Does the Bank Rate matter?
There is a good deal in Evan Davis's remarks this morning on Today that all the fuss about whether the Bank of England should cut interest rates may be the equivalent of bald men arguing over who should have the comb - and his apology to my old friend Roger Bootle, a follicularly challenged economist, was priceless.
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To return to my boring refrain of the past 18 months, the biggest problem for our economy is not the price of money but the availability of it. Banks are contracting the amount they lend. So the question is whether a cut in the Bank of England's policy rate to a historic low would increase the supply of credit.
In normal times, a cut in the Bank Rate would help to boost the flow of new lending. But right now it's not clear that a reduction would have much positive impact
The reason is that the main headache for the banks is that both regulators and markets are forcing them to hold more capital relative to their loans, their assets.
The risks of lending are perceived to have increased. So lenders to banks and also the FSA officials paid to stop banks falling over want them to hold more capital as a cushion against future credit losses.
Capital is scarce. The main source of it right now is us, taxpayers. Banks aren't keen to be nationalised to any greater extent than happened last year. So the route the banks are taking to boost the ratio of their capital to assets is to lend less, to deleverage (to use that ghastly euphemism).
Here's the good news. When interest rates are cut, that provides an opportunity for banks to generate capital. How so?
Well if banks fail to pass on the reduced cost of funds to borrowers, such as companies and those with mortgages, banks' profits increase, which in turn boosts capital (so long as banks don't pay out the profits as dividends). To put it another way, if banks make greater profits from lending that's one of the best incentives for them to lend more.
Here's the less good news. With interest rates so low, banks are under intense and understandable political and populist pressure to maintain interest rates for savers while still passing on the rate cut to borrowers.
In other words, they are under massive pressure to generate reduced profits from lending - which of course serves as a disincentive to lend.
And as the Bank of England's Bank Rate moves closer to zero, the louder is the clamour for the banks to keep rewarding savers while charging next-to-nothing for loans.
Which would squeeze profit margins till the pips squeak.
And there's a further drain on their profit margin as interest rates fall, which is that there's an unstoppable shrinkage in the margin between their average lending rate and the 0% rate banks always pay to the millions of us who keep some of our money in current accounts that never pay interest.
All of which is to say that cutting the Bank Rate now that rates are so low won't cure the disease that's afflicting the economy - the shortage of credit. And there's a risk that cutting rates to almost zero could make the illness worse.
Which is why it won't be too many weeks before we see policies that would be the equivalent of giving a comb to a hairy economist.
These, as I've been saying for some time, would involve taxpayers lending more to businesses and households, the further nationalisation of the credit-creation system.
What's still unclear is what form this nationalisation will take.
It could involve taxpayer guarantees for some bank loans. It could involve extracting loss-making assets or toxic loans from banks, to give the banks greater confidence that their capital won't be eroded. It could involve the state taking direct control of the provision of some credit to the real economy.
There's a massive amount of work on all this going on in the Treasury. And ministers are doing a great deal of agonizing about it all. The results of that agonising matter a great deal more than whatever decision is taken today by the Bank of England on interest rates.
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The problem is chronic short termism in Government policy. I really wish Brown had called that phantom election in autumn 2007, since whoever formed the subsequent Government would have a nice cushion of up to four remaining years in which to sort things out. But the electoral timetable now means that Brown is desperate to get results as quickly as possible and the future can go hang as far as he is concerned. So we will get short term palliatives which are likely to make things much worse in the longer term.
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The additional taxpayer support --- vainly trying to keep total lending at bubble levels --- will lead to a huge increase in govenment borrowing. Ultimately, the British govenement will default on its debts by creating inflation.
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There comes a point where BoE rate cuts have no effect.
Commercial banks, like all businesses, have to make a profit. They cannot lend at less than 3% interest because this is roughly the minimum required to cover their admin' costs, the necesary premium for risk, and still make a very small profit on the loan.
The biggest effect of BoE rate custs is to devalue sterling. I think sterling is too low at present (having lost 30% of its value), as we in Britain are too reliant on imports. However, some economists believe the weak pound is a good thing becasue it helps exports. Only time will tell who is right.
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"Does the Bank rate Matter?" is the headline.
To savers yes, its going to be another kick in the face today when the base rate is dropped.
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Very interesting article. Perhaps someone, or yourself Robert, could enlighten me on the following.....
There has been a massacre in the Banking business - one which is still going on. If this had happened in any other industry, one of the first things that I would have expected to see was NEW competition.
Is there any possibility of a brand new bank being set up by someone with some brains who realises that the competition is so paralised that they could not possibly fight of the newcomer?
Imagine, a bank with REAL reseves able to lend REAL cash to people who need it (such as #56 from yesterday).
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We have clearly been lied to by the government over the extend and depth of the recession, which is largely of their creation. They are about to drip out another estimate in the budget.
Now we are about to subject to the risks of printing money and consequent hyper-inflation without even being consulted.
At the same time the government is spinning that no such action in being considered.
We cannot trust the government to act in our interests.
The people of the country should decide which strategy they wish to pursue: Labour?s spend your way out of recession or the Tories? save your way out of it.
The outcome for the country is potentially catastrophic.
It?s far too important a decision to be left in the hands of governments with vested interests in self perpetuation.
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It's not even complicated. Money needs to flow, from whatever source, to those businesses that make a real contribution to Britain's wealth and will do so in the future recovery.
At the same time, it needs to be impressed upon ministers that it SHOULD NOT flow in the quantities it used to to those businesses which in the long-run make us all poor, that is to say, should not be used to make individuals more indebted to buy tat they don't need from abroad, and absolutely should not be used to prop house prices up at stupid levels.
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As a saver, and someone who did not perpetuate the house price boom (as it would have been a feckless thing to do) the lowering of rates comes as a slap in the face of prudence.
If rates go much lower I will withdraw all of my savings and place them in a deposit box, as I refuse to let my cash be used a tool to prop up these one sided attempts to recover a situation that was not of my making.
I can only hope that enough people do the same, to send a message that the steadfast saver should not be exploited in such an unjust manner.
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Re credit see simple example.
1) If I buy a car under HP then one of two things will happen.
a) For the next 36 months I will have less to spend or
b) For the next 36 months I will need to have more income.
For the last 10 years the individual buying and property buying in this country and US has been based on the fact that there is a third option
c) For the next 36 months I will obtain more credit to enable me to keep spending at the same rate as before without needing any more income.
2) Now c) is not available as an option.
b) is not easy to achieve which leaves a), spend less. This effect has been delayed by Christmas for individuals but must start hitting home now.
3) The government is now making the same mistakes by not following the rules of a) or b) in some vain hope that at the end of the 36 months something will either a) magically appear or b) it won't be their problem because the Tories will be holding the baby (note this does not mean I think they will be any better at it!)
A lot of people on this website are described as doom - mongers. We have to accept that we are in a very frightening postion for many many people and the action being taken is only dealying the inevitable and making the problem bigger in the long run.
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A point that has not been made is that the banks are not lending because there are few out there who have both satisfactory collateral and also the ability to service a loan in these financially fraught times.
There is no point in lending when it is virtually a dead cert that what is lent is going to go down the pan!
The companies that are viable do not want to expand at the beginning of a recession.
It is mainly the businesses that are on their last legs that want more credit. Why throw good money after bad?
The bank rate really does not matter
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It was inevitable that a 'solution' of the type tried by Brown last year would only hold the line for a short while, until the contradictions became apparent somewhere else in the system. Reductio ad absurdum.
Now not even the Germans can get their bonds away: reducing interest-rates still further at these low levels has none of the desired impact: and for the reasons Robert gives above, all manner of extreme practical consequences are emerging that (despite all the "massive amount of work going on in the Treasury" - which I can confirm) the government is most unlikely to be able to manage.
This is coming to a head, and fast. So - for a man who is ultimately a political animal like Brown - an early election would seem to be a logical part of the escape plan ?
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Robert - shortage of credit is not the problem, it's the shortage of NEW credit. The UK consumer and corporate sectors have both become credit junkies, needing a 'fix' to avoid bankruptcy, overextension and much else.
What is cruelly problematic for Mervyn King
(a man whose detailed practical and theoretical knowledge of broad money policy in the UK is second to none) is that it isn't at all clear that measures to reduce what the '30s economists used to call (rather quaintly) 'idle money balances' would be any more effective at this point from an increase in direct liquidity to the system ('printing more money' for instance) than from reductions in interest rates.
What is needed is a strong form of that old Bank of England tactic 'moral suasion' - in short, the bank and HMT have to lean on the lenders, hard. They have to do all in their power short of nationalisation (I hope) to persuade/cajole/threaten the financial institutions of the UK to play the game.
That is a perverse situation to be in, of course - a bit like a policeman forcing a drug dealer to allow an addict their fix! Then again we live in interesting times....
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Robert,
An excellent blog covering some very important points. It has been evident for some time that political statements regarding what the banks should do does not accord with the rules the government require the banks to operate under. If they are required to hold more capital then they MUST lend less, and the government should be making statements that are more coherent.
With respect to interest rates, the baldness analogy used is spot on ? rates are already effectively zero and any further tinkering will make no difference and even as you suggest may make things worse by denuding banks of capital.
If there were no move in interest rates today it may also go some way to restoring confidence in our battered currency which would be desirable for a country that is a large net importer ? that is we import more than we export rather than we import large nets.
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I am at a loss to comprehend why the Government has to encourage 'financial institutions' to increase the flow of credit. Somewhere in the dim and distance past I am sure there was something called local authority mortgages. Why can't the Government cut out the middle person and lend-sensibly-to small business and inividuals direct?
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One thing for sure, long term lessons must not be forgotten.
Taking "toxic" loans away from the banks is tantamount to exempting them from stupid mistakes of the past.
For an economy to flourish, (Thats long term - not just for the life of this government Gordon!) bad behaviour must be seen to have bad consequences and this includes for banks and bankers.
When I studied economics I was told that higher risk = higher potential reward, so why at a time of higher perceived, (not real 'cos GB is going to guarantee these loans) are rates being cut?
Has anyone done the sums and figured out just how many seniors are cutting back their spending and what the impact of that will be?
One digression if I may - at the hotel where they found all those Rumanians working illegally by producing forged Portugese documents - did anyone check whether they could actually speak Portugese????
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If the government paid off all our personal debt, bank loans, credit cards, mortgages, etc.
The banks would have lots of money to lend and being debt free we could all set the bubble off again.
Of course next time time round all the prudent savers could join in as well. Obviously we could only buy things produced in this country as the pound would be worthless abroad, but hey if the word secretly got around beforehand we could stock pile loads of stuff in advance.
There is always a KISS solution somewhere.
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#3 - banks can not lend at less than 3%??
Surely a bank lends at a fixed margin above base so on the same level of borrowing would make the same income to cover its costs???
The problem is more attracting the savers as interest rates on savings at virtually nil make it pointless putting money in a bank so there is no credit to give out.
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I hope the BoE does nothing with interest rates. There appears to be no advantage to the economy in so doing.
The banks have already indicated that they will not be passing on any reduction and we will therefore not see any advantage.
On a very personal note the maintenance of the existing rate will help to maintain (maybe increase) the exchange rate value of the pound against the US dollar.
The really interesting point is what do we do to try and release the necessary credit flows for business and individuals. It is clear that the banks are not willing to do so. Perhaps this is a good thing. After all they have proved to be poor decision makers and reckless in the recent past!
Perhaps this will be the key to Robert's New Economy
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if they are deleveraging with tax payers money it defeats the objective
may as well nationalise them and get it over and done with
blatantly obvious though Bert you are not in business - even if you can get a base rate deal which is extremely unlikely you will be paying at least 4% above it so the banks can more than cover their costs
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One thing is forgotten re bank base rate cuts and tracker mortgages is that many people's payments are only adjusted annually.
My mortgage is with Barclays / Woolwich and my payments were fixed in September 2008 based on a bank base rate of 5% plus the load for the tracker.
My payments won't reduce till October 2009 and whilst I am overpaying on my mortgage, and may well be overpaying by more by this afternoon.
I'm sure Barclays is not alone in annual amendments both for tracker mortages and Standard Variable Rates.
At present many people are effectively over paying their mortgage and don't have anything extra in their pocket so for me and them the mortgage rate cuts whilst nice hasn't seen a boost to may wallet, at least not yet.
