance.
I suspect its been a long time since Robert took out a 95% mortage too- generally the bank makes you take out an insurance policy to cover their losses if you default as a one-off fee (normally several thousand pounds) when you take out the mortgage. so this '1.7% extra to cover risk' is also nonsense for the riskier loans.
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The mortgage lenders have been forced to cut their mortgage rates. I fear it won't be long now before they are passing the hat around to the tax payers again. Maybe there is just time for Gordon to call a snap general election before the banking system in this country collapses completely and the electorate wakes up to realise what an incompentent PM he really is.
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"#26. At 11:59am on 07 Nov 2008, Pot_Kettle wrote:
Bob
You missed the point that in fractional reserve banking they lend the same money multiple times issuing new debt.
In essence they borrow ?1000 from BoE at 5% cost ?1050
they then lend that ?1000 ten times over.
If they charge 0.5% interest they would profit ?9000 as the return would be ?10050.
The con that all banks perpetrate is that the savings rate or the rate they borrow the money at has anything really to do with their lending rate."
I was about to post my thoughts which are almost the same as this previous post, can someone confirm or deny this is the situation with fractional reserve banking and borrowed / lent interest values?
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WHAT ABOUT SOME GOOD NEWS FOR SAVERS !!!!!!!!!!!
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I see some of us won't get the cuts passed on until December 1st. Sneaky.
Your lender gets to keep approx 4 weeks worth of extra 'profit' equal to 0.115% of your mortgage. Might not sound like much, but an easy £115 for them on every £100k of mortgage you have.
I'm with HBOS - they have millions of lenders and by delaying until December they will probably make many hundreds of millions in extra profit.
Any reason (apart from greed) why the cuts could not be passed on immediately?
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55. iwanttoscream wrote:
The main control mechanism which the "Government" has for the economy is interest rates. If these are disconnected from the real economy then the true controllers of the economy are the banks.
Interest rates may let the government influence the economy, but ultimate control always lies with whomever has the ability to issue credit.
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No one is really on top of this economic problem. The experts have been found out to be wearing no clothes. The scared cows of the last 10 years are being slaughtered day by day.
Is it really impossible for us to build a financial system that we can understand/control/predict? I do not think the current system is a feasible model - time for version 2.0.
In terms of leadership ... is a National government the way to get people to focus on the challenge to the future of the UK?
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#112: "The higher rates do not simply reflect increased risk as the banks claim. They are also trying to achieve larger margins in order to replace the capital that they lost through reckless lending in the past. This rebuilding of their capital bases is reducing the effectiveness of the government's attempts to reverse the downturn."
The banks lost money, so it stands to reason they need to make it back or else they either fold or fall into full state ownership, neither of which are attractive options. I do not see the problem with charging borrowers more. It is the cure to the original error of charging them too little. There is an argument to be made for administration and resale of failing institutions, but the new owner will still have to tighten up lending standards otherwise they would be repeating the same mistakes.
Until every bank and building society boasts a free capital ratio well in excess of 6% after all SPVs are on balance sheet and nonperforming assets are written down, and mortgage lending is back to 20% down, 300% loan to income, the government's attempts are as futile and irrelevant as pushing on a string.
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Excellent, for once an informative, rational and objective assessment of the situation, more please.
Only one criticism, you propose that the root cause of this problem is imprudent lending by UK banks to UK citizens and businesses. This has not been the cause of the credit crunch to date. The banks have not lost the confidence of their main lenders on the money markets because of huge defaults on UK loans(the extent of THIS imprudence will be measured during the current economic recession). No, the reduction in the availability of this important source of funding for all banks is due to 2 reasons:
1) It is still not completely transparent how much exposure our banks have to the toxic US sub-prime debt. Therefore the money managers who look after those billions you speak of on the money markets will not lend to the banks at any rate, for fear that they go completely t**s up and they loose the lot.
2) The fear and panic, assisted in no small part by yourself that the mortgage securities packaged with UK mortgage debt has the same toxicity as to the US CDOs etc.
We had ample opportunity to distance ourselves from the poor sentiment surrounding US mortgage securities, which will have generated real losses. If we had done more in the UK to keep the economy on track, the financial system and the housing market stable we could have taken more advantage of the USs deserved woes. We lost that opportunity with Northern Rock and have since dug ourselves into an increasingly bigger hole shoulder to shoulder with our American cousins.
The root cause of this mess is still the mass fraud perpetrated by US mortgage brokers in selling loan products to ill informed people with no prospect of the debt being repaid. I know there are some dodgy mortgage brokers in the UK but not on the same scale or to the same extent.
The real root cause behind this is down to Chinese manipulation of it's own currency, but what would you expect from a totalitarin regime, this is a topic for another day.
Anyway, enough of the doom and gloom, I recently managed to secure a superb mortgage deal with the main mortgage lender in the UK(part nationalised) which tracks the BOE base rate. I also have similar products on my portfolio of investment properties. Tonight I intend to single handedly kick start the UK economy by increasing the demand for alcohol. Cheers!
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#123
People won't get into debt if they are not allowed to (get credit), the point about the interest rate is that some people (such as company directors and the like) have to invest, a lower interest rate helps them to (re-)invest in UK Plc whilst other people who are already in debt find it easier to repay their debt - and remember that this whole problem was caused by people not being able to repay their debt, from the home owner trough the company to the banks.
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I bought houses in 1973, 1979 and finally 1985.
Interest rates of 7% in those days would have been a dream come true.
The problem for people with mortgages now is not the interest rate but the amount of the loan which will never go away.
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WHO CONTROLS THE STABILITY OF THE ECONOMY.
IS IT GORDON BROWN OR THE GREEDY BANKERS?
The Bank of England (BOE) cut the interest base rate by 1.5% to 3% in an effort to stimulate the economy, and we have seen that mortgage backed securities have been the driving force behind Gordon Brown’s booming economy upon which stability depends.
Some banks and mortgage lenders excuse for not passing on the cut of ‘interest rate benefit’ is - because the “Libor Rate” is too high. This is the interest rate that banks use to lend to each other. But it is the Bankers Association that sets and controls the Libor Rate.
Traditionally, a cut in interest rate has, at all times, been for the benefit of borrowers, as they are the ones who have to pay the interest, not speculative depositors or predatory greedy bankers.
By withholding the ‘interest rate benefit’ they are causing repossessions inter alia – thus forcing borrowers to enter into new agreements. We have seen an example of this were banks have withdrawn Tracker mortgages, and we have also seen how they raise collateral with the use of mortgage-backed by the securities of homeowners property assets by repackaging in the form of collateral loan obligations (CLO) and similar products, selling them on in volatile money markets. Whilst you the homeowner were sleeping in your bed greedy bankers were undermining the asset foundations of your property. At no time in principle and in law did the bankers have your authority or the authority of regulation to gamble with your home. The bankers’ knew perfectly well that what they were doing. They knew it was other peoples’ property that they were gambling with and should the bubble burst it would not be their property that would be repossessed to pay of their gambling debts. Their conduct most foul has left the economy seriously vandalised.
In principle and in law your mortgage lender is not entitled to withhold cuts in interest rate benefit – so be careful not to waiver your rights. You should put your mortgage lender on NOTICE that by withholding the benefit it is unlawful inter alia.
However, on the one hand the Gordon Brown is taking the credit for the cut in interest rates benefit for homeowners. Whilst on the other hand, it suits the Government that the benefit is not passed on as it might be spent on the high street thus fuelling inflation.
But, why should the bankers’ withhold this benefit when the Government has already injected hundreds of billions of Taxpayers’, money into the banks? This use of Taxpayers money, was loaned at a ‘penalty interest rate’, to bail them out, the purpose of which, to capitalise the banking system, so to stimulate and stabilise the economy.
But the Banks refuse to pass on this ‘benefit relief’ to their mortgagor-customers. Instead, they use the benefit to offset and reduce the ‘penalty interest rate’ – all at the expense of the taxpayer and benefit relief meant for homeowners.
The BOE ‘interest rate benefit’ belongs to the mortgagor. In principle and in law, and of regulation, it was never intended for lenders to benefit from the cut in interest rate at the expense of mortgagor-homeowners.
The ‘Libor Rate’, as we have seen is a very important control for Confidence, Stimulation and Stability of the economy, its control should not therefore be in the hands of the Association of Greedy Bankers. If the Treasury is to truly, be in control of the Stability of our Economy - it must take control of the ‘Libor Rate’, and any Bank or financial institution that does not pass on the benefit, should lose their licence to operate.
The bankers most certainly knew the enormous value of mortgage-backed secure assets, and that they would be the driving force behind a powerful booming economy. They knew they would make a fortune if they could trade them on the US financial markets in the same way as US government-sponsored-enterprises, or GSEs. However, the bankers knew they couldn’t be traded unless they were taken out of their protective regulation. So how did they get their hands on them?
Well, first, you must know what you are doing, and know how to have them deregulated. By changing the banking system in 1997, banks were able to trade CLOs and other stealth products through institutions, but an institution is not called a bank, and therefore operated outside strict bank regulations. This was the key to the unscrupulous bankers making a fortune. The question one should keep in mind is, was it Mr Brown's idea, or the Bankers' idea, or both? Who persuaded who?
Mr Brown in speeches he says - what I want to do……… He never says - what he can do. He says, he wants to: Stimulate the economy, he wants, Stability, he wants Transparency. But I at no time have I heard him demand “Accountability”.
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Robert, you have it wrong this time. Stop cowtowing to the banks. No one is suggesting that banks revert to 110% mortgaes with huge multiples of salary. What we are demanding is that interest rates are equitable to the BofE Lending Rate.
LIBOR is set by the banks: if a high LIBOR is hurting them, they should address the problem.
After bailing them out with billions from taxes raised from our hard earned wages(unlike their disproportional bonuses), they must reduce the mortgage rates to a fair level.
tf Chichester
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#105 "sadly a toothless leadership is almost as bad as no leadership."
Actually, NO !! If there is no leadership, we can elect another in its place. A toothless leadership refuses to budge and needs to be got rid of !!