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The economists and politicians have missed the point again becuase they do not live in the real world like most of us. I have no interest in banks lending me money. I am busy saving what i can in case i loose my job and to make sure i can stay out of negative equity on my house. Business needs to borrow, but consumers will not buy until they feel financially safe and for 12 million mortgage holders that will not happen until the housing market starts moving again. What is needed is a massive injection of money into new mortgages. When people start moving they will start doing home improvement, refurnishing and repairing which will benefit the whole economy. Any intervention elsewhere is merely fiddling while rome burns. The saving figures speak for themselves as people try and reduce their mortgage debt by making lump payments rather than buying new televisions. I am exasperated about how slow politicians and economists seem to be to wake up to the fact than fixing the housing market is the key to starting the recovery in this country where home ownership is high and most wealth is tied up in homes.
What is worse is the banks are creating their own debt by reposessing people in a low market, forcing prices down and turning potential loss into real loss and destroying families in the process. Its a vicious circle and judges should be refusing repossessions except for in the most dire of circumstances.
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Banks don't lend based on a personal judgement, they lend based on their capital adequacy ratios. These are based on very complex calculations which forecast risk into the future. One of the key issues affecting risk is diversification, in other words, if market movements in the retail sector are not linked to market movements in the construction sector, they can lend more.
The problem with the credit crunch is different business sectors have become correlated. Correlation means less risk diversification, which means more risk, which means Banks need to see aside more money, WHICH MEANS LESS MONEY TO LEND!
In a non correlated market, the interest rate would have impacted more than just home owners, but also it's credit appetite, now it simply affects home owners and not Banks willingness to lend.
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Sooner or later we're going to be a 0% rate or thereabouts. What then? We surely can't cut them further!
As a layman, from what I see cutting interest rates in the past few months has achieved little except the devaluation of the pound and a few lucky people get to pay less on their mortgage.
It's certainly not getting the banks to lend any extra and hardly anyone I know is benefitting from a temporary increase in having say £100/month extra - they aren't spending it. No one wants credit at the moment and to be honest, even if you did the economy is so unstable that who knows what is next? 15% interest rates? 0% interest rates? If the banks aren't lending, there's little benefit.
What about those who are "stranded" on fixed rate mortgages? With house prices dropping, those who's current deals end are going to be unable to move to other deals because they don't have the equity. And let's be honest, a lot of people haven't any other option having committed the "sin" of wanting to put down roots in a town to raise a family. So, there's little benefit there.
Pensioners and people with savings are getting hammered as well, no benefit there.
We don't have much of an export industry to drive us out of this so a low pound isn't going to make a great deal of difference. No benefit there.
The thing is, ultimately, interest rates have been too low for too long and I speak as someone with a mortgage, pension and a small amount of savings. Reducing them further isn't helping anyone as far as I can see, and we know that as inflation kicks in next year they will no doubt rise which could then hit people.
The whole thing is a mess, an absolute mess.
If Brown had any bottle about him, he would nationalise the banks today and stop this "middle ground" nonsense which is benefitting no one. Any arguments about the benefits of unfettered free markets have frankly been shattered and what we need to do is set about creating the basis of the next financial model rather than trying to breathe air (money) in to the corpse of globalised, unregulated capitalism.
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"Does the Bank rate matter?"
Yes - the destruction of sound money is disastrous, not only as a fact of making all savings worthless and all borrowing free, but mostly for the signal it sends to the World on how incompetent the regualtors have been and are still being.
As a Nation we have still to come to terms with the gigantic level of monetary mismanagement. All the people responsible must go, pension-less and without massive, or indeed any pay-off. (That is the Governor, the whole MPC the Chief Executive of the FSA and the senior staf and the Principal and Department Secretaries and Under-Secretaries at the Treasury.)
These 'incredibly skilled' and huge salaried 'wise men' created, and even have the cheek to admit they created the bubble. The admit they knew what was going on. They had the power and were given the duty by us to act. They did nothing. Ergo they must be sacked.
If interest rates go down today the whole lot should be sacked today.
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My interest rate is seriously waning!
http://blogs.ft.com/wolfforum/2008/12/central-banks-need-a-helicopter/
We really are in trouble now if HMG start using the Mugabe model!
looks like we're in for some uncontrolled inflation and debt deflation. Time to start investing in wheelbarrow manufacturers
I'm off to the toilet now for some quantitative easing!
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I am suspicious that Government knows that a further cut will not result in significantly smaller mortgage payments or business loan interest [but will result in a proportionately greater fall in savings interest - this is just simple arithmetic]. It may even result in an 'emperor's clothes' awakening that the lever 'interest rate cuts' is now pushing on a string and thus (for all practical purposes) broken.
However the Government debt is rather large and if it is 'valued' at current interest charges then a further cut will make Mr Brown almost look a success. Wait for the press release 'Government debt interest costs fall'....
Hopefully Building Society Boards will ignore a rate cut completely (other than for tracker accounts). After all a reduction in 'minimum lending rate' is permissive and not imperative.
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To ian_the_chopper post 20. my mortgage is also with barclays on a tracker. If you phone their customer service line they will recalculate your mortgage and apply the new new rate immediately. If you don't contact them then they will leave you overpaying until october.
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Robert,
The lower rates will still have a big impact on borrowers who have tracker loans and this is a massive stimulus to the economy and to the taxman.
So it is still worth the BOE cutting.
What is needed for the longer term is regulated lending so borrowers are vetted thoroughly and so lenders have a lower risk.
There is more money washing around than many think!
Also Lower rates will force those with capital to look at investing in business property or other less lazy (bank deposit) forms of investment.
There are some massive almost Idiot-proof investment opportunities around at the moment.
Don?t YOU think?
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At the very least rates should remain unchanged-better for them to increase.
More margins for the banks, more money for savers and more money into the country.
As we import more than export raising rates is best thing to do. Said that back in November, as did others.
Fingers crossed.
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Surely, the big risk with whatever the gov does next is inflation, and ultimately much higher interest rates in coming years.
So many people I know are spending the extra money they are saving on their normal mortage/loan paymenst because of of historically lower interest rates - which is what the government wants.
But come next year those same people are going to be in a HUGE problem re. being able to afford those same mortages as interest rates go back up. Perhap very high and very quickly. That for me is the truly sacry thing we are all starting in the face.
An as people on her rightly point out, Gordon and Co. probably won't be around to worry about it so won't care what they do now.
Time for a gov of national unity, for ever there was a time to act on behal of the whole country and not indovidual parties, now is surely it.
Decisions taken in next few weeks and months could scar a generation.
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We have 7 days left to show some sort of effort. Join the petition now !!
http://petitions.number10.gov.uk/Finance/
Come on - let's see some numbers to create debate.
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Robert
Good article, we really are caught between a rock and a hard place. A further squeeze on current available credit would be the situation where savers moved their assets from locked in savings accounts, to current accounts increasing their liquidity but conversely decreasing the banks liquidity.
Other savers may move their savings abroad where returns are higher but also "gambling" that Sterling is more likely to fall in the future months against most currencies. I have a feeling that this has already happened (but cannot provide any evidence) over the last few years - it only takes seconds to transfer GBP Billions to half around the world.
Is the spectre of exchange controls looming?
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Post 17. I think what post 3 means is that for personal loans and small business loans there needs to a load of at least 3% above their own borrowing costs to cover their admin costs and their profit margins for these lendings.
If so why are personal loans still at least 10% plus?
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Time to scrap the MPC and for the government to adopt a much more radical intervention involving direct, statutory, fiscal and monetary levers of economic management.
The reduction in BR is more like over correcting a skid but the effects on saving is devasting. Indeed is it inconceivable that banks will go for negative rates for borrowers with unpredictable consequences for people and the economy?
The continued worship of the private enterprise finance system by Labour prevents them from returning to their root beliefs on economic management but direct control through central and local government (e.g. building houses bridging loans for businesses, paying their low paid workers more instead of making them redundant) will be far more effective than anything the BoE can do.
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Not sure whether the mods will post this:
http://mises.org/story/3265
Maybe an exaplanation as to why Brown and Darling want to be seen as the "do something" party.
Make your own minds up as to whether they are helping, and what the long term implications of thier intervention will be.
From the article:
"A free-market economy could certainly deal with the correcting effects of deflation. However, the coercive apparatus of government cannot: its very existence rests in great part on ever-higher amounts of credit and money, in particular to finance cascading amounts of public debt at low interest rates.
This might explain why governments do everything they can think of to keep the current system churning out credit and money: by increasing the base money supply, cutting interest rates, spending (future) taxpayers' money on an unprecedented scale, or nationalizing the banking sector.
However, these measures will not solve the problem brought about by circulation credit. As Mises noted,
The boom can last only as long as the credit expansion progresses at an ever-accelerated pace. The boom comes to an end as soon as additional quantities of fiduciary media are no longer thrown upon the loan market. But it could not last forever even if inflation and credit expansion were to go on endlessly. It would then encounter the barriers which prevent the boundless expansion of circulation credit. It would lead to the crack-up boom and the breakdown of the whole monetary system."
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We have already put "countless squillions" into the banks and they havn't yet come out as they were supposed to.
If we put more in how do we know that would come out?
It's a guarantee that printing money will be the only option left.
So the banks have to now be by-passed. They have made so many mistakes on such a vast scale that this has made bank Rate irrelevant as an economic tool.
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Phlipperz post 27 thanks for the response.
I don't need a new car or a new tv at present and can afford the overpayment, at least at the moment, so with interest rates on savings so low I might as well keep overpaying.
I might as well overpay now when rates are low because in a couple of years as a taxpayer I am sure I and those of us still with a job will have to pay a huge amount to sort of Gordon's mess.
No doubt by then interest rates will be back up to encourage foreigners to bail out our economy and taxes will be up to pay for the current government's desperate attempts at survival.
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Great to see you mention Roger Bootle, Robert.
Of course we all know that Roger has been scaremongering and calling the top of the market since 2001; he had to be right some day.
There is a slow acceptance from borrowers that rates are higher than Libor/base, but this isn't a bad thing. the banks are making more margin, and for the first time in 7-10 years properties are being bought in the commercial world with positive yield. At the moment good kit can be bought for 7.5%, and even with inflated rates, it can be funded at 5.5%. At the height of craziness, Property Yields were 4%-4.5%, and people were borrowing at 5.5%-6%.
There are deals out there for good astute borrowers. It isn't all doom and gloom.
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All this reduction will do is reduce deposits and a mass exodus of existing money from the banks into other investments that might offer higher yields. I just cannot understand the logic behind this race to zero rates.
I read another report this morning on average only 0.14 per cent of the last cut was passed on to customers by mortgage lenders. Another 1% off the rate will surely not change that figure much but only reduce the interest on deposits. No new deposits equals no new lending, pretty much in the current climate.
Another report I read this morning was, yesterday the German government couldn't auction ?6bn worth of 10yr bonds. God help us if there isn't an appetite for buying Euro/German bonds given that we might be third in this queue behind the US. Maybe Darling read that report when he mentioned the printing presses are going to start working at full steam.
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The banks can only lend to those that want to borrow. That means that they have to lend to people who have been borrowers in the so called good times. These very borrowers are already deep in debt so why should the banks offer them more.
HMG does just not understand how ordinary people think or behave and to blindly state that we must all carry on spending is ridiculous and will only make matters worse in the long term.
Over 50bn was withdrawn from our houses in 2007 and spent by stupid people on big cars, exotic holidays, designer clothes etc. and this amount of money cannot be made up from another source.
That means that the banks would have to lend an enormous amount to make up for this type of borrowing, bearing in mind that the very same people who wthdrew money from their house to fund a lifestyle they really could not afford are now scared stiff as their houses fall in value.
Our High Street banks are being asked to lend at 2007 levels which is impossible as the Icelandic banks and many other lenders are now out of business reducing the amount of money available to lend. Anyway it was a lot of these now defunct banks that lent at the stupid levels in the first place. Are we to ask the banks that remain to repeat their mistakes?.
I do not know where this is going to end but I personally have opened a safety deposit box for my money when the bonds I bought mature this year. We should all do this and give HMG something else to think about for preaching such remedies.
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Hmmm, Banks knocked again.
Well, three big high street Banks are now owned by a Spanish Bank.
And one is mostly owned by the Gov't.
So any profits are either goingto Spain, or eventually to the Treasury.
Before the profits nearly all went to UK Pension Funds.
Makes you think.
Interest Rates falling won't help the property market unless workers also recieve pay rises that keep up with their cost of living.
Only then will enough people feel confident enough to buy Houses.
Bad news for the Housebuilders and probably means their days are still numbered (and that number is falling fast).
If the Gov't wishes to inject demand back into the consume economy it will have to accept the fact that the only way to do so is to increaes the Pay of the lowest paid workers, such as many in the Public Sector.
Now it cannot order the Private sector to give out pay rises but it can do so in the Public sector as it controls the purse strings.
A ten or twenty percent rise across the Public sector would restore demand in the economy and feed through to higher Sales and Higher Profits in the Private Sector businesses. And this would feed through to higher employment in the private sector and more jobs in general.
Of course another plan is to sit on ones hands hoping that something will come out of the Blue to save the British economy.
This might happen, but for Britain to become competitive enough internationally for that, the Pound would have to be closer to one half a Euro and One Dollar or Salaries would have to halve in the private sector.
A stark choice.
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Re #20
Overpaying a mortgage by 'fiscal drag' is good. The best investment you'll ever make. Remember the extra money pays off the capital, reducing payments into the long term.
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#18, foredeckdave, I agree, what is the point of reducing interest rates for the sake of it? There is no point.
#1, crowdedisland, I also agree with your post.... Gordon Brown is desperate for short term success to enable him to win the next election.
Gordon Brown is doing nothing to change the bubble mentality. He's still encouraging consumers to spend money that they haven't got which landed us in this mess to begin with.
It's almost as though he assumes that pensions and savings are irrelevant now that we're in recession - who needs to retire anyway?
I continue to maintain that Vince Cable should be in charge of the economy - he know the LibDems aren't going to get in so it's not about the politics for him. He'll get on with the job and do what needs doing.
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Does anyone know how much money HM Government has lost in unpaid PAYE and VAT with the Administrations of Woolworth, Zavvi, etc?? HMG no longer a secured creditor, so they will get not much either.
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This is another critical decision point for the government - and I hope they come out with the correct decision.....
..... which is to ignore the self interested posturing of the bank directors, who are still only thinking of their own personal salary and bonus arrangements (and to a much smaller extent the interests of their shareholders), and force them to raise more capital, if necessary from the tax payer.
Post 5 is absolutely correct that in any normal market of goods, stronger players would enter if they see existing players weak and unable to invest/compete adequately, but given that this cannot happen in the banking sector, the government should force banks (again) to recapitalise.
The sooner we can get to a Swedish solution to the situation (where the stupid banks are completely taken over by the state, recapitalised, new management installed and then set free to operate again) the sooner we will approach a normal lending situation.
'My' government just cannot start buying up all the toxic debt, for me to take a huge loss on when:
a. bank shareholders are still in business and earning good returns from totally incompetent managements
b. the savings I've put aside in the good years now attract a paltry interest rate, a large portion of which is then carved off by the very same government
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The problem with our financial system is that all too often it finances speculation rather than investment. Also, that banks as secured creditors do not share fully or fairly in the risks of an enterprise. This gives them power to destroy a profitable company, or to benefit from irresponsible management as in the Farepak fiasco. Ie waiting until the innocent punters have paid in advance for their orders and then pulling the plug.
We need a new model for investment, ie that it should not be the bi-product of a casino. Loans to companies should be discouraged in favour of equity stakes, and all shareholding should be for a minimum of three months. 30 day settlement terms to suppliers should be enforcable by law - indeed any attempt to write contracts to get round this should be a criminal offence. On the other hand, companies should be expected to keep enough cash to meet their short term obligations without needing loans.
Perhaps there should be competing national and regional unit trust schemes, backed by the government, but accepting money from private investors? These could give backing to SMEs in return for an equity stake, repurchasable by the other shareholders/partners at some future date.
The aim: any provider of finance to business should have a very strong incentive to help that business succeed, rather than pull the plug.
I am not a businessman, merely an armchair commentator, so I won't be offended to be (politely) shot down in flames by people with more experience. However, I believe strongly that if we are to avoid the regular crises of exaggerated boom and bust, we need a new financial model.
Any other suggestions?
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For those worrying about Rates of return on their savings, it is a bit like someone on the Titanic complaining to the Steward about a leaky Faucet.
The British economy, unfortunately has depended on Financial services to supply a huge chunk of its income from abroad.
As it stands the British economy is unable to maintain itself at its previous levels.
Tourism may be able to pull in some more income especially if the exchange rates stay low, but alone it will not make up the difference.
At a much lower exchange rate manufacturing MAY pick up and draw in some extra income.
But lower exchange rates are in effect quite huge bursts of Inflation (appiled against imported goods and raw materials) and will drastically reduce the value of depositors savings.
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For those worrying about Rates of return on their savings, it is a bit like someone on the Titanik complaining to the Steward about a leaky Faucet.
The British economy, unfortunately has depended on Financial services to supply a huge chunk of its income from abroad.
As it stands the British economy is unable to maintain itself at its previous levels.
Tourism may be able to pull in some more income especially if the exchange rates stay low, but alone it will not make up the difference.
At a much lower exchange rate manufacturing MAY pick up and draw in some extra income.
But lower exchange rates are in effect quite huge bursts of Inflation (appiled against imported goods and raw materials) and will drastically reduce the value of depositors savings.
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I am a retired person in England who regards my 'savings' as my private pension fund. When my wife and I had a mortgage the rate was always in double figures and we made sure that we could afford it; now my fund?s interest is falling to zero. This is not a good enough return and I have been looking around the world, via the internet, for a better investment. Brazil for example, or France, to take advantage of the future further falls of the pound against the Euro. I certainly no longer trust the pound. For example, any one with £100,000 in Euros would have seen an increase of value to around £140000 over the last twelve months.
I do not understand why the interest has been reduced, it can only lead to a loss of capital to Britain and a consequence of a slump, as happened in the last century. The pound has already followed the dollar down to a drastic revaluation that must lead to seriously increased inflation.
Is this all being done to delay the bankruptcy of badly managed banks and a minority of property developers/dealers and stupid mortgage holders who have over-borrowed; and maintain the unrealistically high property prices? I would have thought that it would be better to get the bankruptcies done to get rid of the incompetent, and place their business in more competent institutions and cleverer people.
The removal of the incompetent banks and the drastic reduction of property prices to affordable levels would be a much securer long term solution. We have had a very long period of continued inflation, it is time for a period of deflation to balance things up and bring about a stable value of our money for future generations. It is grossly irresponsible to allow the continuous inflation of prices that erodes and devalues the value of every one's money and gives future generations very little to build on.
As a person who owns the money I am not satisfied with any interest below 5% pa, and if the interest is not returned rapidly I will take it to where it is more valued, and respected; which will not be the stock market, but rather abroad, or property when it falls far enough. Then the UK lenders will not be able to offer cheap loans because they will not have the money to do so.
If things continue as they are now, then the UK?s financial institutions and people?s personal savings are going to be nationalized, as were the coal mines, the railways, the car manufacturers, the steel industry, and the defence industry, and where are they now?
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I am a retired person in England who regards my 'savings' as my private pension fund. When my wife and I had a mortgage the rate was always in double figures and we made sure that we could afford it; now my fund?s interest is falling to zero. This is not a good enough return and I have been looking around the world, via the internet, for a better investment. Brazil for example, or France, to take advantage of the future further falls of the pound against the Euro. I certainly no longer trust the pound. For example, any one with £100,000 in Euros would have seen an increase of value to around £140000 over the last twelve months.
I do not understand why the interest has been reduced, it can only lead to a loss of capital to Britain and a consequence of a slump, as happened in the last century. The pound has already followed the dollar down to a drastic revaluation that must lead to seriously increased inflation.
Is this all being done to delay the bankruptcy of badly managed banks and a minority of property developers/dealers and stupid mortgage holders who have over-borrowed; and maintain the unrealistically high property prices? I would have thought that it would be better to get the bankruptcies done to get rid of the incompetent, and place their business in more competent institutions and cleverer people.
The removal of the incompetent banks and the drastic reduction of property prices to affordable levels would be a much securer long term solution. We have had a very long period of continued inflation, it is time for a period of deflation to balance things up and bring about a stable value of our money for future generations. It is grossly irresponsible to allow the continuous inflation of prices that erodes and devalues the value of every one's money and gives future generations very little to build on.
As a person who owns the money I am not satisfied with any interest below 5% pa, and if the interest is not returned rapidly I will take it to where it is more valued, and respected; which will not be the stock market, but rather abroad, or property when it falls far enough. Then the UK lenders will not be able to offer cheap loans because they will not have the money to do so.
If things continue as they are now, then the UK?s financial institutions and people?s personal savings are going to be nationalized, as were the coal mines, the railways, the car manufacturers, the steel industry, and the defence industry, and where are they now?
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Why isn't the devaluation of sterling considered a bigger issue by the press and politicians?
We have seen sterling devalue by ~25% against all major currencies. Every reasonably sized company in the UK uses for some portion of its supply-chain off-shore factories and foriegn built goods. The sterling devaluation has resulted in their costs increasing hugely in just a matter of weeks.
And lets be clear, just because a UK company produces goods in a low cost economy does not mean it is not adding value to UK plc - for most of these companies the highly paid knowledge workers remain in the UK, foreign currency and profit is still brought into the country.
Unless the pound strengthens soon, we are going to see many companies go bust, not because the availability or expense of loans but because their manufacturing or component costs have just increased by 20-30%. Not just old companies like Wedgewood?s, but high-tech companies where predominately design is carried out in the UK and manufacturing is in Eastern Europe or the Far East. Last I heard, the government was placing their hopes on high-tech growth for the future UK industry.
Further, as the UK as a whole is net importer of goods, everything we import now costs us 25% more. Add on top of this the BoE further reducing rates and printing money as "a monetary stimulus package? how can we now not avoid both a collapse in industry and double digit inflation?
Surely this is a bigger issue than a further 0.5% or even 2% cut in interest rates?
What am I missing here?
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#21
I am exasperated about how slow politicians and economists seem to be to wake up to the fact than fixing the housing market is the key to starting the recovery in this country
But the housing market is fixing itself quite nicely all year. Down almost 20%. Another year or 18 months and it will be more or less fixed.
where home ownership is high and most wealth is tied up in homes.
But that 'wealth' isn't real. It is just an artificial artefact of the previous decade of profligate government and individual borrowing and squandering. Why should property values treble in a decade while the price of food, electrical goods, cars and practically everything else went down in value? What stroke of economic genius did these individual householders think they'd pulled by simply sitting on their duff in their house? How had they added any value to their house let alone trebling its 'value'.
They hadn't. That money didn't exist. It was never earned. It was never there. We just have to face the reality that our houses are not piggy banks and if we want a foreign holiday or a 42" plasma TV or a new 4x4 then we'll just have to save up like every other generation before us. Oh, how boring.
Sadly we spent the last decade being encouraged by Brown to believe that all this house inflation and borrowed money was some new economic paradigm that would continue forever. I think he might have actually believed it himself. He certainly doubled national debt and seems quite miffed that the banks have stopped lending even more to individuals so that they too can get further into debt.
The solution is actually very simple. We work hard, do without the little luxuries we seem to think we've become entitled to and pay off the debt. We live within our means. And so should the government.
I don't know why Brown finds it so difficult to be honest about this.
It's that simple. As a result there will be many in banking and retail who will lose their jobs and that is unfortunate. But then you could argue they were fortunate to have a job at all these past ten years since clearly their job only existed if we all went completely bonkers spending non-existent money.
If they hadn't been sucked into such unproductive jobs they may actually have spent the past decade diverting their energies to something more productive and sustainable. I know that sounds harsh but it really is as simple as that.
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Interest rates cut do not affect the average mortgage holder as much as they should.
Its sickening to see how the inbred greed has meant banks will waive any moral right to correct the hand that feeds them. While the Bank of England (BoE) might drop rates to a potential low in over 300 years, none of it matters if the banks themselves drool and wryly point to their small print seeing the BoE drop as a golden egg to increase the money going into their coffers. A few banks pass on a token gesture of the decimal variety but 1% only always means much less to the people who have a home to run. Being told a 2% or 1% base rate means nothing. Who will benefit from this the most? Ans - The banks. Most average people will still have circa 5%(+) to pay when the BoE rate hits 1%. Thats for those people who have mortgages. For those that dont...scrape, borrow, steal the neccessary and almost impossible (min) 20% first-timers-deposit required and you too can join the other homeowners who stand NOT to benefit from the BoE rate. What a ridiculous empty hope.
Unless the BoE rate (like for like) is not passed on, you wont boost the circle of money coming in from the single biggest expenditure in people's lives. Its not rocket science. Too many people make it so.