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#128, #26
It is not correct, it is a flawed understanding of what fractional reserve means. In essence what it means is that a small portion of what the bank takes in as deposits and savings, it must itself deposit with the bank of england as a reserve, for which it gets interest. The rest they can lend out. So it is correct that they can lend alot more than the reserve, but this is still money they have borrowed from their depositors and savers, it is not created by the bank.
The notion that banks create money is misunderstood by a number of those who post about FRB here. A bank creates money in the sense of deposit money, a credit balance in your account that you can use to buy goods and services. But at the same time, it also lends out the cash that you deposited, and it goes back into circulation, so the money in circulation (cash plus deposits) doubles. But the bank is no richer, the borrower is no richer, and the depositor is no richer, as the new money in circulation is also matched by debt. When a loan is repaid, money is destroyed in equal measure. It is no drama.
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@110
Southerngent
Yep I have been totally amazed that NO ONE at all replied.
I really dont think that anyone else has woken up to the con yet.
If this was a scam it would be on Rogue Traders or the Real Hustle, The fact that this is what actually happens and everyone bends over and takes it is stunning
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I see these inches are populated by the glee-makers and viewers again. Ban this, punish that, put your head back in the sand. Maybe these are just really wise people but I suspect that most of them are miserable and only made happy by seeing other peoples misery! Yes schadenfreude is alive and well in the BBC blogosphere.
Let's be practical about it. We are where we are. How to get to a stage where saving is worth while once again and therefore banks will have money from savers to lend to borrowers. All without leading to excessive bankruptcies and companies closing.
The Libor rate has come down but is still about 1.5% about base. This differential will remain for some time, but as the base rate is historically low, we have the chance toe earn our way out of recession and debt, not foreclose ourselves out of debt. Maybe the BoE should have cut rates in August but they didn't and, as I said we are where we are.
I posted yesterday here one thing that could be done to reduce personal debt.
There are other things that can be done like improving lending to small businesses, promoting new housing by limited and tapered tax relief on new builds only (or genuine change of use from industrial use) for, say, the first 20 years paid via the mortgage company. This will increase the housing stock over a sensible time and ensure that we don't end up with silly values in the future, which is one of the main problems with the UK economy.
But I doubt whether anyone is listening - too much wrapped up in their 'told-you-so' overcoats.:)
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From a personal view, I want interest rates high as I am trying to save for retirement.
From the point of view of a partner in a small business, interest rates are irrelevant; what we need is a significant tax cut, preferably combined with a reduction in obstructive regulation.
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@123
You would be very lucky to find 7 times as many savers as borrowers in this country.
I would be surprised if we arent far off 7 borrowers to savers
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This is the "Hair Of the Dog" solution to economic problems. We got drunk on debt and credit, had a great party but now have a hang-over. Solution? Keep on getting sloshed and the pain will hopefully go away.
So we got into this mess my having too low interest rates and the banks lending too much money through mortgages to people that couldn't afford them along with loans and credit. And the solution? To extend the lending so people can carry on buying stuff via loans and credit cards as well as obtaining daft mortgages.
The banks should be encouraging people to save money to prop up their failing institutions, but people will continue spending money they haven't got as they won’t have the incentive to save. Cheap credit got us into this mess, it won't get us out. Alas, the government panders to the good-timers who recklessly borrow money and thinks that spending money for the good of the economy is the answer.
We need real solution and a have a proper strategy - not putting off till tomorrow what should be sorted out today. Yes, it's going to be painful but it needs doing. Oh, wait - I know why they are putting off any real remedy that people may find discomforting and make the government look unpopular - any real solution (if done at all) is for after an election.
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Ref
Pot Kettle and southern agent 1972
I have a very good question for you both.
If as you say in FRB banks make up money from thin air, why did the crock B&B and the rest require wholesale funding? Surely they could have made these loan up to each other and charged at 0%
Valid question is it not? Why would the crock require wholesale funding if it could create money?
Yes it is a valid question.
There is still some rules
The banks must hold reserves.
I still havent finished reading modern money mechanics but it is free to download
I believe the banks were required to increase there reserves with the impending doom therefore required refinancing.
the fractional reserve system can work well, when times are good.
However it requires ever increasing loans to pay back the intrest. As the money supply is only increased via debt and that debt is required to be paid back with interest. then the interest must come from more debt.
Every pound you hold is owed to a bank by somebody else and there is not the money in the economy to pay the intrest.
Thus poverty will always be built into the system, and we are all slaves to the banks.
ps
we cant publish the link to modern money mechanics
as it doesnt get past the mods
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@122
Leverage dear boy
They had already borrowed their £1000 and lent it about 40 times over so when they were asked for the original £1000 back they didnt have it and no one else would lend them it
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#117 I had said in many earlier posts that HSBC, not only did not need to depend on expensive Arab bailout money, but can actually tap into cheaper Far Eastern pots of money. Therefore, they have escaped from the dead hand of the government and can do business the normal way. Hence your "good fortune" in a rate cut !!
While everyone rails at the banks, HSBC is not mentioned because it will make their whingings meaningless !!
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@140
Sorry but you are incorrect.
Have you heard of leverage.
The leverage figure is the ammount more that you have lent out than you had in.
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Robert Peston stated:
Three month sterling LIBOR has in fact fallen just over 1 percentage point to 4.49%. There will be intense pressure on the banks to pass this cut on in full, at the very least in the rates for new tracker mortgages.
I think he is missing the point here. Before this cut lenders were offering trackers at around bank rate plus 1% to 1.8%, so when the LIBOR rate was 5.64% and bank base was 4.5% the margin of LIBOR over bank was 1.14%. Now that bank is 3% and libor is 4.49% the differential is 1.49%. How does this make it viable for lenders to CUT tracker rates?? They will be paying even more of a differential for borrowing at LIBOR above bank. The point being that, yes RATES will be cut, as 1.49% above 3% is less in money terms than 1.14% above 4.5%, but the underlying rate is unlikely to be cut in real terms, if anything an increase is on the cards, even though the reduction in Bank rate will make it look like the banks are passing on the cut. Dont get hung up on rates when looking at trackers - its the margin that is charged above bank that is the important factor. A year or so ago new borrowers or remortgagers could get bank rate minus 0.8%, now you will be lucky to get bank plus 1.5%.
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#120 "Why didn't I spend it all on wine women and fast cars."
Wine will give terrible hangovers, loose women will give you STD and fast cars will kill you faster that the previous two put together !!
I hope this helps !! :-)
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MODERN MONEY MECHANICS
can be downloaded at this link
http://landru.i-link-2.net/monques/mmm2.html
supplied by the Federal Reserve Bank of Chicago
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quote from MMM
How Much Can Deposits Expand
in the Banking System?
The total amount of expansion that can take place
is illustrated on page 11. Carried through to theoretical
limits, the initial $10,000 of reserves distributed within the
banking system gives rise to an expansion of $90,000 in
bank credit (loans and investments) and supports a total of
$100,000 in new deposits under a 10 percent reserve requirement.
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#123 "With seven times as many savers as borrowers why is this huge cut in interest rates a good thing?"
This is because these borrowers are crybabies who throw tantrums if they cannot get more money to splurge !! *Not all* borrowers are so irresponsible. There are many more who have borrowed within their means and are not so vocal !!
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Ok so Darling has bullied most of the banks into passing on the interest rate cut..
Now when will he announce that the corporation tax rise for small companies won't go ahead?
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So to get Brown's confidence to an all time high all it costs is bankrupt the economy and spend £400Bn.
High price. Are the two perhaps related? I think we should be told.
GC
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Surely, if we have been living beyond our (collective) means by virtue of loans, there must be a re-adjustment to a lower level of economic activity, and that will mean that credit is more difficult to obtain? Maintaining 'easy credit' will only result in another cycle boom and bust.
As others have commented, received economic wisdom has been confounded by events, old shibboleths have been shown to be false, and it has been clearly demonstrated that no one - especially governments and Central bankers - have their hands on the levers of economic power. Indeed, there are none. Moreover, the foundation of capitalism - competition - has been shown to be a wraith, a figment of economists' imagination. 'Twas a good theory!
Clearly a period of greater regulation looms, but it needs to be accompanied by greater disclosure. Auditors need to become independent of companies, and shareholders assume joint and several responsibility for the actions of the directors they appoint. Perhaps, too, the freedom of Information Act needs to be extended to companies. Certainly the Competition Commission needs to take a fresh look at banks, utility suppliers and supermarkets. The Government might also consider re-considering the terms under which banking licences are issued.
Finally, 'bank rate' ought to be formally linked to another rate. Logically it ought to be the minimum rate paid on deposits, as these are essential for lending, and because fixing the rate paid on deposits rather than lending should promote 'competition'.
On fiscal policy, the only supposed economic 'lever' in the Chancellor's gift, the situaution calls for higher tax reliefs and even really high marginal rates of tax (including employee NI contributions) on high earners. Bonuses might then benefdit only the community, especially if they attracted employers' NI contributions. We really do need to change the culture of society. Payments to politicians would be a good place to start.
This is the time to change economic ethics for the benefit of the community as a whole.
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With the last rate of inflation at about 5% any account giving interest at less than this is effectively loss making. 1% over inflation seems reasonable for a safe investment giving 6%. This was available until yesterday from building societies. If loan rates drop so must savings rates and we will have negative real interest rates.
They must have a lot of bonds at this rate for at least a year and so can hardly reduce the rate at which they lend below 6.5-7%.
Remember the savers. One problem that has been highlighted is lack of savings. Perhaps this is due to the low interest offered by many accounts.
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What's in it for the government.
Well I suppose they took fright when they saw the number of people struggling to meet their repayments on Northern Rock's variable interest rate.
Those that could not remorgage elsewhere because they were in negative equity or were in arrears.
The prospect of having to repossess so many houses by a nationalised company would have been too unpalatible to the general public. It's obvious the other part nationalised banks had to follow.
There is also the problem with the huge payments of mortgage interest the taxpayers will have to pay the qualified unemployed in months and years to come. This will keep those payments down.