Banks like to sit in their high white towers and gamble other peoples money by 'hedging' and then turn up with a very large cap in hand begging for help. (Kinda like a gambling addict hooked on casinos). The banks were quick to ask for money, quicker to shift blame for any of the situation and now wont play ball with the government who dug them out of their holes. Gordon Brown needs to put pressure on the banks and make them kneel. Otherwise the banks will drip dry the last pennies out of the economy without any moral or ethical conscience whatsoever. And when it all falls down, they will walk away with their pockets stuffed. This is what banks do. Look at the CEO's of all the banks, they feel no moral obligation whatsoever.
Gordon - time to put the collective power of the voters who placed you in government to good use. The banks owe you. Make them pay for the loans which, hypocritically, they charge everyone else for.
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#17
(i) The ineterst paid on my Nationwide cash ISA is only 1.5%. This means that Nationwide must charge its borrowers at least 3% for a mortgage, in order to cover costs, risk, and a small profit. In fact, a profit margin of only 1.5% is probably too small; so Nationwide will have to charge more than 3% to the majority of its mortgage borrowers.
(ii) Unsecured loans are being offered at rates far in excess of the BoE rate. Barclays is currently offering unsecured loans at an APR of 9.9%, which is far in excess of the current BoE base rate of 2%
(iii) The BoE base rate is not the rate that commerical banks actually pay for the money they borrow, as they source their funds from depositors and the wholesale money markets. Hence, LIBOR seems to be more important than the BoE base rate.
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I agree that any further rate reduction will have virtually no impact.
With rates as they are I can get an unsecured loan of £10,000 - £20,000 at 7.9%. If the Bank rate reduces the rate I'm offered will, I am sure, be hardly any different.
I'd like the money for various things but I don't need it and being a cautious soul I will not be taking a loan out. I have no excess money each month - (my resolution is to live within my means) so I am actively seeking ways to reduce my spending.
I work in the private sector and although I think my job is relatively secure I'm not certain so my confidence is not high enough for me to take out a loan. There must be millions in the same situation (or a lot worse off).
VAT reduction has been a total waste of time - I think an income tax reduction would have worked better.
Gordon will have to appeal to the people who have benefitted most from his term in office - those in the public sector - they are less likely to lose their jobs so should have more confidence for the future.
Confidence and cash are the critical things and both are in short supply.
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One other problem faced by British manufacturing is the deskilling process begun under Thatchers Gov't and not yet reversed.
You see it is much easier to buy in finished goods for resale (as a Merchant) rather than produce the goods yourself as a manufacturer.
As a simple Merchant one does not have to worry about factory machinery , training of staff, discipline of staff, pay disputes, raw materials etc, etc.
All you need do is inspect the quality before buying and if you do not like it you award the contract to a different manufacturer.
This does not apply to every product, but a great many of them it does.
This is just another driver of Globalisation.
Being able to buy in finished goods, means anyone can be a Director.
They do not have to understand the manufacturing process in any detail, or have any particular skills of their own.
Makes you think.
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There seems little doubt that a further cut in interest rates will be no better than flogging a dead horse. The banks have seen what happens when the Government decides to behave like Henry the Eigth and simply take over assets . The share-holders in remaining banks have seen other bank shareholders tipped into the drains and they are quick learners. If the government behaves like a tyrrant it will be treated as such. The banks will pay lip-service to listening to it but will sneak out of the room just as quick as they can and see if they can't put some more bolts and locks on their shaky doors.
How to restore the situation ? Treat people fairly. Do not steal, just because you can.
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Any change in itnerest rates today is merely a re-arrangement of the deck chairs. It will do nothing.
The banks' profit margins are being squeezed and they need to generate income at a level greater than the 12% that they are due to pay the Government.
There has been widespread dismay that the Banks have received assistance from the Government, but not passed this onto customers and businesses that need help.
A focussed and cost-effective boost could be given by the Banks settling the Bank Charges claims. They would save everybody a lot of legal fees on a case they must inevitably lose. They would be refunding customers and businesses that most need their assistance, since they obviously have cash flow problems to have items unpaid. The refunds could then primarily be used to reduce overdrafts and loans first and any remainder can then be used by the clients. So a boost would be given to businesses and customers, without them needing to increase their borrowing. Indeed, it would substantially reduce outstanding borrowing. The money would not even leave the banks. In many cases, it would reduce borrowing that they had already written off or were struggling to have repaid.
In the words of Delboy ?You know it makes sense.?
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#35 Interesting. Gold companies are trying to push a return to the gold standard in their own interest. There was a letter on similar lines in the FT last Saturday, from Peter Munk of Barrick Gold Corp of Toronto. As Mandy Rice-Davies observed: "he would say that, wouldn't he?"
Truth is though, the gold standard never worked - and never prevented financial crises. It just meant that those who possessed the limited quantity of gold available did well at the expense of everyone else. Read Galbraith: "Money, Whence it Came, Where it Went". for a good history.
The only true backing for a currency, gold or no gold, is the value of useful goods and services available in a particular economy.
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So pensioners and savers are in effect being forced to pay for the greedy bankers' and greedy PLC directors' bonuses!! This is ultimately what is now happening and it is disgusting.
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A better, more thought through effort from Robert today, although I think Tom Stevenson puts it better in a remarkably similar piece in the Telegraph.
So far silent on the very good Sainsburys results and the news that they plan to create 4,000 new jobs. (Not to mention the even better results from Peacocks and its plans to open 50 new stores). No doubt still thinking of negative ways to spin those. (And if he tries to claim that bottles of port, brandy butter and 12lb turkeys are not discretionary spend I will throttle thim, in a cyberspace way).
Anyway, back to the point. I agree that 2% is far enough and all policy efforts should be directed at reducing borrowing costs (LIBOR) whilst preserving returns for savers. Perhaps Gordon is warming us up for a two year public gilt auction by ensuring that returns elsewhere are so miniscule as to make gilts at c4% very attractive. (I for one will be a buyer if interest rates go lower). I can see a "Sid" type advertising campaign for gilts coming on. Seriously.
As Tom Stevenson points out, the risk on house prices is now that they over-correct on the downside (which means another over-correction on the upside in due course). So I would support a government deposit guarantee scheme for first-time buyers that would help bridge the 25% deposit gap which is so far keeoing first-time buyers out of the market. Only for repayment mortgages, of course, so the guarantee amortises quite quickly.
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#21 Sorry to disagree: Britain's main problem now is that we are too reliant on imports for our basic needs.
Tying up "wealth" in housing will not solve this problem, au contraire, it is part of the cause of it.
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As a saver I feel penalised for saving. I have always spent within my means and saved as much as I could. I never owned a credit card or borrowed more than I could afford to pay off. Yet now the return on my savings is being cut to pay for those who borrowed to much at a time when it was clear that the bubble could not last. Why should I pay for the banks and the governments mess up? Interest rates should go up to at least 5% and stay there!
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Of course the bank rate matters.
It matters to retail savers
It matters to retail borrowers
It influences LIBOR rates
It influences the cost of money to business
It matters to the banks
Over the last year Libor peaked at over 6%. This would have been the cost of raising money in the markets.
If, as a bank, you needed to refinance loans that were used to fund mortgages fixed for three or five years at lower rates than these you'd have been making a loss
If, you had an american ARM mortgage that came to the end of its low fixed rate period, the reset of interest rates would have been LIBOR +, leading in some cases to doubling of interest rates
If you were a corporate borrower your interest payments might have been tied to LIBOR with higher charges
Three month LIBOR is now under 3%
Unfortunately some of our banks and banks worldwide made loans to corporations, investment vehicles and individual speculators on the basis of the value of assets that have now tanked so to be frank, reducing interest rates isn't going to make much difference to those needing to repay or refinance loans. The collateral just isn't there.
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What does it do to the securitised loans (corporate and home loans)?
The rate of return on them also falls.
Hence the investor will liquidate them even futher.
And we will fall more in the rut.
Serendepity.
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53.
I'm sorry, "indbred greed" it is not, common sense it is. The shareholders have been shafted enough, restoring profitability and confidence is the only rational and sane thing for the banks to do, until and unless the government tries to force them to do otherwise.
The base rate is not the banks' funding rate, it is LIBOR and the cost of servicing deposits. It would be insane for them to reduce their lending rates in line with base rates, without commensurate movement in LIBOR and deposit rates. (And we can all see how popular lower savings rates are!).
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45:
I'm sure the Shareholders of Northern Rock , Bradford and Bingley and Alliance and Leicester would not feel that they have been Bailed out, or in fact that they have been helped in any way shape or form by the Gov't actions.
In fact the Shareholders in the first two have lost every penny, and the last about threequarters of their investments.
The majority of their Shareholders were of the small variety with the largest holdings of Shares being held by Pension Funds and Insurance Companies.
None of whom were black hearted villains, just ordinary people or those representing their interests.
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IO have no doubt rates will come down 1% or more in a bid to be seen to do something.
I also think the bond failures in Europe hark for bad news for our government and that may well force rates up much sooner than many analysts are saying.
The government are leading us to penury, for those that did not see the real story behind all the 'activity.'
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to add to #64 and the problem is no one has any confidence in how much the collateral will be worth in a year, two years etc time so even if it is there it is being downgraded even further.
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For some reason I have no confidence in Brown being capable of fixing what he has created.
We seem to going along the same path that Mugabe walked, no doubt with the same results.
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Post 42 that is exactly why I am overpaying.
To be honest pretty much everybody I know is doing the same. None of us are spending the "saving".
We all are astute enough to know that sooner or later someone, and that generally means the UK taxpayer, is going to have to pay for all the government bail outs and borrowing. We will really need the extra money then.
As you say every pound extra paid off the capital now is greatly rewarded in the future.
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Re 63
Do not worry. Borrowing is so high that interest rates will soon rise. They will probably get up to about 7% to 10% within 2 years (although inflation will rise too).
Meanwhile we shall have a short period of deflation - perversely *net* interest rates (i.e. interest rates net of inflation) will then also be high, even though interest rates may be zero.
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Differential interest rates matter. Not that long ago Japanese rates were 1%, US rates about 4% and European rates were over 5%. A flood of capital washed to europe. There were better returns to be made. Now, with interest rates closer to parity, there is no need for capital to flow here. In fact because value was seen to reduce, capital flowed into US Tbills and Tnotes because these are seen as the safest form of repository. Thus sterling deflates as investors buy safe dollar investments and foreign investors in sterling funds sell further because they see their investment decline by about 25%.
So do interest rates matter. Yes. They are about one of the few vertical things left in a flat world
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#52
I completely agree with you.
The housing market is the key to this because housing costs are not included in inflation figures. Inflation is the economic compass and it has been manipulated to cause the last ten years of "boom".
Can anyone answer why housing costs were not included in inflation figures? and don't say because the US did not include them. I think the US did not incluse them because they knew it would create an asset bubble which they wanted...Why else do they spend the most per capita on defense...so that they can go bust without the threat of an attack.
We all need to look at the bigger picture and not get bogged down in the details of VAT etc. Look at the causes, not the symptoms..
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Evan Davis is the BBC Economics Editor who told us for years what a brilliant job Brown was doing-I wouldn't take too much notice of anything he says.
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Surely the threat of the BoE printing billions of new notes to pay off debt and therefore, increase inflation figure would get the banks to get rid of cash as quickly as possible, wouldn't it?
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There's another aspect, folks: if the only place to go is upwards, why go downwards now? Oscar Wilde rightly commented that a cynic knows the price of everything and the value of nothng, one might rephrase today's Blog as evidence that a hypocrite fixes the price of everything at the risk of his skin. It's a ridiculous circumstance when supply and demand have broken down so significantly that whilst the risk of lending has gone up, the rewards for it are going down, and investors are likely to start pulling the plug now, regardless of what the Chancellor says - in a word, by not understanding diddly-squat about what he's about, he's fiddled while London burns and we're about to hit the wall.
It's even worse than that, because the Wall is now moving towards the Chancellor: one supposes he's now dressed in a natty silver swimsuit, because far from hitting it, it's about to hit him and unless he's positioned right, he's going to end up in the drink within a month. There's only one place to go from the last-chance saloon, harp lessons start tomorrow.
The melody to learn is "Da mihi manum", as you'll be needing one soonest to nationalise the banks, fire the executives, and send the foreign folks off to Frankfurt. The Serious Fraud Office is going to be working overtime, now it's already started in on Madoff - it should be asking itself who else was part of that conspiracy.
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Thuis is becoming surreal. Interest rates take 12-18 months to have any effect, even where they are passed on to the customer, naturally the recent cuts have not yet had any impact, everyone agrees that they can't go much further anyway, most agree that we have had too much borrowing already, the banks can't lend more because they lack the capital. The way forward must be quantitative easing, to get more cash in the economy (and, by buying up gilts, transfer the Government's debt to the BoE where it will be little more han an accounting entry) , accompanied by higher interest rates to moderate the future inflation, encourage savings (and bank deposits) and help banks make more profit to rebuild their balance sheets. This seems so simple and obvious I must be missing something, or do we really have to proceed in the present linear fashion until it is clear beyond the slightest doubt that it is not working?
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If you and the government believe that interest rates are a blunt instrument, I can also guarantee that Gordon Brown will not increase interest rates to control the resulting inflation from printed money whilst the economy is still in depression.
The coming of hyperinflation will not be from a booming economy, but from printed money Mugabe Zanu Labour style to pay for his public sector cronies, plus from higher import costs and shortages of affordable goods.
Infation destroys wealth and savings, and the banks will have no money on deposit to lend other that that provided by government loans themselves via borrowed money from treasury bonds since the taxpayer already cannot fund this amount of money.
Thanks to Labour who socially engineered the majority electorate to be dependent on public sector jobs and state benefits, these indebted people will carry on voting for Gordon Brown till we all starve. Next comes elected Communism.
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Some (off the wall) alternatives:
a) Spike interest rates UP a few percent and invite massive Overseas investment especially from the Middle East states. More cash in UK PLC means less pressure on UK taxpayers, more for lenders and savers. Normality and global trading resumed.
b) Redeem every UK residents mortage debt. Just wipe the slate clean and start again. Wouldn't cost much more than spending so far. Would stop homeless, dole payouts for mortgages and enforced bankruptcies freeing up HM Courts to act against real Financial frauds.
c) Take all countries off of the Terror List (Axis of Evil) and those with Sanctions against them and start trading freely with them. We can sell them M&S foods, organic vegetables and meat products. In return we get their cash and they can't spend it on weapons for terrorism.
No?
Ok. Cut interest rates to zero and we can all be broke and unemployed for years to come.
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A boost would be given if the BoE and Billy Bunter worked with the Government rather than against it.
I sometimes think the government and the banks in their criticism of the MPC's extremely poor judgement, have upset Billy Bunter, and some on the MPC, like schoolboys, are doing all they can to damage its plans irrespective of the damage done to the country.
To reduce interest rates further as you explain would be of little if any benefit and could be very counter-productive.
Perhaps the Government ought to take the BoE under its control as suggested by various politicians such as Cable, remove King (after all he has presided over the first run on a british bank in 160 years and potentially the lowest base rate in over three hundred years whilst promoting high interest rates just a few months ago), and ensure we have a coordinated approach, both in what is done and what is said, the latter being particularly important to restore confidence, as recent comments by the BoE for example about nationalisation can do immense damage and become self-fulfilling, by further destroying investor confidence.
It is good to see that the government speaks against full nationalisation, which would be disastrous in terms of international and domestic investor confidence in the UK, and has slapped Bean and co down.
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Another day.
Same problems
same mistakes
same bloggers giving there own personal solutions that also havent changed.
Yah Boo, Tax the rich sack the bankers call an election cable knows what to do darling is a stool pidgeon osbourne is a light weight. I'm doing this were all doing that you should all do the other.
Its all just hot air.
Money and posessions are the myth, what can you take with you?
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The Government needs to find a way to By- Pass the Banks to inject loans into the Small Business Sector.
All small business pay VAT - many are cash accounting - ie they pay when paid.
The government could easily offer this sector the chance to defer VAT Payments for - 3/6/9 months thereby allowing Businesses to Borrow directly from the Government.
It would certainly ease our Cash Flow.
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#35 Thankyou for the Thorsten Polleit/von Mises reference.
#41 You say:
"A ten or twenty percent rise across the Public sector would restore demand in the economy and feed through ... to higher employment in the private sector and more jobs ... but for Britain to become competitive enough internationally ... the Pound would have to be closer to one half a Euro and One Dollar or Salaries would have to halve in the private sector."
Please, supercalmdown, read mark and learn from the reference posted by #35 and save my blood pressure.
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Of course what the government is panicing about is that the credit boom i.e. the silly living on borrowed money giving the appearance of a grwoing economy, is over.
To maintain the fiction people would have to borrow an additional £11 billion just to maintain 2007 spending - instead the banks aren't lending the money and in fact customers are repaying £11 billion.
At one go the 'boom' is over - GDP is falling by £22 billlion - 3% and of course the government loses VAT receipts on the purchases - £3 billion.
Hence the desperate measures to try and reflate the spending bubble.
If the government does print money - it will go straight to the banks as people pay of loans - who will immediately buy government gilts and bonds to improve their solvency/ capital tier 1 assets - in other words the money wont't get into the retail economy - it just goes back to the government.
The plan of quantitative easing/ dropping money from helicopters will, of course make the attempt by the government to raise money in April by selling Gilts - £128+ billion that much more likely to fail - who would want to buy assets in a devaluing currency.
And if you want to know - the IMF has funds of about £150 billion available - so a serious failure by the government of the UK would just about wipe out the IMF (why else do you think GB was pleasding with countries to give money to the IMF last year?)
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#22 NewsSpotz
Hopefully these aren't the 'very complex calculations' they've been using to get us into this mess.... maybe a little 'personal judgement' wouldn't have been so bad
#28 the1beard ? I smell a man on a Tracker......
'The lower rates will still have a big impact on borrowers who have tracker loans and this is a massive stimulus to the economy and to the taxman.'
..... and it is offset by the big impact on savers who are now not stimulating the economy or benefiting the taxman! Or are HM Gov hoping savers will continue to spend by withdrawing their savings? - as opposed to the guy on breakfast news this morning who was 500GBP up on the rate cuts and was deciding whether to save or spend! The issue here is the arbitrary way in which people on tracker mortgages have been rewarded, regardless of their ability to pay ? without Gov intervention and the contrived reduction in the base rate a Tracker would be suffering as the Bank of England push up base rates to cap inflation......
Like I sad in earlier posts ? I get the distinct impression all this money is being spent in the hope that we?ll go out and buy more T-shirts, shoes and TV?s........ Not great building blocks........ I?d put my hand up for Harder Times now but better for the next generation..... I think that was the approach we took as a country in 1914 & 1939.....
Is Thatcher really too ?Dotty? to take over again?
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It matters because it enhances or detracts from the view of how well we are doing as a country. It will not help us from that viewpoint. For savers it has an immediate impact as the lower rates are always passed on with great speed! For borrowers the lower rates are a lot slower to come through, and this will get worse as lenders have to ensure they have the funds coming in and it is getting more difficult to attract new deposits. If we could all get 12% like the goverment are achieving with their recapitalisation of the banks then they would have no trouble getting depositers! How the government then expects the banksand building societies to lend near the base rate is incomprehensible, but then they are the KNOW NOTHING PARTY.
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@73
Yes, Mrs Bloggs13c2, differential interest rates matter, but not when nobody knows what inflation or deflation really is, and when it'll make no difference whatsoever to the outcome. Differential interest rates are the true return after inflation, but when the market's broken, such that spreads have become pointless, you've no way of knowing what risk is - and at that point, we have nuclear meltdown.
The other way of hedging might be to swap out into another currency, fully covered, and cap it with a US option - of course, the risk is that is that the bank may not be there to unswap it at the end, whence the cap insurance... it's a hell of a premium cost and you still need to place the money elsewhere. I'm away from the FX markets, what are the forward points doing against the Euro?
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What I find interesting (frightening?) is how unstable markets have become. We saw this in 2008 with oil going from 60 USD/barrel to 150 then down to 30, shipping rates collapsing by 90% and once hugely profitable US investment banks collapsing back in October. I think the lesson for 2009 and beyond is that there will be further huge shocks and that noone knows what they will be.
Do Brown/Darling/King really believe that the turmoil can all be fixed by a 1% drop in interest rates or by printing a little extra money? I rather doubt it, but then I see much more hubris than humility.
So what do they do if there's a serious gilts strike, or if Sterling collapses (or conversely appreciates to an unsustainable level), or if there's another run on a British bank, or if a major foreign bank that takes UK deposits collapses, or if there is a further wave of corporate bankruptcies in marginal constituencies, or if food prices spike in the next bubble?
I really wish they would do nothing and wait for events. Since none of them are really in control of events, why pretend that they are?
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Here's a very quick and simple idea.
Tie the bonus levels of all staff to their company share price, with all bonuses to be repaid in the event that they leave the organisation, or that the organisation goes into administration (or receives government assistance) within the next 5 years. Similarly, senior management salaries could be baselined at the start of each financial year, and then adjusted by the net increase or decrease in the share price over that period. For politicians, salaries could be tied to a combination of FTSE level and an exchange rate basket of currencies.
This would have the happy effect of reducing the salaries of some of these greedy individuals by 80 or 90% (or even more in some cases). And it might even get them to start thinking longer term, and to think in terms of the interests of their company or country, rather than their own pockets.
Finally, the only way we are going to get a lasting solution to the current mess is when people start spending only the money they actually have, or can genuinely afford to borrow (i.e. the level of debt can be covered by existing assets by a factor of, I would suggest, at least 3 times). Yes, this will mean lower standards of living than are currently enjoyed by almost all for a few years, but as has been noted here already, many of these excesses have to now been funded by fantasy money.
Painful, but it will put us back on an even keel.
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#5 is looking for a bank with REAL reseves able to lend REAL cash to people.
Tesco.
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Does anyone actually believe that the government & BoE interventions will make any difference to where we are headed? We are after all a capitalist society and in such a society the market decides what happens and as everyone knows - you cannot buck the market.
There is a massive readjustment going on which will last for some 2 - 3 years at which point we will slowly begin to recover, the markets will start to take off again and all the lessons learned previously will be forgotten! Collective amnesia is the driver of these cycles!
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So now there is further leaks of potential rate drops, which will have no impact whatsoever.
Lets see what is happening, borrowing, spending and saving. As individuals we are being encouraged to do the latter, not by GB but by the Tories.
The govt seems to be only intent on borrowing so it can spend its way out of the mess it has partly created.
I seem to remember that Obama said the same thing shortly after his election victory, with one exception, he also said lets save money on reducing expenditure on areas where political or other minority pressure groups has been brought to bear.
In the UK lets save money on cutting the number of Quangos and other such minority groups.
If we, as individuals, have to save to ensure we withstand the future financial pressures, then the government under GB's leadership, should do the same.
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The great joy of the internet is that any old mrs bloggs can, now, if she chooses root away and look at annual reports, the government's blue book, newspaper articles from august journals across the globe and within relatively short time spans discover that most of the 24 hour news is shallow regurgitation of press releases and personal opinion. The facts often paint a very different story
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Does anybody else have the feeling that we are getting into Car Boot sale territory with the interest rate - looks cheap but on offer because it doesnt work properly anymore?
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Perhaps tighter regulation needs to be applied to any PLC's in future.
Regulation to limit just how much Debt they can have in relation to their assets.
This would help prevent Private Equity from buying up a PLC, asset stripping it, loading it with debt and then selling it on to the Public including our Pension Funds.
It would lead to a Private Sector with more resilience to slumps and downturns.
( I would not apply such rules to private limited companies, just those Publicly listed)
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Cutting interest rates is totally pointless. When this whole crisis started they should have been immediately cut to 3 - 4 percent, but they dithered and cutting below that has now become totally pointless. Lenders will never in a million years pass on the rate cuts, and they've told people that, savers are always the first to be hit by a rate cut and it merely devalues the currency even further.
On top of that, we now have the same high levels of government spending, financed by borrowing because tax revenues are going down, which will snowball the effect still further in a few years as our taxes do nothing but pay the interest. Even that kind of advice is available from debt counsellors.
Are central banks, governments and economists that far out of touch with what is happening?
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52. U9461192
46 sashaclarkson
spot on, couldn't agree more.
16. joeplumber
"If the government paid off all our personal debt, bank loans, credit cards, mortgages, etc.
The banks would have lots of money to lend and being debt free we could all set the bubble off again.
Of course next time time round all the prudent savers could join in as well. Obviously we could only buy things produced in this country as the pound would be worthless abroad, but hey if the word secretly got around beforehand we could stock pile loads of stuff in advance.
There is always a KISS solution somewhere"
Absolutely brilliant, I apologise that I actually took you at face value for a complete thicko when I first read it but I now I understand. Better keep it VERY simple in case someone overseas finds out before we start hoarding!