Unfortunately the price will be paid by the majority on fixed rate mortgages and those with savings.
There are always winners and losers in Brown's so called fair society.
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In the early 1980s there was a book entitled 'The Psychology of Military Incompetance' - worth a reread and redone as 'The Psychology of Banker Incompetance'.
Somewhere there is this rarely seen breed of men 'the bankers'. Like the High Command at the time of the Somme in 1916, they were rarely seen where the action was taking place and rapidly blamed Tommy Atkins for the failures they so brilliantly planned. It took time to shift command to the competant.
When are we going to see the wholesale retirement of the Board Members of our failed Banks who presided over such a disasterous loss in share value. Confidence will only be restored in the Banks when we visibly see the people involved up front and demonstrating some business acumen. At present all we have is second hand interpretation of their inactions by Robert P et al.
Why do they need LIBOR ?- a bright guy would surely do bilateral deals with the other banks secured by tax payers to lower the interest cost.
When it is clear we are paying through the nose to do business with Banks something will emerge to allow us to bypass them. The sooner the better I say.
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hmmm.
It is not right to say that we can't have it both ways. It's not the right way of looking at the issue.
The reason that the banks need to pass on the rate cuts is that we need to keep spending to avoid a depression (not recession).
Yes it was over-lending/borrowing that got us here BUT now that we ARE here we can't make the mistakes from the early part of last century by reigning back spending.
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Lower interest rates with stricter credit controls will achieve the same result as high interest rates and no credit controls
Emphasis should be on directing capital available to important environmental projects ,power generation and export industries which can balance our payments deficit in the long run
the availability of capital to housing, which is effectively dead capital should be restricted
Since less capital is available for new housing, councils should enable houses to be occupied by two families ,or extended nuclear families with young children, [suitable for the first seven years ].Such modifications and conversions could provide desperately needed employment in the innercity areas
Allowing cooperating families to share expences and save for a deposit on single couple family housing for when children reach adolescence
The converted houses would have two seperate soundproofed private accomodation areas ie the loft and first floor with shared public areas on the ground floor
Couples will enter into seven year contracts over which time they will build up capital resources for down payments on better accomodation should they wish to move on
Those self serving couples expecting a free handout turning their noses up at such innovation should be given a free air ticket and accompanying parachute to Antartica where they can revive the polar bear poulation and/or rediscover the meaning of gratitude for the taken for granted ,dearly purchased benefits of civilisation .
Such measures to encourage inter family cooperation would also be an antidote to the rampant selfserving aquisitive individualism destroying western civilisation
The measures outlined could also deal with "the poverty trap" allowing poorer couples to accumulate creddits to be put towards other more important purposes.
Couples using children as a lever to aquire subsidised housing will also have to revert to smaller units of accomodation as children leave home or agree to look after the increasing number of lunatics produced by modern civilisation
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So if the BoE is charging 120 to 170 bips then it is not "bailling out" banks. It is lending with a risk premium for default.
Someone needs to teach Mr Preston the difference between net exposure and face value.
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Re: #137 FORENSIC-DEBATE
Some banks and mortgage lenders excuse for not passing on the cut of ?interest rate benefit? is - because the ?Libor Rate? is too high. This is the interest rate that banks use to lend to each other. But it is the Bankers Association that sets and controls the Libor Rate.
The BBA may well "set" LIBOR, but it does not control it. The LIBOR is determined on a daily basis by asking a number of banks the rate at which they can borrow: they have no control over this - it is the market that decides the rate at which they can borrow.
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Re: #161 markyg_ wrote
hmmm.
It is not right to say that we can't have it both ways. It's not the right way of looking at the issue.
The reason that the banks need to pass on the rate cuts is that we need to keep spending to avoid a depression (not recession).
Yes it was over-lending/borrowing that got us here BUT now that we ARE here we can't make the mistakes from the early part of last century by reigning back spending.
Hmmm... good thinking.
Except that it was exactly this thinking in 2001/2002 that got us HERE: that was when interest rates were slashed dramatically in order to avoid a healthy and frankly necessary recession. The result of trying to interfere in the natural economic cycle? We now face something far, far worse.
And so the Masters of the Universe again decide to interfere in the natural economic cycle.
"Those who fail to learn the lessons of history..."
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Clearly Robert you have missed the rather large main point of this whole debacle.
The lender (therafter known as 'the taxpayer') who has balied out the banks now has to watch the continued ineptitude of those banks.
Having already failed in their responsibility to behave appropriately with the funds they had, they continue to belittle the taxpayer by 'thinking' about reducing the rates. They continue to behave immorally and without regard for anyone other than themselves. That it has been necessary to be brought to book by Number 10/11 should be viewed as embarrassing by all concerned but probably will not be.
For years banks have allegedly 'made billions'. It is now time for them to reap as they sow and accept some losses, specifically in the short term
Your argument about the necessity to charge more than the BOE rates for borrowing could be ripped apart but my main concern is that utltimately the consumer is paying from almost every conceivable angle at this point.
What really scares me is that banks will continue 'recover' the lost revenue by reviewing and changing all the other types of mortgages available.
And what are the chances now that bank charges will be deemed illegal, too hugh, call it what you will? I doubt it very much.
The situation is frightening.
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The government is planning to take on a lot more debt to finance handling this crisis. Its not surprising it wants to bring down interest rates to reduce its own interest costs.
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#61, sorry but he hasn't got a clue. He throws these large numbers around but doesn't explain their significance.
There are two main reasons that LIBOR is so high:
1) Wholesale customers aren't depositing for more than overnight in significant numbers - and by value they are the biggest source of deposits
2) The government is pumping in cheap risk-free money. Only the desparate are borrowing at LIBOR. It is a completely illiquid market hence the spreads.
So much is simply wrong in what he "explains"
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I'm not sure whether there have been any comments on how credit card rates will be affected. For instance, Natwest are now charging 24.9% pa interest to existing card users, similarly RBS cards. There seems little publicity to the problems these extortionate rates are creating (nearly all the minmum payment is interest). With bank rates so reduced is there any hope that charges will reduce to original levels? When will more attention be given to this major problem for many people?
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get real Mr Peston, the retail banks have become money machines totally reliant on computerised credit scoring and similar systems; they are no longer service providers.
because there are no longer local experienced managers who know there area,clients and local businesses, decisions on lending are referred upwards to facless managers who cannot be met face to face.
no wonder banks have lent on doubtful and spurioud data from lenders just in order to meet targets set by head office.
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This comment was removed because the moderators found it broke the House Rules.
What about savers, especially those like pensioners who live off savings interest. It seems to me that those who may be able to pay a bit more per month for mortgages (or who have been rash and overstretched themselves) are being subsidised by those who are least able to afford it.
I do not see how dropping interest rates for everyone does anything to help the vulnerable and less well off.
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#158 has it.
Savers have locked in 6-8% interest rates from the last year of deals for anywhere between 12 to 36 months (myself included). That's the banks borrowing short from primary lenders of capital (you and me) and you can be sure the wholesale markets are not giving better deals (frozen, remember?). The government's preferred equity supposedly comes with a 12% coupon, and again no-one else is offering a better deal.
So how are banks supposed to charge less than that on long term money? Brown and Darling think lowering the rate on some portion of borrowing might help. Not much. They still have to pay us our 6-8% and the big funds in the teens of percent from somewhere.
It is fantasy to suggest borrowers who entered into debt at the summit of the bubble can expect much of a discount from what they see on a savings best buy list. If they get what they want, either the bank or the taxpayer has to lose money.
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The base of the problem is that banks can't lend
on assets that they believe may depreciate, so
there is a shortage of good borrowers.
Until the real estate market reaches bottom,
there is no safety in real estate lending, so
the money has to go into a safe haven until
then.
Here in the states we could just now be
starting to see a bottom, as sales of foreclosed
properties are starting to pick up. Since you
folks in the UK are about 6-12 months or so behind
us, it would not be unreasonable to expect that
similar trends would follow in your market.
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I've been thinking that these calls of "pass on the rate decrease" are too simplistic. I've saved carefully, never borrowed more than I could aford to repay, always considered that rates might rise or the economy turn down. Never over-stretched myself. Now my savings are at severe risk of erosion by inflation. Partly in order to bail out people who've borrowed more than they can afford to repay.
Here are 6 things I still haven't seen explained.
1. Why is the Bank of England not focusing when it sets rates solely on controlling inflation, as it has been charged to do?
2. Aren't loan rates and savings rates set these days by the market, not with reference to base rate, given the growth in dependence on wholesale funding?
3. Shouldn't banks be setting loan rates based on marginal cost (ie the cost a new £1 loaned should be a risk margin added to the cost of the most expensive £ borrowed).
4. If banks are short of liquidity, because of an over-dependence on wholesaling funding, where are the wholesale depositers putting their cash instead? They cannot possibly be putting it under a mattress.
5. What is really going on in the inter-bank market? We are told banks are unable to borrow from each other at longer than overnight maturities. But as it's an INTER-BANK market, for each bank unable to borrow, there must be another bank with spare cash it's unwilling to lend. So the bank unable to borrow is over-dependent on short-term financing. It needs to slim down its asset base (together with the commensurate overheads) in order to eliminate that over-dependence. Meanwhile, the bank with the unlent money could be growing its asset base, mopping up the other banks loan customer base (subject of course to not refinancing the lame ducks). That is how markets should work. Why does the government need to interfere with this mechanism? If anything, the state should be intervening to force the over-expanded bank to cut back more quickly - because bankers find it easy to add on assets, overheads etc but very hard to reduce the size of their little heap.
Answers (not based on an flawed understanding of FRB please) would be very welcome. Apologies if they are already here and I have missed them.
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Do note that this is the first major crisis to be so extensively covered by the electronic media.
The ubiquity of high-speed broadband and other relevant technologies have allowed us to grasp in finer detail the issues at hand by means of a computer or even a high end mobile phone.
A lot of people are now familiar with terms such as LIBOR, fractional reserve banking, etc.
Robert Peston has done an excellent job in this sense and I, for one, am impressed with his simplistic writing. I am sure that there are many more of the same.
The majority of criticism directed at him have no foundation or bearing whatsoever.
I find it really amazing at how these "overnight experts" on here can behave with such arrogance and impunity.
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Hi
The banks caused this, the government bailed them out using public money, and now the banks are complaining about having to lend that money back to the public at a reduced interest rate. How I feel for the banks... NOT!!
IMHO the FSA is run by the banks for the banks, its senior members are a part of the 'old boys network' and its this lack of effective regulation that caused the whole debacle in the first place.
Those in charge should be held criminally responsible for their actions, but alas they will get away scot free - i am sure they all saw it coming and ensured that their money was safe beforehand. The only person who looses out is joe public.
A system should be put in place to prevent irresponsible lending. No one earning less than say 40K should be allowed to borrow more than 3x their salary. For people earning over 40K, this should be 4x salary etc. I dont just mean for a mortgage, but for everything. If you earn 20K, and have credit card debt totalling 5K, a bank loan for 5K and an HP aggreement for a car for 10K, then that 20K counts against the 60K max that you may borrow - i.e you only have 40K left for a mortgage. The information as to a persons level of debt is already held by the credit reference agencies. Adding salary details is not rocket science.
House ownership is a privilage, not a right, if you dont earn enough money to be able to afford a house, rent, or get a better job!
Such a system would also prevent house prices going silly - because people would not be able to raise the capital to pay silly amounts - this lends stability - if house prices dont go up by stupid amounts in the 'good times' then they dont have so far to fall when times are tough.
Nigel
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Re my earlier 'post', as well as defining 'bank rate' as the minimum rate paid on deposits (as these are essential for lending, and because it should promote 'competition'), if mortagage interset rate is so important to politicians, perhaps we should also legislate for all mortgages to be 'instant trackers', so making the banks exist on the 'competitive margin'? History shows that banks consistently widen margins, increase rates instantly, but defer rate reductions.
Bankers beware (anyone know the Latin for that? Caveat ????)
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I think I have woken up in a parallel universe, the very thing that caused the financial melt down in the first place is now being encouraged all over again..... how does this work? We need to spend our way our of recession by borrowing more and more??
I fear that this is a desperate measure to try and get people to spend at christmas, if the forecasts are right otherwise, January will see some big redundancies on the high street.
I am truly fearful as to where this goes next, the more we try to spend our way out, the deeper the ultimate recession becomes...
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"147. At 4:32pm on 07 Nov 2008, Pot_Kettle wrote:
They had already borrowed their ?1000 and lent it about 40 times over so when they were asked for the original ?1000 back they didnt have it and no one else would lend them it"
Which is why a run on a bank is such a problem. Only 10% in the USA, 3% in the UK and 2% in most of the EU will ever get their money back.
Want to see a banker squirm? Take out a loan and then take it all out as CASH.
The 10k money laundering laws, the debit cards, the credit cards, the attempt to charge for withdrawals on ATMs are all mechanisms to stop you using CASH. If you take out cash, the banks have to unwind 30 times as much in loans. You take 100k out as cash from a bank to pay for a house for example, that would require the bank to unwind 3 million pounds worth of other loans.
You want to see exactly who the government works for?
Organise a mass "bank boycott day" or national CASH day. Simply get a bunch of people to do no more than take their savings out of their bank accounts in CASH. You'll be slapped in prison so fast your head will spin.
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The banks are at fault for the mess, not us, so we should benefit from the cut in the base rate.
The reason for this, is that the Banks have been too easy on lending money, no matter if the customer can afford to pay it.
As a result, they have lent money to people who clearly cannot afford to repay (mainly in the US, but here as well) and the affect is the situation that we are in.
If the Banks had given a due diligence to each loan, where they ensure that the customer can repay the loan, rather than just giving out loans no matter what, then the global economy would not be in the trouble it is in now. The Banks have been pursuading customers to have loans that have clearly been beyond their means.
Now I know that this does not take into account redundencies which can affect anyone, but this is a situation that has gone way beyond that. I know that banks are a business, and to make money from loans, but there should have been more of a check on each person.
As a result, those of us, who have been able to afford loans, are now finding ourselves struggling, due to the recklessness of the banks and their business practices.
So, the cut in rates, should be passed on, in the short term, so that the banks can get their houses in order, and not pass the problems to the majority who are not at fault, ie us.
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ref 175
no one can answer your questions if you deny reality.
FRB does exist, it does drive the poverty of world and when the economy contracts it does create much pain.
The banking industry is nothing short of a cartel, and they are pulling the strings here.
have you read modern money mechanics yet.
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@167 tom_edinburgh
"The government is planning to take on a lot more debt to finance handling this crisis. Its not surprising it wants to bring down interest rates to reduce its own interest costs."
Well spotted!
Its borrowing rate will be low and its lending rate will be high - wish I could do that!
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all the endless speculating does not help. we are where we are and the damage has been done.
the bbc is at fault here for constantly prodding the dead corpse and focussing on the negative.
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For banks to pass on the full interest cut to finance negative equity borrowing (which is going to get worse ) would be just as irresponsible as the lending that nearly brought them down three weeks ago. Suddenly the government sees this as a good idea ? Is it because they think that blaming the banks for their incompetence will save their jobs, or are they just totally out of their depth ? Anyone who is about to suffer a cut in their savings rate, is going to move their cash to a higher rate bank very quickly if they have any sense, rather than risk it in a bank that's willing to gamble with it. This will reduce the money supply for lending even more. Remember, this government has yet to totally guarantee savings , and are unlikely to do so. People seem to think the banks have a duty to lend cheaply ; they don't, they are in business to make profits, not to subsidise those living beyond their means.
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It seems to me economics of the mad house when the government is expecting the banks to charge less to borrowers than they themselves expect in return for their bailout loans.
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I wish everyone would acknowledge that this financial mess is soley due to Fractional Reserve Banking. This devise which has been allowed to grow by both the Government and the BoE over several decades has allowed Banks to lend up to ten times their assets. To do this the currency has been devalued and real Inflation has been the result. Contrary to public belief Inflation is nothing to do with the Cost of Living. It is all about pumping the economy up with money it does not have. If prices go up that is as a consequence of Inflation so rather than blame the workers and consumers for their wicked demands the political leaders and Bankers should be owning up to their incompetence.
A price rise takes money out of peoples pockets so how on earth is that inflating anything. It must be deflation by definition.
There are several very good articles available on the Web written some years ago before Sub-Prime which warned of all this mess. ( Fractional Reserve Banking)Politicians want us all to feel a little better off each year to hopefully secure our vote the next time around so they allow the "economy to grow". The result is more Inflation. Where will all these Billions come from to bail out the near bankrupted banks? By more government borrowing of course. Bring back the days when bankers were honest folk and had the wellbeing of their customers and clients at heart and did not dip the pot for vulgar and vast bonuses that did nothing but empty the till. I always hope we may see some show trials in due course to establish the blame for this fiasco. Finally spare a thought for the future generations that have been mortgaged into poverty before they have time to leave school for they are the ones who will bear the debt.
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12th December: INTERNATIONAL CASH DAY.
Just in time for christmas too. Take out all your savings as cash, buy a present or two over the weekend, put the rest of the cash back on the 15th.
Show the banks who the customer is.
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One thing - last nights positive vote in Glenrothes must have made Mr Darling's job much easier today.
Hopefully the banks have realized that as they are on "Social Security" that they have to what the "Job Center" boss says!
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CREDIT is the cause, CREDIT is the effect
Why should a company have to wait to be paid for months?
Why should an individual have to borrow to live somewhere?
Why should a Government need to borrow to ensure the States basic infrastructure is built and maintained?
Oh, economic cycles. Hmm, only in Capitalist societies
Oh, well companies need to spend on infrastructure or R&D before they can charge for things. Hmm, the end product costs more then?
oh, well people need to try to keep maximising their bedrooms and gardens and ensure the walls are high enough to ensure their castle remains their Jerusalem
Oh, well, without credit the whole infrastructure of 'financial services' and its illusion of providing a means of getting something before you can actually pay for it implodes and the 'fake' economy of a State will be found wanting.
Whether its getting your invoices paid or sticking the weekly shop on the never never to get you by, the whole fake system has been designed to grab back as much of your profit, salary or available cash as it can to ensure the fake 'industry' is maintained and instead of the business or the individual getting true value for their cash, the perpetrators of this system rape all.
There was a day a sack of potatoes was swapped for a sack of carrots and we shook hands.
Now our entire economy has been built on debt, fake cash and failure.
The good thing is that it has reached the point of non-continuation. Where by whatever means they try, they can not prop up the failing system.
The only "lending'' going on is illusional lending from Governments and the IMF.
Assets will fall, purchases will increase, savings will prosper and debt will languish and we can go back to swapping the Euro in your pocket for Euro worth of produce again
I say Euro because as a consequence of the immediate consolidation of companies will come the consolidation of nations
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The government has reprimanded the banks for reckless lending - now they are pressurising these same banks to do exactly what they have been criticised for... to lend at 2007 levels!!
Why? The government wants to win the next election - thats why! The sheer hypocrasy of it is mind-boggling!
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#175, you ask some pertinent questions.
1. I cannot speculate what the Bank of England is up to.
2. Yes, savings and loan rates are set by the market, not with reference to base rate. If I can get a savings bond paying 7%, why should I cross the street and accept one paying 4%? The Bank of England can say whatever it likes, but if some entrepreneurial bank manager promises 7% in spite of a base rate cut, that is where my money goes. His borrowers in turn cannot expect 4% loans. That is the market in action.
3. Banks should be pricing in a lot more risk on new loans than what the political imperative is at the moment. In fact the government would love 0% if it wins them the next election, but the numbers will never add up that way. Inevitably the cost of borrowing will continue to correct upwards.
4. Capital is fleeing to reputable Treasuries with short dated maturities. Some people will even accept a defined loss rather than risk the unknown elsewhere. There is a global flight to quality and governments are crowding out the private sector in the very act of financing their bailouts as they issue more Treasuries. There is a greater supply into which people can flee from other parts of the credit market, which can then shut down and require another round of guarantees, the cycle repeats, etc.