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Probably burried but his is my 2 pennies worth:
Reducing interest rates will:
Make savers look at alternative assets to bank savings (property, stocks) which will benefit the economy reversing some of the 'flight to cash' resulting from falling asset prices
Benefit some borrowers (those with tracker rates without collars) by a considerable monthly sum, some of which will be spent. This will be offset by a reduction in spending by net savers but possibly this second group will be forced to run down their capital as they will not have the option to cut back.
Yes the reduction in interest rate spreads will harm the banks profitability but the government has conculded that it can support banks capital base directly so this is not the key problem.
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Not passing on the reduction in full to borrowers makes a mockery of the whole system! Wait until they start going up:
BoE reduces by 1% - Bank reduces by 0.25%
BoE reduces by a further 1% - Bank reduces by 0.25%
BoE increases by 0.5% - Bank increases by full 0.5%
BoE overall rate is 1.5% lower - Bank's is right back wher it started (so effectively 1.5% HIGHER). Disgraceful!
What is also a disgrace is the way Robert is allowing himself to be used by Labour to explain away what is essentially the failure of the Government to force these banks to reduce rates - Even when the taxpayer owns a majority stake! Is Gordon really THAT powerless?
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#96
Surely the debt levels should be in relation to their ability to pay - income/revenue
Asset values may go up or down as we have seen
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89: Now Santander has assured everyone that it is not like RBS, the Property market in Spain is just fine. their Mortgage book is sound, etc, etc ,etc.
Of course, they will repatriate their profits from the UK Banks they took over home to Spain in future.
The Co Op Bank seems very attractive these days!
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Now that competition for money has intensified the biggest problem confronting our prime minister is the same problem that confronted several of our past prime minister's, how can bank lending be chanelled into manufacturing (what little is left) and other wealth creating industries and not into property speculation.
Without causing further damage to the property sector.
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Whilst I fully recognise that this approach is impractical on some levels, I can't help but think that the banks need an incentive to become competitive rather than taking taxpayers money and sitting on it (which appears to lead to GB's inclination to give them more on the assumption that, eventually, they will begin lending it to us again).
To me, the choice is becoming ever clearer: carry on handing over our cash to a system which won't cooperate or hand out our cash to those people who really need it directly (to remind the banks that they have to work for their money). Either way the taxpayer is likely to lose out in the long term but at least the latter avoids some of the more unpleasant outcomes of banks not lending to each other. (I keep hearing about the option of printing more money to inject into the system. Hyper inflation (and not financial salvation) will surely follow??)
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It's all about saving Gordon's skin; we all know that cutting the interest rate is not going to solve this problem and it may even make matters worse... but hey what the heck... if Gordon can keep announcing things to help the hard-working families (on the surface) then that may curry him a few favours.
The man on the street thinks cutting interest rates is a good idea, so that's what Gordon will do. The problem now is that GB has in effect given himself the task of leaping into action every time there's a slight blip in the economy because he has charged David as a do nothing man, hence Gordon must always be 'doing something' even if it is irrelevant to the task.
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Well, there it is. After over 300 years, as an act of capitulation, the government slashes interest rates to an all-time low.
Two world wars. Napoleonic wars. US independence. Cold War. 1970's. Thatcher.
All insignificant events compared with the economic catastrophe visited upon us by this Labour government.
Jackasses. Aren't they though.
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Re: #28 - the cuts are not a stimulus to those with tracker loans/mortgages, because they are often the people who are prudent (to use the Gordon's term that he himself has ignored). I have a tracker mortgage and some savings. It's swings and roundabouts for me, because my savings are not generating the return I would hope. A lot of people will have to sit tight and weather the storm.
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But high St banks don't borrow from the BoE so why would they pass on the Bank rate cut?
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Their is obviously a need for money to keep the economy going.
The government seem to look only one directional. Bail out!
Yes, the banks need the money they borrowed to people. Who bails out the people who don't have enough or any at all money to pay the banks?
The money the banks receive is "public money" right?
So why aren't we giving the money to the public first so they can give it to the banks themself. Or make the "bailout payments" as a contribution towards the public's mortgage debt in the form of a direct cheque payment towards the households mortgage. It doesn't help to borrow money to people who are struggling to pay back their excisting debt. They need the "bail out" to primarily help them to stimulate the economy. The people are being choked by their mortgage debt. Some may argue that people got themselves into this situation, but it was also a system that allowed it to happen. Blame won't help any of us. Without breath, there's certain death.
Let's help solve need for money on both sides.
The people have their mortgages partly paid and the banks have the money they so "critically" need. The public/people now having less pressure from their greatest debt, they will surely have extra money to go and spend where it is needed to keep retail and other industries alive.
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As a small business (5 people) our biggest problem is getting our larger customers to carry on spending money on new equipment and support for existing machinery.
Three or four have said that they are suspending new capital spending and reducing planned maintenance, so that the flow of work is starting to dry up for us.
This is the sort of problem faced by thousands of small to medium sized companies, and reducing interest rates has absolutely no impact on it at all, just as the VAT reduction had little impact on retail spending.
What is needed is a shot in the arm for business with something significant that will make things start to move again.
Peter
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For most of my life I have paid interest, however recently I reached the age when I could hopefully use interest on savings to enhance a ludicrously pathetic money purchase pension , which wasn't even worth the tax relief.
I find my expectations dashed, and the interest I can receive virtually nil.
I have great sympathy with the suggestion that we all withdraw our cash and place it in secure storage. This would sharpen minds immediately, remember the panic reaction when savers started withdrawing from Northern Rock.
However I remembered the initial reason for the formation of mutual building societies was to give savers a fair and safe place for their money and lend it to safe and deserving homebuyers at a small profit.
I see no reason why the mutual movement cannot sieze this opportunity with both hands. If they offered 4% to savers and lent at 6.5% this woul;d still be an historically reasonable rate.
It could restart the first time buyers market as they could be preferentially targeted.
This is what used to happen and is how most of my generation got on the property ladder, and very very few of us defaulted.
So it wouldn't help the property profiteers and buy to let get rich quick brigade, let them use the commercial banks!
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So BoE base rate down 0.5%.
Somebody above said that it was like moving the deckchairs and I think they are right. The reduction will not be passed-on by the banks. It will have little or no effect upon LIBOR.
It appears to have had little effect upon the spot exchange rate at present - the £ is still up against the Euro and US dollar and strengthening!!
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Instead of throwing good money after bad to the Banks (whose boards are only intrested in their own jobs) the Goverment could stimulate the housing market in a simple way that would be to long term benefit to country.
1 - Buy up all the repossessed houses at the attractively low prices, and start to let them out to the massive amount of people on housing waiting lists.
2 - start contracting all the out of work builders to start work on repairing the existing housing stock that various goverment departments/local authorities own that are in such bad repair that they cannot be let out. Surely now when cost of materials has fallen through the floor is the best time.
When we eventually get through this mess and the housing market recovers the properties could be sold at a profit or retained as an asset.
(just do not repeat the mistake of the original right to buy scheme when houses were literally given away so the tennant eventually made the profit on future sale.)
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#111
the credit unions in the US have been doing just this
looking after savings
lending prudently
remembering who their stakeholders are
they are not in trouble
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Another lucid explanation of what's happening in the financial fog - thank you. But the quickest way to recreate credit is surely through the property market rather than the banks. It was the boom in house prices that fuelled the 30 year consumer boom, and the subprime mortgage crisis that triggered its collapse. House prices are the key to recovery. Coupled with the record low bank rate, a government guarantee to double or triple the deposit of first time buyers would provide a bottom to the house market. And that would improve bank asset sheets and confidence more than the injection of more funds to the banks themselves.
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This reduction in Interest rate will do the same as the last couple ie nothing, except drive confidence in Sterling down again thus reducing exchange rates. As the Euro is at its lowest rate since introduction Should the PM, Treasury and BoE be looking at ways to prop up the pound as they did in the old days.
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i feel sorry for savers........they should draw all their money out, and leave brown and his miserable crowd up the creek without a paddle. good riddence to brown hes a disaster.
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0.5% cut, MPC still behind the curve (literally)!
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This feels like a financial Tsunami.
Interest rate cuts now and massive inflation in years to follow.
It's the tide going out now - everyone still playing in the sand will get hit when the big wave comes.
"It's the end of the world as we know it - and I feel fine..."
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It would be madness on the part of the banks to lend money to businesses that are already struggling before the reccession proprly takes hold. The sad fact is if these businesses are struggling now, they have no hope of weathering the coming storm. However much the incompetent duo Brown and Darling together with the governor of the bank of England ( who is long past his sell by date ) fiddle, nothing in their tiny armoury can change what is coming.
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We are hear again Mr brown and his Fools have cut the rate which is no good to us.
where is your housing programe. you have had time to get a good part o9f this country back to work,but no, what could and what should you have done withh the Vat 12.5billon, This would have put a lot of people to work and how it would have kept manufactures would be happy,
But no lets cut Rates
This is no good for first time buyers which can't get mortages or d'not have Jobs now So start building Homes for rent before everybody has there homes repossed by the Banks who d'not care about anyone.
God help us we will all be in the poor house while Mr brown and his fools have got there 2 homes paid for by us.
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#5
I think you have identified a limiting factor to Gvt. manipulation of interest rates.
And if you go and Google "Tesco Internet Saver", you will find a savings interest rate which, I think you will agree, indicates that they are pricing themselves very competitively (like many a new bank before them) trying to pick up business by capitalising on the weaknesses of the existing banks.
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"...both regulators and markets are forcing them to hold more capital relative to their loans...". Sorry, but I thought the whole idea of re-capitalising the banks (aka part-nationalisation) was to boost their capital/asset ratio once and for all so they would start lending again.
Did we just not re-capitalise them enough? It looks like they should have been fully nationalised after all, or at least the part-nationalisation should have been done on a permanent basis so they have no incentive to save up in order to try to buy themselves out of part-nationalisation again in the near future.
Also, the banks just don't seem able to accept that the world has changed. At the end of all this, house prices look like they will be half what they were at the peak, and sectors like buy-to-let, Private Equity, PFI, etc will be far smaller than they used to be. All in all the banking sector needs to shrink considerably. There need to be big cut-backs at the banks to reduce overheads, and then perhaps they could cope with a smaller margin between lending and saving rates.
As for the headline "Does the Base Rate matter?" - I'm not sure it ever really did....
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I am not sure what effect it will make.
What I do know is that that our investment (the taxpayers) in the banks is earning around 12%.That is the sum the banks, that have borrowed , are paying for the reapitalisation money. How can they then lend near the base rate?
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This seems to be just about the only place to get a realistic view of what's going on in our economy today.
There must be some way we can get the Treasury and the BoE to read some "Peston-omics" before they waste more of our money on futile moves such as VAT and interest rate cuts.
Our big economic thinkers don't seem to realise that this new economic disease needs to be met with a new economic treatment. This is not the time for a repeat prescription. It's one of the rare instances where doing what you've always done is NOT going to get you what you've always got.
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Good article - very informative.
#38 - Robert0
I have to agree that there are some good property deals around. The Banks seem willing to lend where the LTV is 70% max (which gives them their cushion for risk) and the tenant is Lidl/Aldi etc and therefore unlikely to go out of business in the forseeable future. The Banks are therefore rebuilding their balance sheets where possible hence relative restriction on credit.
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The answer to Evan's little quip is that us bald men have to pay the barber the same rate as you more follically gifted for less work. We subsidise you so a bit more respect is in order.
When I had a receding hairline people felt I thought a lot, then when I developed the bald patch on the crown the view was that probably I was sexy. Now that the receding hairline has joined up with the bald patch I just think I am sexy!
The old jokes are the best jokes as they have lasted through the years.
There is another old axiom that if a product is scarce but in demand then it will become expensive. So how come that interest rates are going down when money is getting scarcer?
Has the demand for credit fallen by so much that cash deposits are not required?
No, this is all nonsense: we have entered an economic lala-land where up is down and down is up.
I fear this is the sort of thinking that got us into this mess in the first place. Is the economy a simple or a complex mechanism? In my view the economy is a continuous process that functions well when there is confidence but then falls apart when confidence disappears. Simple, it ain't: there is a psychological element we cannot disregard but which we choose to exclude from our calculations as it is too complex to comprehend.
We have discussed how we got into this mess in the first place. The simple reality is that nobody called the top of the market so that it could cool down of its own accord. Nobody had the bottle to do that so the economy has fallen over the cliff.
What can we do about it? I am begining to fear that there is nothing we can do about it. Perhaps what the government is accusing the Tories of doing, which is doing nothing, is the only thing possible?