5. Yes, there are banks with a surplus of cash. You can tell which quite easily. But for them to grow, a bad bank has to fail. With that come questions. A management group would be held accountable for the failure. The market should rebalance itself, but the government feels the need to interfere because some quite important people would come under investor scrutiny if nature were to be allowed to take its course. You have seen a few resignations already, but that is the tip of the iceberg.
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Can someone explain how Nationwide has cut it's mortgage rate to 4.69%, but is still offering e-bonds for savers at up to 6.5%, and it's still possible to get a fixed rate bond at 7%?
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What happened is this: the banks got computers, they got young whiz kids, they closed branches and lost experienced lenders, they lent sloppily via idiotic products. Even the young whiz kids understood that "bank rate" is a chimera of no real consequence except when the market is at tulip time, but in their innocence they thought that LIBOR was a natural thing that had been around, and would be around, for ever.
They did not know that before the late 'sixties LIBOR did not exist. The Soviets, via the Moscow Narodny Bank in London, had only then invented it. Before that banks had to raise their own deposits, a very long and arduous ongoing task, requiring great attention to customers. LIBOR in the form that we have known it for the last forty years, MIGHT NEVER COME BACK.
Once again the banks will need to provide the sort of service that gains respect, and they will need to offer meaningful interest rates for deposits. Just about the only thing that is now in great demand and in short supply is money. It is the old saw of supply and demand - rates will go up - and very painful it will be.
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193
Easy question to answer
Find out who actually gets a mortgage at 4.69% and the % the majority are offered, average it out and the net will be above 6.5%
Its a con trick that has been used since they sold the magic medicine to cure all.
I think Pony dung soup is still used by a major pharmaceutical or two!
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#121 : YummyCarolKirkwood
I think, Carol, what we're beginning to see now is a definite attempt to re-define the high moral ground as being one of borrowing and spending. Like you, I suspect, I resent this.
I can understand that our society is in a very difficult position. We have been bombarded with the concept that happiness equals consumption, and an entire generation has grown up in an environment where one is an oddball if one is not in debt to the maximum amount it is possible to borrow. The very concept of deferred pleasure has been erased from modern culture. A third of the population cannot and do not accept that there may be a social fault in the way they have been brought up to do things. There's no recognition that maximising consumption through borrowing is in any sense a way of life that deserves criticism. How can it be? It's a fundamental part of what the culture of the last 20 years has been drumming into our heads.
So in addition to the huge structural and technical problems of sorting out the mess we are in, there's also a massive cognitive one as well. I personally think that it's this more than anything else that is the reason Brown's running away from trying to deal with this in a constructive way. He's just firefighting, hoping against hope that the UK economy can be propped up for another year or two.
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#191
But they are not asking for that, they are asking for that level of credit to be available, in other words the amount of money available - or at least that is how I understand it - who gets the credit is a different thing entirely!
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For those of us that have bank base rate tracker mortgages - the sun is about to shine on us. It's now possible (as long as lenders pass on the rate reduction!) to pay less on your mortgage than you're able to obtain from a high rate savings account! If you've a "Drawdown" mortgage, it's possible to (assuming you have it available) drawdown any equity amount available, pop it into a high interest savings account that pays monthly interest and bingo - the savings will return more than the cost of the additional borrowing!!!!
And when rates start heading up on the mortgage, the savings are withdrawn and popped back into your mortgage pot to reduce the rate.
One over the banks I think.
I have no sympathy at for the banks, this problem has been brewing since 2001, it's burst just as a recession is heading onto the horizon which makes it doubly painful.
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Isn't interest in a fractional reserve system repaid with additional work? If I save 100 GBP per month over 12 months I can afford to spend 1200 GBP on a new TV. Let's say its world cup year and I want the new TV now - I can borrow at a fixed rate of 5% for 12 months which makes the interest 60 GBP - in other words my total debt is 1260 GBP. The interest isn't more debt as I just work for 13 months to earn the money to pay it off.
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How about those that have followed sound principles, reduced or eliminated mortgages and started saving.
The careful and diligent are likely to see their savings earning less than inflation (even with the governments doctored figures), and the poorest tenants who don't have a mortgage will not get any benefit from lower interest rates either.
Why not take the pain now and reintroduce a minimum deposit for borrowing, the %10 tax for low earners, and %90 tax for extreme income and false bonuses, with no dodgy tax loopholes or fake expenses (that would increase unemployment amongst accountants though).
Set the basic tax allowance to be the same as the individual state pension, the 10% point to 2 times this, 20% at 4 times, 40% at 8 times and 90% tax point at 10 times, so they would automatically be adjusted annually! You could use a starting salary for a nurse if you prefer, it would probably be much the same. The 10 times pension figure would also be a good salary limit for anyone employed in the public sector, and use the married couple pension equivalent for married state sector employees (especially MPs and ministers).
Mike
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Oh, and for every headline of 100's or 1000's of job cuts remember the BBC will only headline the Brands like Royal Worcester or Corus, not the 10,000;s of day to day jobs that are now being cut every week
Still want to borrow, will you be allowed to borrow? At what interest rate are you prepared to borrow at? At what interest rate will you be accepted at?
Model says NO
and little britain is pertinent!
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Hi Robert Preston Thank you for your very clear and informative article today about bank rates, bank lending, cost of bank lending etc. Very interesting particularly towards the end, when you pointed out that banks will actually have to pay above 5% to borrow from each other, which is above the 3% Bank of England rate. Therefore the banks risk being 'out of pocket'... Do you think that mortgage lenders will become more generous over the next 3-4 months and that the housing market may start to move again? I would be very interested to know your opinion on that. Many thanks. Susanne Neslen email: [Personal details removed by Moderator]
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Why are you all hankering for what you thought is "fair and justifiable" i.e. cheaper borrowing rates from the bank?
After the sub-rime loans crisis and whatever else, isn't the message clear that the banks do not operate to satisfy either it's borrowers nor its lenders!
The banks exist to make a good spread between its assets and liabilities just like the humble "rag and bones" man, whose main purpose is to make a profit from junk.
Aparently you all still do not understand that the current Western Financial Systems operate with "Alice in Wonderland" rules.
Look to ensure that banks' liabilities i.e. deposits do not thin out, the Western Governments now guarantee depositors of their placements.
To facilitate re-capitilisation of the banks, the governments invested by taking up preference shares.
To ensure that the banks' assets are not terribly undervalued, "mark to market" accounting rules are suspended.
Afterwhich, it is left to the banks to earn profits by maintaining the widest spread between their cost of funds and uses of these funds.
What the current Western Financial Systems have are "half-backed socialistic recipes" that will not make decent economic pies for their citizens to partake.
If the Western Governments want to go full swing on their socialistic panaches, they should just take over all the housing loans and lend at rates which they think will help the economy. Same applies to loans to other non-financial firms.
The current situation is essentially the preservation of the banks' self-interests.
If you think this is airy-fairy nonsense, just ask Singapore about its its public housing policy, where 80% of its population stay in government provided housing.
You are all expecting too much of the banks to aid in resuscitating the economy when recent events proved that without these banks, there will be no Western capitalism.
You just got to suck it up and stop whining to enjoy your sub-optimal solutions.
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Can you clear up, what actually is the Bank of Scotland 'base rate' and the same for Halifax , it seems each are different, and, as many people will have agreements with each bank for a specific % above 'base rate', which is their base rate not the Bank of England's rate, what is their base rate.
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I have a credit card from a major British Bank which I use when in England. At the end of the month I get a statement that say a should pay 5% by the 17th of the next month with the usual penalties if I do not,
I also have a Credit Card from a leading Spanish Bank. First of the month the total outstanding is taken out of my current account, full stop.
This also the practice in France Germany and the Netherlands to my knowledge. My son who lives in Amsterdam, tells me that if he does not funds to cover a purchase with a credit card only if he has sufficient to cover in his current account will it go through.
And mortgages will only be granted by your own bank, the manager being held responsible for any bad debts. Not difficult to understnad why the standard provission for bad debt by our bank is 1%.
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If you are so good Mr. Peston, why are you looking at this!!!!!
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You should be a billionare with your insight into the present crisis !!!
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205
Your Spanish bank has kept its National and Local borrowing model (as the majority of Spain still barters instead of borrows) and community heirachy still exists. The mayor and the Bank manager are high officials or worth (if not tainted by international greed)
A computer is used to process the acceptance of the Manager instead of the computer evaluating the acceptance based on a credit score.
As a result, the interest is set for longer and at lower rates (the risk is lessened)
However, Spain got greedy like the rest of them and invested in overseas debt to fund their white palaces on the beach.
Now, just standing as white elephants as their own tsunami approaches
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After our dear leaders triumph in the Scottish soviet in the wee early hours it is back to the boring business of re-writing history. The property bubble of the last seven years never existed because our great leader had banished boom and bust. Despite heroic efforts by the comrades at the Canary Wharf FSA commune greedy bankers were able to supply the financial oxygen for the bubble which never existed. The fact that we can kid ourselves that annual inflation is only two or three percent when house prices were roaring ahead at twenty five per cent per annum is still a mystery to our dear leader and he is urgently setting up a review to make sure it does not happen again. Obviously our dear leader is the first to admit that even on his watch there will be mistakes made and he promises to be very tough with the greedy bankers who have sabotaged the economy. Lest we forget the business model of the Northern Peoples Rock was the cause of the collapse of this magnificent institution and there was no way that the heroic efforts of the FSA commune could have detected such devious tricks. Our dear leader created the FSA commune as his bequest to the nation and he feels sure that history will show the wonderful works which they have performed. Once of course our dear leader has written that history. By investing public funds in the former mutual building societies our dear leader has attempted to bring stability as the property bubble, which never existed explodes. Indeed our dear leader is working day and night to spend as much public money as it takes to finally show the greedy bankers the errors of their ways. Those who sneer that there is no such thing as a free lunch and that there will have to be huge increases in taxation or massive cuts in public expenditure to finance these efforts to rescue the masses from the clutches of the financial parasites are wrong. You can buck the market and our dear leader will use our money to prove the point even if it means that future generations will be climbing a debt mountain. After todays exhortation to the peoples banks of HBOS, Northern Rock and Lloyds that they do their patriotic duty and cut interest rates our dear leader has shown that he who pays the bagpiper calls the tune. The house of Barclays and the spivs from the Fragrant Island bank be warned. Our leader is not a novice and has serious form when it comes to spending vast quantities of other peoples money. A billion here a billion there is small change for a man that has helped to build the economy which those scoundrels at the OECD believe will experience the deepest recession of all the developed economies. Clearly these fools were not listening to our dear leader just a few short months ago when he announced that the Country is in better shape than other foreign domains to survive the onslaught of the greedy bankers. On a parting note our dear leader would like to thank the tireless heroes of the Brown Broadcasting Corporation for their welcome recognition of the victorious achievement earlier this morning.
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"199. At 8:55pm on 07 Nov 2008, InetUID wrote:
Isn't interest in a fractional reserve system repaid with additional work? [snip]
The interest isn't more debt as I just work for 13 months to earn the money to pay it off."
Where does the extra money come from to pay it off?
You can work till the cows come home but if there isn't money there to pay the debt, it *can't* be paid. The MONEY to pay off the interest comes from newer larger loans. Why on earth do you think there is all this todo about credit and lending?
The only money in our economy which is not destroyed when debts are paid off is the physical money. The notes and coins. All other money is destroyed when a loan is paid off. Gone.
The problem is now notes and coins make up only 3% of our money and the banks are very keen to keep it out of our hands. Debit cards, credit cards, bank transfers, charging for cash withdrawals etc etc. Anything, as long as people continue to use credit and not cash.
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RP:"We can't have it both ways".
Glad you say that. I wished there were more people who understand that. In the meantime, the value of our currency is being destroyed. What's worse, inflation will skyrocket. It is nothing but a lie, that inflation will disappear. It is at a record level right now and the devaluation of the pound combined with the total dependence of the UK on imports (great job to scrap manufacturing!) will make it even worse. So to conclude, the UK tries to continue to gamble away the future of its children. Thanks Mervyn, thanks Gordon!
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Pony Dung Soup (credit)
Chewed the grass, expelled s**t, bottled it as gold and sold it to you as a panacea for life.
The rectum has a very thick skin for a reason and thats why the rich always hold the head.
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I was just watching the 10 o'clock news on BBC1 and the impression I got from Robert Peston's presentation is that *ALL* the banks have caved in to the government blackmail.
However, looking into the BBC news website, I get the information that only the nationalised or soon to be nationalised banks have been pressured into this suicidal move.
The two major banks that escaped from the government's dead hand are listed as "Under review" as are all the still independent building societies !!
http://news.bbc.co.uk/1/hi/business/7716086.stm
What this means is that there will be a sorting out soon when the nationalised and partly nationalised banks get deeper and deeper in debt and will be forced to drastically raise their lending rates or call for more taxpayer money.
The more prudent banks will keep their financial and commercial independence and will come out of this recession stronger than the rest.
The end result is that the nationalised and partly nationalised banks will be sacrificed by this government for their own political ends and the next government will be forced to let them go to the wall.
I get the feeling that Gormless Gordon has given up hope of winning the next general election and is now on a Scorched Earth policy to deny the next government !!
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It is possible to 'have it both ways'. I believe the biggest problem is that we allow banks to make money through fractional reserve lending. Why not reserve restrict this right to a National Bank who can provide loans at the rate set by the MPC?
Other financial institutions can then borrow from the National Bank and provide loans at a premium. Then shareholders and investors in these other entities will have to bear any commercial risks. This is, after all, how a large segment of lenders work.
By doing this, we avoid the moral hazard issue where the State has to step in.
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It is sensible to withdraw tracker mortgages: they are much more attractive than fixed rate deals when rates are high or perceived to be about to fall.
When rates are low (bank rate 3% is incredibly low) then tracker deals are simply pointless (anyway they're little different from 'standard variable rates').
If savings rates are 1.5% above base (6% Brum Midshires versus 4.5% bank rate) as they currently are, then mortgage rate needs to be 2.5% above base (Halifax SVR 7%).
A 5.5% fixed rate deal (once the latest cut has settled down) would therefore be an extremely attractive deal.
If that seems high then you are just too greedy!
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I'm worried about Robert.
He hasn't had a financial scoop in weeks and weeks and weeks.
No more breathless scoops about failures like Northern Rock. No more shock and awe, over-exaggerated vowels and BBC gesticulating.
Now he spends his time fretting about,
How much banks should cut interest rates?
and
Credit and credibility (sounds more like that dreary Jane Austen).
Yawn, yawn, yawn.
Robert, you've left that dusty old FT behind you, now your in the entertainment industry.
As a genre, to be successful, financial writing for the masses should be like horror movies in recessions and beyond the dreams of avarice in booms.
If you carry on like this Rory (Bremner) isn't going to like it.
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Whoops, although rectum is a perfectly legal word of the latin and english language the moderators have chosen that my post containing said word should be nuked.
Is it not time the moderators stopped using the Blue Peter hymn sheet?
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Mr Peston I think your wonderful, perfectly logical and accurate explanation is part of a typical modern day malaise we all seem to suffer from. Let's find the rational explanation so that we can then forgive the wrongdoers. We see it for example when approaching criminals "oh but they had a poor upbringing..etc etc"
But the truth of the matter is that the banks have been freely "spraying and gambling" with our money and earning, irrespective of whether they are successful or not. Indiscriminate third world loans (Brazil for example), Indiscriminate pointless gambling (Enron for example). Now, we are asked to foot the bill and they are busy making sure their indiscretions are fully covered. Meanwhile, businesses are paying the price because these banks are not making intelligent and rational decisions on the risks for each of their business customers.
No, i'm sorry, but bankers have been shown up to be what they really are; pretty unintelligent, self serving greedy market stall holders.
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Fractional reserve banking (in moderation) has been around for some time and has helped develop the economy.
That used to mean better and more comfortable factories to make more goods or explore the world or whatever.
Only in the last six years has it meant borrow money from Johnny Foreigner (0 to 600 billion in 6 years!) and develop ways to spend it!
Exponential growth cannot go on for long - pyramid letters work at first after all - but if the money isn't being used to produce things then the exponential growth simply accelerates.
Once J.F. has bought everything then we'll have to nationalise it and default on our foreigh debt....
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A shame that Her Majesty's Revenue and Customs couldnt pass on the whole rate cut ... I wonder if Gordon will have a word with them ....
see:
http://www.hmrc.gov.uk/rates/interest-late.htm#itnic
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hi, any chance of a blog about hsbc? They (as far as I can tell) do not seem to have been affected that much in this whole thing, they did not need government help and as far as I know have not needed to go begging overseas yet.
In all this chaos they seem to have been pretty sensible, or am i mistaken?
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OH DEAR........
I have the upmost respect for mankind, and have read everyword that people have wrote on RP blogs over the last few weeks.
Iam just a simple man but not stupid. haha
but lets look at it in a simple way.....
for the last 10 years life as been a game of monopoly. While we took the money from the banker to buy our homes on pall mall, and mayfair and to build up our buisnesses, the banker went bankrupt
HE AS NO MONEY
So the banker comes bank to us and say please can i have some of the money back. and as we like playing monopoly. its best we do. Because if we dont the game ends.
But remember we only gave the banker some of the money back not all. so the banker is going to be back in trouble if he does,nt watch out. he is desprate for more of our money, and if he doesnt get money quickly then he may go bankrupt again. And good most would say. but not so because the houses we have on pall mall and mayfair are worth much less than when we leant the banker some of the money last time. so we have no more money for the game to contiune.
the game as to continue and the only way it can if we give some of our houses and buinesses back. not good i know , but its best surely that some of us lose, rather than all of us?
Just one hugh problem our leader GB never learnt how to play monopoly
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I run a small business and had problems a year ago. I was earning 6 figures but when it went sour I just didn't draw a salary for a year. So why should we pay high interest rates for bankers to earn even more than I used to when they make a mess of things?
Let them work for a pittance for a year or two as a penance - that's the real world outside working for the state - or now that they're half nationaliosed have they forgotten that??? maybe you have goo??
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#220 Don't you know that there are two, and only two, guarantees in life - death and taxes.
With any Labour (Nu or otherwise) government, those is more than guaranteed since they'll tax you to death !!
So there's no point in hoping that HM Revenue and Customs will pass on any "cuts" in taxes. If anything, in these impecunious times, they are more likely to *ADD* to your tax !!
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why is this blog running 1 and a half hours late? You should be able to afford to pay someone to monitor quickly now you don't have to pay jonathan Ross!
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I asked my bank how much they would pay me to take out a mortgage, but I couldn't make them understand.
They would pay me 6.5% on a deposit, and give me a 5.5% mortgage, so it is not too difficult to say 1%. Is it?
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Far too many banks that's all...in this country and around the world.
They love their work and they'll do anything to stay put and avoid redundancy !
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welcome back boilerplated! I bet you've been expanding your fruit cake business!
Noone has taken me up on my offer yet to put GB and AD on the rack-can't seem to find any journalist or politician willing to do it, so we have to find a way of doing it ourselves.
GB and co (including bankers) are total megalomaniacs-the sheer number of these posts prove that noone wants to see or hear anymore of his hogwash-it's all along the lines of 'I'm so wonderful I can tell the world how to manage their finances-look, I can even get a majority in a Scottish bi-election!'
The banks have pulled in their horns, raised their drawbridges, and settled in for a seige. They will find a way around any kind of tinkering from GB and AD.
We all know why we're at this point-not just financially in meltdown, the economy is in meltdown-we've all seen it coming.
Banks can't tell you how much bad debt they have-at least some of it is from other countries-they have no way of knowing where or how much, nor if it will even be covered by insurance.
And how long before big underwriters go to the wall?
Personally I only have a mortgage which has now become more than 80% LTV cos of dropping prices. Eventually this will turn around. I have no credit cards either, and my fixed rate mortgage will be worth having when rates go up. I take a long term view.