The banks need cash deposits so they can then lend on the back of those deposits. Interest rates should then go up. This is the logic of the market.
However, my understanding is that the taxpayer is underwriting the banks instead as a substitute to the money market. Am I wrong? Is the bank bail-out failing? Or, has it, like the absurd VAT cut, already failed?
When is government policy going to start working or is it all just spin?
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Perhaps I'm missing something obvious here, but why is it a good thing for banks to lend lots of money? Wasn't the whole reason why we're in this mess in the first place that the banks lent too much money?
Surely it's a good thing if the banks are now lending less?
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Banks are blantly using low interest rate to boost they capital and protect the shareholder capital in them. Government will have to take much firmer action to increase available credit and if necessary use an already nationalised institution to lend at the new low rates, competition will soon encourage the others to follow suit or see their businesses loose business on a large scale.
As for savers, due to fractional reserve banking, banks can effectively lend and earn interest on £100,000 from a deposit of only £1111.12
Therefore the amount of taxpayer money made available to the banks would indicate that there is already enough liquidity in the system to allow credit to flow again.
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afternoon me hearties
I would have to say that the .5% cut justs goes to show that BoE (and HMG) simply don't know what to do but think that they have to be seen to be doing something; it would have been fascinating to be a fly on the wall of the MPC discussions about this; i bet they did a fair imitation of the jury in 12 Angry Men: a lot of disagreement and dissension; also suspect that their independence is now compromised and that they are under extreme pressure to follow govt instructions
Never though I would agree with John Redwood about anything but I really can't see the point in cutting interest rates any further now. There is little impact to be had. Libor might change very slightly I suppose but I suspect that both lending and savings rates will change very little.
The economy is like an oil tanker in that it is big and has a lot of momentum; our glorious leaders have been steering a course directly at the icebergs for 5+ years. Wildly spinning the wheel now to try to change course won't work as it won't have any significant effect for 6+ months, by which time Sod's Law says that, we'll find that what was needed was actually higher interest rates starting to feed through. Unless the govt WANTS hyper-inflation in 2010 of course..........
Whatever one may think of our own banks and their lending policies, the fact is that all the foreign and sub-prime lenders (like the Icelandic lot and some of the US banks) have withdrawn from the UK market; lending will continue to go down for the time being and that's just a painful adjustment that we'll have to get through. Small businesses should get priority for whatever money/credit is available.
As 113 wearealldoomed, says above, it would seem more useful for govt to directly intervene in the housing market by buying up all reposessed and empty housing, fix it up and rent it out as public housing. I would go further and pay housebuilders (before they all go bust) to carry on with all of their mothballed projects and also insulate all the existing housing stock for FREE. So the economy is stimulated sooner and we end up with a bigger and better housing stock.
Fiddling around with interest rates is yet another example of gov't continuing to hope that the market will find its own solution if nudged in the right direction.
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Robert,
Have you been talking to someone in the Treasury? Certainly sounds like it.
It would sound like flip flop Crash is about to add another few degrees to his spinning. The good ship UK is about to have huge pressure applied to the rudder.
Can he do that without admitting that the policy he has followed so far has been incorrect?
Surely all that is contained in this epistle is backing for all those foreign Finance Ministers who have openly called Crash and McDarling policies' wrong?
So can we finally pull the financial rug from under the banks that made the mistakes and set up something new from the assets released from their liquidation? Thus we isolate all the toxic debt and the debt collectors can chase all those bankers for repayment.
Why are we propping up a section of the business community that is paralysing the rest?
Then lets start the investigation to hold some people accountable and make sure it can't happen again.
Please ask when Interest rates will have to rise, and to what level, to protect the rest of the economy now that someone has identified this blind alley.
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I have a question. If this is a worldwide "credit crunch" - Please can we just admit this is a recession - who (as a country) are we all borrowing money from? If America, Europe, Asia and UK are all in the same boat... Then how can this situation be resolved?
Would it not be better to draw a line under this and start again? it can't be any worse that the impending doom that faces many companies and their employees. There has to be a worldwide banking ombudsman or such like that ensures that the banks greed does not get the better of them again.
These organisasions should be independant of the banks in order to ensure that the banks are not acting irresponsibly, again.
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You say that "in normal times a cut in the bank rate would help to boost the flow of new lending". That's because in normal times the flow of credit is determined by DEMAND and not by supply. As you correctly said (but has NOT in fact been your boring refrain of the last 18 months) the current problem is the SUPPLY of credit.
A cut in rate will REDUCE the supply of credit, not increase it. It will REDUCE the incentive to banks to lend, and it will REDUCE the incentive for people to save their money into bank accounts.
This move by the Bank of England is TOTALLY NUTS and will make things even worse.
The totally daft idea that the goveernment should provide credit directly to individuals and companies is even more stupid. Where would the money come from? Answer: from the government BORROWING (which would REDUCE the private sector supply of credit) or from the government PRINTING MONEY (which would debase the currency).
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#41
Nice line on public sector pay. As someone in the private sector I may be willing to cut you a deal ? say 10% pay rise for all those in the public sector on less than £25K with tapering off for all pay grades above that level.
HOWEVER ? in return we the private sector would like to:
1.End pensions apartheid and maybe have a national pension scheme in which we can all contribute / participate. We haven?t forgotten GB?s raid on private pensions which is still ongoing.
2.Cap all public sector pay at £100K to restore the notion of public service
3.As the economy recovers reduce the public sector to no more than 20% of the workforce. This may be achievable by laying off everyone with equality, diversity, health & safety or outreach in their job title
What do you think?
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My personal opinion is that you can't save all of the banks.
Its just too costly.
Its also a waste of money if your trying to pass on investment to businesses.
because there will be a percentage (100% at the moment) loss as they refinance their own debts,
take out management costs & pay their own wages/bonuses/pensions/redundancies.
I know we'd all like to be able to go back to the old banking system but you can't.
The National Loan guarantee scheme is a brilliant idea but who will guarantee that the banks don't skim the funds.
as they have with every other financial service they provide.
Drastic action is required now, not next month.
Either use the Post Office to administrate the funds with the Inland Revenue.
Or nationalise one small high street bank.
You cannot 'save the world'
You cannot save the banks,
the stock exchange,
the public sector and the UK business economy.
You can save one and hope that will stimulate the others.
But it has to be the right one.
Get the loans freed up now!
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Interest rates are just a way of transferring money from borrowers to lenders. As far as the health of the economy is concerned, they are unimportant provided the money keeps flowing.
This is the big problem of the moment!
The banks have a historically wide profit margin of about 4% to 5% for secured lending and much higher for unsecured. Currently they are forced to horde this cash and are not flowing the money on in the form of additional lending. This means that any drop in interest rates will take money out of the economy.
My conclusions are;
(1) In the present circumstances these low interest rates are actually damaging the economy!
(2) Low interest rates are helping the banks at the expense of the wider economy!!
Does anyone agree?
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The problem seems to me that the government are lending money to the status quo and thereby propping up failing businesses.
Thereby breaking first rule of capitaliam - at least the old variety of capitalism.
Ideally, as someone esle suggested, there would be new blood, new institutions appearing to take their place but we probably don't have time to allow that to run it's course.
However, it seems to me that if money needs to be invested in existing failing institutions then it should be done in such a way as to:
(1) Buy into the institution's shares at a price that reflects it's true value (which may well be zero).
This allows the taxpayer to hold shares and therefore to make a profit by selling those shares when the new institution does better in future.
It also acknowledges that the existing shareholders have actually made a bad decision and that should be rewarded in the usual way.
(2) Replace the management and impose director in an oversight capacity representing the new "taxpayer shareholders" and able to influence lending policy.
It seems ridiculous that the failed management should be allowed to continue in any form.
(3) The corporate structures in place re shares etc need to be re-examined. It has been shown to be untenable that a company should consider it's shareholders to a far greater extent than it's customers. The shareholders have paid to take a risk for profit, the customers have not.
It must be time to consider some form of customer representation on company boards.
When you look at, for example, the great mobile phone licence sell-off, we see that the costs of monthly contracts which were falling sharply up to that point to around £10 per month have now risen to around £30 per month. Effectively, the company passed the cost on to the customer to maintain the interests of the shareholder, meaning that the money received by the government was effectively a form of personal taxation.
This is clearly not working in my view.
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I can't help thinking that, if the government actually force banks to pass on a reduced interest rate to all loans and mortgages issued before a certain date and then popped the interest rate to 5%, this would protect savers, help those owing on loans and also reduce default rates. And, potentially, cause a shift in liquidity which would be entering the country.
All new loans are at the new rate (and house prices have tumbled so mortgages could be around the same repayment)
Savers don't put their money in a tin under the bed (as they're not paying to store money with a bank)
New savers with more cash will become customers of the banks; this will mean more liquidity
Those with loans will become lucky winners and will either repay the capital more rapidly or inject some life into consumer good markets
And confidence may take itself upwards a notch or two....
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Stepping back a bit,
I notice the Chancellor presented [Unsuitable/Broken URL removed by Moderator] Special Resolution Regime in July in support of the Banking (Special Provisions Act) 2008 which may yet come to haunt him, as it puts a limit to the pain he can cause the private individual under Human Rights property legislation, which appears to become relevant about now as risk flies out the window leaving reward behind.
The timing's just too apposite - he coudn't have imploded the system himself, could he?
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Bank Rate Cut.
Another blow to prudent savers.. . .
Begining to wish i HAD BORROWED A BILLION OR TWO OR THREE.
CALLED IN THE ADMINISTRATORS HAVING PLUNDERED THE CASH. . .
GET REAL GORDY LETS HAVE 6% AND
GET SOME CAPTAL BACK IN THE
SYSTEM WITH FULL GUARANTEE FOR
ALL DEPOSITORS. . .
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I'm confused. The doomsayers are legion but the Bank of England seems to be teling us that output will start rising in the third/fourth quarter of this year. The graph is here:
http://www.bankofengland.co.uk/publications/inflationreport/mktgdpnov08large.gif
So should we take heart from the BofE projection?
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Brown, Darling and King know that this will NOT encourage the banks to lend. However, what I believe they are aiming to do is squeeze hard earned savings from the banks by making the opportunity cost of leaving money in savings (inflation, devalued sterling etc) far greater than the income available through interest. It is absolutely wrong.
We are in a mess and the problem we have is that our leader is determined to get himself another term in office through short term, expensive, populist measures. The long term is looker bleaker by the day.
Obama's election campaign was cheap by comparison - history will show this to be the most expensive election campaign ever seen! The trouble is he is being bankrolled by you and me rather than some benevolent billionaires. I just hope that the campaign is unsuccessful.
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Well I would say pass me the comb! My mortgage has fallen by £600 the past year and I would welcome another £70 saving.
The real issue is that the banks are now in the eye of the storm, they are waiting to get battered again when failing retailers, who have desperately tried to stay alive this Xmas start going to the wall.
Unlike the property market where at least the banks have an asset, most of these multiple retailers were setup on mountains of cheap cash and little or no investment. So what the banks will own will be worthless.
So the banks are not interested in new business, they are interested in old business and are sitting on their pile of taxpayers cash until all the cards have been deal't.
What is needed is patience, the banks will start lending again when they fully know their position, but patience isn't a virtue in this media feeding frenzy.
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#111
japanese inflation has only recently hit 1.5%
I lend yen.
I GOT a 5% return from UK institutions
In stable times, net of inflation that's 3.5%
This is just noise if currency movements are 25% in a three month period
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Epitaph for Gordon:
'Prudence'.....actually turned out to be a bit of a slut!
In the end he could'nt even give it away. Not that there was ever much to give!
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The argument that there is a shortage of credit is too simplistic. I personally, have no problem obtaining lots of cheap credit, albeit through car loans, interest free periods on credit cards, or increased mortage lending. The issue is of my appetite to borrow, and at the moment if I don't feel safe in my job, there is no chance of making any big ticket purchases, even with the massive incentive of a 2.5% VAT reduction!
In addition to this the banks are restricting credit to the borrowers who have stretched themselves, and penalising those who can't pay very hard.
So, over-supply of credit to good risks, and under-supply to the poor risk.
Seemes like the whole point of a recession to me, reallocation of resources from the profligate to the more sensible borrowers.