Business-wise, we are doing old fashioned trade with some our customers and find it works quite well-I can recommend it.
We have people who could start a bank here-I've got a sensible list of ways to improve our economic situation (compiled from various blogs).
Now all we need is a way to improve the hearing of our government and banks-on this point I am at a loss- can anyone suggest anything?
How can we get the action our country needs?
Answers on a postcard to 10 downing street.....
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We have passed what the chaos theorists call a "tipping point" the economy will not respond to tweaks by the Bank of England or the government and won't now turn round until the bottom is reached. Who can say how far down that will go. It has now had an impact on me personally, my son's company has gone into administration.
GB and AD may be able to bully the banks into passing on rate cuts but they won't be able to stop them pulling the plug on struggling companies.
As for me, well, I have no mortgage and a final salary index-linked pension, and I still have a job.....for now.
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Not much noise from fireworks this year !
either the rate cut came to late to encourage the SYMBOLIC burning of fractional reserve money in the form of cheap chinese firecrackers
Or Gordon has finaly brought to an end the boom and bust Chinese economy
Maybe the public are also having second thoughts about the Guy fawkes guilty verdict and think he was mistaken for a banker who re fused to answer a select comitees questions about his pyrate life and offshore aluminium FE thermal lance deposits
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.....seen running from the building persued by two hangry beefeaters with big choppers looking for a double whimpy with onions and sparkler in hand shouting "i'm free"
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The last line in Robert's update contained this bit - "at the very least in the rates for new tracker mortgages. "
I do believe that *new tracker mortgages* are currently as common as horse feathers or hen's teeth !!
So, either that is a bit of spin or it is extremely moot !!
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Ok, I'm pretty new to the whole global finance thing but can someone tell me this.....even though BA announced that they have undershot profits by 90 odd % how come their shares where the market's leading winners, up 11.8%?
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I think many seem to think we have just given the banks a load of money. This intervention was there to prevent a bank collapsing. Can you imagine what would happen if RBS went down- the impact would have been more devastating than a major war- their debts exceed UK gdp which means the money they owe the markets and investors also exceed GDP- so the amount of cash taken out of the system is juts mind boggling in its potential effect. In addition what about all the people who pay bills via RBS as their bank etc etc- let alone the fact that Direct Line and Churchill are subs with technical reserve needs etc. In addition of course RBS issues bank notes. So all in all a nightmare scenario.
I still think HMG have played a good innings on this, they are doing what they can to help alleviate the impact but the PM must be held to account for creating a pathetic UK economy- he wanted the City to be the way it became- he wanted credit to be made available to all - he wanted lots more houses to be built - HE DID NOTHING TO HOLD BACK THE ASSET PRICE SURGE. So give him credit for what he has done in the last few weeks but let us make sure he gets wiped out at the next election.
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so what happens in the future when interest rates go up again? we will be back to square 1? all this now is doing is keeping house prices high.and where will banks get their money from? certainly its not worth saving anything now.I cant see what possible benefit this cut will have in the long term,just stacking up problems for the future.basically the problem is people want everything now and want to borrow to pay for it, it was low interest rates which caused the problems in the 1st place.its a pity nobody,in any party, stands up for the poor elderly people who have saved all their lives have some savings put by.
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Robert
A thing that may not have occured to you is the effect of this cut on annuity rates
Actuarially the income per capital on an annuity is directly proportional to the interest rate.
Hence people retiring wishing to purchase an annuity will now have to take 2/3rds of the income they would have got before the cut. (2/3 is the proportion the the rate has dropped from 4.5 to 3%).
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Business is always about risk and reward and a proper balance between the two. The higher the risk, the greater the expected reward has to be. By its very nature the word risk means that sometimes things will not work out. Lenders and investors need to factor that into their judgments.
Unfortunately, our entire economy is based upon the willingness to take risks. If we take too many risks for too little reward we end up where we are now. If we take too few risks our economy will stagnate, as it is now.
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Business is always about risk and reward and a proper balance between the two. The higher the risk, the greater the expected reward has to be. The word risk means that sometimes things will not work out. Lenders and investors need to factor that into their judgments.
Unfortunately, our entire economy is based upon the willingness to take risks. If we take too many risks for too little reward we end up where we are now. If we take too few risks our economy will stagnate, as it is now.
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Robert
Incidentally using the same logic this rate cut also means that the net present value of the Public Sector Pension Liability has risen by 50% !
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#149 wrote:
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@140
Sorry but you are incorrect.
Have you heard of leverage.
The leverage figure is the ammount more that you have lent out than you had in.
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Leverage in the normal meaning of the word simply means that you partly finance your business through debt in order to get a better return on equity, hence the notion of leverage.
As I said in my post, banks borrow most of what they lend from depositors, savers and other lenders (leverage), but that's not the same as lending money that didn't exist.
#180
And the purpose of that would be... ? I know another good lark, why don't we start campaign where everyone tries to phone emergency services at the same time, just to demonstrate that they don't actually have 60 million phone lines in case of a really, really big emergency. I bet they wouldn't like it.
The point is they don't need 60m phone lines, just like everyone doesn't need cash at the same time.. Get over it.
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another nugget of info-MSN report the LIBOR rates to be as low as May 2004 (3 month) and February (overnight).
Was there a problem with lending between banks then? Nope, didn't think so.
This must surely suggest that the banks are still so seriously in trouble that they have to hoard their cash to offset the terrible price of their gluttony?
What's the betting they haven't been honest with the government about exactly how bad their situation is? These guys are masters of creative accounting-why would they tell the WHOLE truth when partial will suffice?
There's more to come everyone! Hold on to you hats and fasten your seat belts...!
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I think the problem here is yet again we think that the rate cut will suddenly fix the economy and we can all start spending like 2 years ago. As has been said above, lenders tempted by bigger profits took too many risks, the government did not dare intervene as our economy is built on easy credit for both personal spending and high multiples for mortgages.
This rate cut will NOT fix things, what it tells us is how much the outlook for our economy has deteriorated in the last few weeks. The BoE would not cut so drastically unless this were the case. I beleive they are hoping that this will increase consumer confidence to spend over Christmas, but this is not very likely in my opinion.
The rate cut will NOT restore the housing market as buyers have now woken up to the real value of money and how values cannot continue rising at double and triple the rise in pay. Also buyers now have a mindset that prices will continue to fall so waiting is the best course of action.
What the rate cut WILL do is reduce the number of reposessions and business closures. How low will rates go, I think to about 2% - remember than banks cannot keep matching BoE rates as as ultimately they will make losses. Also remember that in Japan 0% did not prevent a recession.
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currently, anyone in a fixed rate is funding the rate cut, as are savers who have a reduced rate-a rate rise would have penalised variable and tracker rates. And what of credit card interest? This goes up very quickly, but down very rarely.
A rate cut is so not the answer-the government needs to put tangible measures in place to help ordinary folk and small businesses, WHATEVER the lending rate does-repossessions and bankruptcies are still going to increase.
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"240. At 09:42am on 08 Nov 2008, crispblog wrote:
#180
And the purpose of that would be... ?"
To buy christmas presents of course. Christmas is coming, hadn't you noticed?
International Cash Day (12th December):
http://www.freewebs.com/internationalcashday/
Would have the side effect however, of taking power away from bankers and politicians and giving it back to individual savers.
And it is nothing like phoning the emergency services. It is my money and I want it back.
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#241, you can't believe LIBOR any more. With the public scrutiny to which it has been subjected, it is now about as useful as official inflation statistics. Everything gets gamed once too many people are looking.
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210. At 10:29pm on 07 Nov 2008, true-liberal wrote:
Where does the extra money come from to pay it off?
From the extra work I did. A fiat currency is only a proxy for tangible assets. Let's say I own a small gold mine - if I did up more gold I make more money. Sure the money supply has to increase to cover but then this reflect the increase in assets. If you ignore the fiat currency and think in terms of bartering then I can barter more and buy more than I could before.
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The blog entry misses the point entirely. The interest rate is not the issue, the evaluation of risk and the regulation of banks by issuing guidelines that limit risks for certain types of banks is. Many institutions which are not called banks are in fact banks and function as banks. Those banks which are insured by the FDIC in the United States make it possible for depositors to be confident that they will not lose any money within the limits of the policy, previously $100,000 per account for each depositor and then $100,000 per bank per depositor. It has temporarily been raised to $250,000 per bank per depositor. In return the bank had to invest depositor's money within guidlines which assured that risk would not wipe them out and deplete the insurance fund. It worked. Investment banks were under no such restrictions but those who loaned them money had no assurance that they would not lose some or all of it and they were told this up front. In return for added risk, they expected higher return on their investment as interest rates are proportional to risk. In the 1990s, people like Alan Greenspan, President Clinton, Barney Franks, Christopher Dodd and others saw that this limited the profit potential of commercial banks. The restrictions were intended to as a consequence of limiting risk of loss. By removing these restrictions Commercial banks ran potentially unlimited risk on the assumption that they would act prudently. But the invention of investment instruments which promised high returns, their deceptive if not outright fraudulent representation of risk caused banks to take enormous risks they never would have been allowed to consider before the restictions were removed. The interest rates were only low at the beginning, so called "teaser rates" on mortgages which expired in a year or two. Then much higher rates kicked in which recouped the up front losses at the beginning. This is similar to the loss leader items supermarkets advertise to lure customers in. They buy the loss leaders at a huge discount, even below wholesale cost but invariably buy many other more profitable items. When the mortgages defaulted because the borrowers couldn't pay the higher rates which kicked in later on, what had been booked as an asset expecting profits became a liability. Further surrounding this were the credit default swaps which were guarantees that large institutions would be able to pay back loans made to them by other large institutions, principally banks. This caused a cascade effect. So far the loss of money in a real sense, that is loss of collective wealth of the world has been in the trillions but threatens to become tens of trillions. As banks head for bankrupcy, central banks have been trying to save them by giving them money, money they largely don't have at hand but have to print. The interest rates are based on the supply and demand for money. Because the supply of money is shrinking faster than the demand, interest rates remain high. Interest is the cost of borrowing money. It is a bad risk to lend someone money to buy a house, start or expand a business when we are in a recession possibly heading for a depression. Therefore interest rates remain high. So far the US government has pumped about 2 trillion into its economy to meet this emergency with much more expected. The only way the US can stave off serious recession or depression is by printing money making the value of each dollar compared to the real wealth it can buy lower. This should cause inflation and devaluation of the dollar eventually. But now the dollar is being upvalued as wealth shrinks faster than new money is pumped in. As the situation deepens, the government may tell the Treasury to throw all caution to the wind and keep printing money even faster. This will have several effects. If the US dollar shrinks in value in relation to foreign currencies because they won't or can't print money as quickly as the US, those exporting to the US will suffer while US exporters will benefit. This will lower the price of US products such as surplus food and machinery on the world market. It will raise American interest rates. It will eventually crash the stock market. But most importantly, it will allow borrowers to pay off loans made in expensive US dollars with much cheaper easier to get dollars. This includes lenders like US Treasury obligations holders of which China is a player having great amounts and mortgage holders who will have to pay back banks. The banks will suffer getting only a fraction of the worth in buying power they loaned this way but it is better for them than owing houses they can't sell. Their alternative is to renegotiate those mortgages to rates the home owners can manage, something they have so far been loathe to do. But time for them is running out. As the recession spreads from Wall Street to Main Street, the number of mortgage defaults will only increase if nothing is done. Right now it's at about 6 1/2% a year in the US and rising.
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Re: #177 veletron
The banks caused this, the government bailed them out using public money, and now the banks are complaining about having to lend that money back to the public at a reduced interest rate.
No, no, NO!!! As I have already said, the Government has not bailed out the banks, they have prevented (for the time being) a complete failure of the banking system. The money injected into the banks has stopped them having to declare bankruptcy: they do not as a result have any money to lend to the public!
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Re: #187 Geoffrey Bastin
A price rise takes money out of peoples pockets so how on earth is that inflating anything. It must be deflation by definition.
Inflation is the devaluation of money. If something goes up in price (ie as measured in money), then the value of money relative to that thing has correspondingly gone down. That is inflation.
If something goes up in price, it makes money comparatively less valuable, and vice-versa.
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What a wonderful science is economics. Not long ago it was widely acknowledged that one of the chief causes of the mess we are in was the over supply of cheap money. Now it would appear that one of the best ways to get out of the situation is to make money even cheaper.
When we can no longer continue to exist by putting ever more IOU’s in to the Mad Hatter’s Tea Pot (it is Brown by the way), I suggest that we use a slight variation on Rabelais for our national Last Will and Testament : We owed much; we had nothing; the rest we gave to the poor.
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#248
"The money injected into the banks has stopped them having to declare bankruptcy: they do not as a result have any money to lend to the public!"
So one of the 'conditions' set down for receiving the Govt. money can't be meet then, is that what you are saying (must be news to the BoE and the Govt.), if so then there is only one course of action left - full and whole-sale nationalisation....
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boilerplated
So good to have you back
Has your fruitcake business gone PLC yet?
I expect you have sent lorry loads to downing street, threadneedle street and to the BBC!
Any idea how we can get the politicians to listen to their disillusioned electorate before their interest rate manipulation causes all out revolution?
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Robert
I find your comments excellent, but as business editor, please do more about what is happening in the real world, not fairy castles-us ordinary working folk need to know what is happening to affect us directly-not sabre rattling and political posturing in a far off distant land!
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Re: Complaint about No 137 made by YummyCarolKirkwood at 164:
The BBA of greedy bankers does set the LIBOR rate. The very fact that they won’t lend to each other shows that they ultimately control lending between each other. Regardless of the LIBOR rate or the markets smoke screen, it is the Banks that choose whether they lend to each other and how they act in unison to protect themselves. ‘We have seen when one bank is challenged over increasing bank charges, to justify its conduct it says: ‘We are not the only bank that has had to increase bank charges, other banks on the high street have also increased their charges’ - As if this was a moral argument for doing so. But the facts are the bankers operate an unwritten cartel. Banks have discovered that because of the nature of the banking business if they try to compete with each other, there will be winners and losers. It is better for them therefore to operate an unwritten cartel, that way they are all winners. The bankers caused the credit crunch and have proved themselves to be greedy and unscrupulous, inter alia, their conduct, to put it mildly was criminal negligence, and they are also experts at spin and subterfuge, that is why their chief executives are paid enormous bonuses to keep their mouth shut, and if they are good boys, they may receive a knight hood for not to spill the beans.
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Not only should banks cut interest rates, they should cut the jobs of the bungling incompetants who made the irresponsible decision to purchase the financial instruments that became toxic debt.
Admissions have been made by banks that they did not know what they were buying. That being the case, the guilty should be fired without delay - to have them continue in decision making capacities is only adding insult to injury and compounding the stupidity of the bad decisions that got UK banks into trouble in the first place.
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I do not care about the fat cats in the banking system that have got away with years of exploiting the public. What I do care about are the people they employ and you and I.
The rate cuts should be given to the customers in full.
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How fitting at the end of this New Labour decade in which the tabloids have so often dictated the political and social agenda that the macroeconomic and financial management of the British economy should now be directed by the Sun and the Daily Mail ("let the British People have their rightful cheap credit again"). Do they never learn? Having spent billions propping up the banks after the last Boom and Bust this economically illiterate government is now leading a public stampede towards a new cycle of unsustainable borrowing and spending which will undermine once again our financial institutions. Talk about Alice In Wonderland and the Mad Hatters Teaparty!
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What I find amusing are the long winded pontificators of Macro Economics spouting as if they knew what they were talking about.
Of cause their fantasies have meaning in their own mind.
Unfortunately macro economic theory is as advanced as Dr Doc's Elixere fixes all.
It is bluff and nonsense that unfortunately takes decades to prove wrong and millions of broken lives.
It would be better if humanity cursed the macro economatician rather than paid him.
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#257
re passing in interest rate cuts
It's not just home buyers and credit card users who borrow money you know, business do to and UK business is going to need to invest much in rebuilding our manufacturing base over the next five to ten years to replace the 'funny money' finance sector that has just vanished in it's own smoke and mirrors!
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Unfortunately there is no quick or easy fix for this problem, which something that everyone, media, politicians and public alike, demands and expects.
Equally unfortunate has been the governments economic policies over the last decade, which have seen excessive and irresponsible spending, fuelled by excessive and irresponsible government borrowing. All of which has resulted in a government with no-where to go. It no longer has the money to cut taxes, which would ease the recessionary pressures and allow individuals and businesses to reduce their levels of debt (the root cause of the current problems), it can't increase spending in areas that will stimulate jobs and industry sectors worst affected, such as a national infrastructure improvement programmes.
Instead it can do what governments always do, find someone else to blame and latch on to stories that distracts attention away for their awful economic record.
Regarding interest rate cuts, it is essential to provide short term stimulation because of the collapsed confidence and lack of any other options that will provide any stimulus, which is clearly the view the BoE took when they made the move. However it is no fix, especially as it is was cheap credit and resultant over borrowing that caused the issue in the first place.
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An angle I have not seen covered is about savers. Presumably if interest rates for savers are too low then funds will leave the banks weakening their ability to lend. As someone running a new, growing and successful business with good margins my issue is not so much about the rate at which we borrow money but the difficulty of getting the banks to lend at all- in my case against invoices raised to financially secure public sector organisations.
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respect has to be earned-a fancy job title doesn't come with respect built in. Equally, once respect has been lost, it takes a massive amount of hard work and consumption of humble pie to regain.
The hardest phrase in our culture is 'I'm sorry, I made a mistake'-this is because owning up also carries the burden of putting the mistake right, or at the very least, trying to.
Acceptance of responsibility. Something which few people do now, preferring instead to transfer the blame to others.
To date, I can only recall the head of the FSA apologising for being asleep at his post. For that I have a huge amount if respect-bow if he would only take that one step further-but no-I expect his hands are tied by someone I Downing street.
I say again, playing with the mlr and perpetuating the credit availability is not the answer. The buck stops with No10, from which should be issues immediate life saving measures such as tax cuts all round-and that is just for starters.
The economy will only improve when the people can live without credit. Providing more at a time when income cannot meet regular bills is insulting, and demonstrates quite clearly that GB has absolutely no idea whatsover about life at ground zero.
We need a vote of no confidence and an immediate general election-the alternative is war-historically the only cure that has pulled countries out of depression.
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Re: #251 Boilerplated
So one of the 'conditions' set down for receiving the Govt. money can't be meet then, is that what you are saying (must be news to the BoE and the Govt.), if so then there is only one course of action left - full and whole-sale nationalisation....
Basically, yes - see http://www.bbc.co.uk/blogs/newsnight/paulmason/2008/10/how_to_blow_the_head_off_this.html#comment40
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Re: #254 FORENSIC-DEBATE
Re: Complaint about No 137 made by YummyCarolKirkwood at 164:
<snip>
You are right to rant at the way the banks have behaved in the recent past, and I don't disagree with your assertion that the banks operate some sort of quasi-cartel, but the fact remains that the BBA does not control LIBOR - it merely produces the figures on a daily basis, based on figures reported by a group of banks. This inaccuracy in your original post was all that I was highlighting.
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This cut is as far as bank rate should go. I am looking forward to bank rate rising again next spring to 5% which is its natural level. The alternative is to cut rates further, wait until the Pound is worth next to nothing and join the Euro as an emergency measure. Past history tells us that this is what will probably happen. Still, we will get the picture of the Queen on our Euro coins, so that's all right.
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Robert et al,
Can anyone clarify?
Although some leaders have past on the rate cut First Direct has not and I expect there are others.
They have however, dropped the rate on savings accounts right away.
I know they would put up morgage rates immediately if it was to be increased by the Bank of England.
Can they really refuse to pass on this cut to existing customers on variable tracker morgages?
And can the BBC do anything to name and shame these intitutions.
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