Trying to buck this trend will just make a bad situation worse, as the government is finding
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I just hope that when LIBOR adjusts to reflect this latest cuts, those corporations and individuals that can refinance, fix their terms for as long as possible
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#98 thorntonheath yes I agree on reading #16 joeplumbers suggestion (that govt just forgive all existing loans on everything and that we start over) is in fact not silly but brilliantly radical economics
it would leave sterling worthless of course, but the UK could adopt the Cuban system of 2 currencies (peso and convertible peso linked to US dollar and worth c 25x more):
a pound, nominally worth 1 cent, for use by UK citizens within UK economy
a convertible pound for use by tourists, visitors and anyone who wants to save up for 10 years to buy a telly
it would be pretty strange, and as in Cuba we would find doctors and lawyers quitting their jobs and becoming hotel bartenders and cab drivers to get access to the convertible pound economy, but heh if our gov't is as desperate as they appear to be, then why not try it
I am not being entirely facetious BTW!
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the BOE cuts rates to encourage lending, when it's been doing exactly that (unsuccessfully) for months. It's clear this policy does not work, and even if it did, higher borrowing is just about the last thing Britain needs right now.
This government is clueless, utterly clueless as to how to dig it's way out of the ever deepening mire. Expect them to throw more money at the Banks shortly, and follow that up by printing more money and thus devaluing our currency further.
One time genius chancellor Gordon Brown has finally showed us the wolf under the sheep's clothing. He's been the ruin of this country's economy, and damages us further every day he remains in power.
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Squeeze profits? Mortgage rates remain pretty much the same as a year ago, saving rates have dropped to an average of about 2.5% (and will drop more) while Credit Card rates and Personal loan rates are sky high at 15% plus.
Bankers are just using the rate drops to make sure their bonuses don't drop much. They should have not been bailed out by the government. It would be just simpler and healthier to let them go down, pay the savers and let the healthier banks (if any) sweep the market.
Redistribution of wealth you say? You bet!
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seems to matter if you look at the bank share prices this am
for all those with economic theories on rates, inflation etc - they no longer exist and the old models have been turned on their head and been binned
its a whole new world out there
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Cut the link between bank savings and the bank base/lending rates!!
Why ARE they in any way connected?
You save with a bank in the hope they'll invest it and get a decent return, same as if someone invested in any business, right?
There is something decidely 'fishy' about savers being hammered due to a drop in interest rates that are used to control the supply of 'credit'.
Any care to give me a constructive evaluation of this mess? And not one that just says banks can't afford a decent return because of the base rate. Looks like a complete con to me..
GC
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Too much economics and not enough work
Base rates up/down - inflation/deflation - mortgages/savings - £up/£down .......
Which lever (leever) to pull ? - it's nothing to do with levers - can't win either way
More work, for less pay
in factories, not offices
buy necessities, not luxuries
and the economy will roar ahead
And it happens all on it's own, by unemployment
New poverty will re-balance prior profligacy soon enough
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The reductions in the bank rate, ostensibly to reduce deflation, are doing no such thing, nor are they improving liquidity.
Like the previous reduction, it has the effect of devaluing the pound; everybody's wealth has been reduced by 25% relative to the rest of the world.
This will please the debtors in our midst; the theft of the creditors' money to bail out the debtors cannot be any other than criminal embezzlement. This is capital theft.
The reductions in the bank rate also mean that saving rates are now less than inflation. This is income theft.
Why do we allow our country to be run by crooks?
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Why the hell do we want to stimulate the housing market? That's one of the prime reasons why we are in this mess!
When houses find their true value as homes rather than investments then we can consider a minor stimulus.
let's urgently start to identify the strategically important parts of our economy and place guarantees around them. Let's start improving our infra-structure now (riding rough shod over the NIMBYs if necessary)
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since the drop in bank rate from 5% to 2% what happened? not a lot according to the BOE "credit has tightened"... so what do they do, cut it further...! the whole of the monetary policy committee led by Melvyn should resign immediately, their handling of the economy has been disastrous. Of course you could say they were not allowed to do the right thing for political reasons so GB/AD should also walk the plank. The government wants the banks to pay it 12% yet expect them to lend to the public at less than 3%.....do the maths GB!
as the wholesale m
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Let's put that 0.5% cut into perspective for somebody who bought the average house on a 100% loan at the top of the market....
In Oct 2007 the average house cost 186K and the interest rates were a heady 5.75%.
Assuming interest only then mortgage per month was 186K*0.0575/12 or 805 quid a month.
Today the same interest only mortgage is 186K*.015/12 or 233 quid a month.
A saving of 572 quid a month. Gord be praised.
Unfortunately last month (According to Nationwide) your house lost (another) 2.5% in value to 153K ie 3825 quid.
So overall you are 3250 quid worse off this month.
So even if interest rates go to zero it makes no sense to buy at the moment since you'll still be over 3,000 quid a month out of pocket the way prices are headed.
And that laydees and gentlemen is why cutting interest rates isn't going to prop up the price of housing and why the government will eventually (actually, probably very quickly - election imminent) go to plan b). ie Print money.
If the government does nothing then in 18 months or two years time house prices will stabalise, people will start moving again confident that they won't be buying a depreciating asset and we can all get on with our lives.
Unfortunately this government doesn't have 18 months so it is going to flail around wildly trying any number of doomed 'initiatives' but will eventually settle for printing money. Lots of it. Very soon. Because it's a tough decision and 'the right thing to do'.
It will hammer the final nail in the currency and the economy but it will marginally increase their votes amongst those of the electorate who spent the past decade borrowing to the hilt and are now desperate to be bailed out so that is what they will do.
Plus it will inflate away all the debts they (the government) has been running up. Plus it will rig the GDP figures so that no doubt they will actually post a positive increase in GDP this year too. Good for election soundbites.
Works for Mugabe.
Because they are jackasses.
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oooop
........as the wholesale markets are frozen, then the only money the banks have to lend is from savers.....with a less than inflation return why would we bother to save?
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Re:111
The flaw in your comments about re-introducing the mutual building societies in the way that you describe,is that most first time buyers do not have enough money for a decent deposit and because house prices are still more than three and half times what the average first time buyer earns.
I suspect that you are of the same vintage as myself and can remember the good old days when house prices were more affordable and the annual price increases were small enough to allow us to save up for a deposit, even though it was a struggle.
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Reducing interest rates to these levels is madness. The government/BoE are playing fast and loose with the all our lives for decades to come. I thought the BoE was suppose to manage interest rates to ensure inflation remained within gevernment guidelines, even though this is madness as well? Part of the reason why we have got into the present mess is because the BoE has been changing interest rates in a vain attempt to control inflation with no regard at all with what was happening in the wider economy. Interest rates should be adjusted according to the ratio of the amount of money being borrowed (debt) to the amount of money being saved. When the ratio goes up interest rates should go up to discourage borrowing and encourage saving and vice-versa.
The economic downturn has been caused by too much borrowing by individuals and the government. The government's solution seems to be to encourage even more borrowing by people who are likely to be out of work in the near future and by a government whose tax revenues are about to fall off a cliff.
The only way we are going to get through this is by getting rid of this government and replacing it with a government that (a) knows what it is doing and (b) doesn't let its electoral popularity drive its economic policy.
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Bankers have Zero incentive to lend. They are paying 12% for the money from government and being asked to lend it out at far lower rates. The only people affected by lowering interest rates are those with fixed margin above base rate loans and mortgages. New lending is no where near base rate and that is if you can get it. The bankers of course stick assiduously to base rate margins when it comes to savers. Bankers in many cases would like their umberella back and Government really seems to have lost the plot. Loads of headline grabbing initiatives to make them look good, usually a rehash of old ones using previously announced money or using some more more money they have committed our children too. Ideas anyone?
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I notice that a lot of you are decrying the low interest rates on savings and are so fed up that you're seriously considering withdrawing your money from the horrible banks and sticking it under your beds or investing abroad.
The govt might not like it and could even introduce exchange controls, but if you have friends and loved-ones overseas whom you can trust, you could always follow the impressively cheeky Mr Madoff's lead and mail small, lightweight but high value items to them for safekeeping until things here in the UK pick up again.
If you don't have suitable overseas friends & loved ones then I would be happy to help out
Just send your diamonds, platinum, Titians and Canalettos to:
somali pirate
private beach
450 km north of mogadishu
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I don't feel able to comment on the wisdom of government initiatives, except in one respect.
Financial measures being taken or considered by government may define the relative winners and losers within our national economy in the near-term, but I hope such measures are being geared to the shifting sands of international cause and effect and that decisions based on Treasury advice are not only good ones, but capable of being adjusted rapidly enough.
We will be able to look back in years to come and assess our economic strategy relative to other economies in light of policies being adopted now, but by that time, the only penalty to be paid by individual decision makers will be how history records their contribution.
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The interest rate doesn't matter to me.
I was being charged 6% on my SVR mortgage and now I'm being charged 4%.
But the NatWest is still taking the amount it calculated at the start of the payment year, so my bank account is suffering from massive inflation (e.g. unplanned foriegn exchange costs for holidays) but not benefiting from interest rate cuts.
Sometime this year the NatWest will send me a letter to say that I have over-paid and that the excess amount will be deducted from the amount I owe. Sounds good... But.
By the time I could expect to see the benefit of a smaller mortgage, I will be paying far more tax to repay national debt, and interest rates will be sky high to control rampant inflation.
On reflection, the rate DOES matter! Please put it back where it was and STOP BORROWING MONEY!
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What on earth is going on here? Previous interest rate cuts haven't even fed through yet and the government is cutting still further, weakening Sterling as it does so. There is a school of thought that Brown and Co. are deliberately trying to trash Sterling as Bush and Bernanke are deliberately trashing tthe Dollar forcing us to use the Euro and the new Amero currency respectively. It does look like it to me. The failure of the US governmental financial system has already been indicated in a secret Congressional meeting of March 2008, sometime this spring apparently. If it goes, so does the Dollar and the whole world economy, heralding the New World Order favoured by so many of our political leaders.
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Come off it folks can?t you see what?s happening here ???
First Gordo raided OUR pensions, he?s now raiding OUR savings and at the same time he?s ripping us off through publicly owned banks.
Have you seen what Northern Rocks SVR is?
Even so called ?good? banks like the nationwide are ripping us off (I?m a customer of theirs), we are being fleeced bigstyle.
It?s a disgrace that the dispossession (shameless repossession, kicking kids out of their houses) is continuing unabated or reported by the press!
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Point to note Ian_the_chopper #20
If you call Woolwich you can ask for your repayments to reflect the new rate immidiately rather than waiting and making overpayments.
It seems a lot of people don't know this.
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Why refer to Evan Davis. He was another BBC commentator who just trawled out the Labour propaganda. He wrote in 2004 when agreeing with Brown that UK debt was at 35% when we all knew about PFI and Pension obligations being kept "off-book" He quoted "The British banks have been making large profits, and their finances are in relatively good shape to withstand a shock". He knows no more than the rest of the sheep.
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When will the British ever learn!
They don't have a state Bank like the French Spanish and Portuguese do to name but three, and then they wonder why their own private banks fail to toe the line whenever the government issues a directive designed to stimulate the economy.
Not only that, the government then displays incredible naivety in bailing out those same banks using tax payers funds that they do not even have to bail those banks out. It matters little that the banks created their own nightmare scenario by lending money that they did not have to private individuals after being seduced by the short term gains to be had in the sub prime mortgage market.
Such institutions do not deserve to be bailed out and certainly never on terms that compromise the fiscal health of the nation for generations to come.
What they should have done is use that money to create a state bank working in competition with the private banking sector as a means of controlling the banking sector's actions. Believe me it works. For one thing it would eliminate banking bad behaviour at a stroke as they would then be forced to pass on any cuts on interest to borrowers simply because the state bank will have done so.
The British Banking Industry is by and large unregulated and it is therefore little wonder that we are now in a recession that threatens to destroy the British Economy as we know it.
It would not surprise me if all of the High Street Banks fold as a result of not being able to meet their comitments in a shrinking economy.It is highly likely, that bank mortgages will become worthless and unenforceable, as the government will not bein a position to take these over.
Only then can the economy begin to recover,as disposable incomes will increase without the burden of mortgage payments thus kickstarting the economy once more.
All the mortgage payer has to do is sit tight and wait.
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Well the downward slide of BoE interest rates - which you only see as a depositor, never as a borrower - has to stop soon, interest rates can't much lower than zero. Another Brown moment when interest rates go to the lowest figure since the central bank was created in the 17 century. So many records. El Gordo and Comical Ali and their bust perpetual growth machine must be running out of groups of folk to upset, surely. It reminds me of prodding a dead horse with a stick, things just do not respond as they want. A change would be good. Albert Einstein - it is madness to keep doing the same thing and expect a different result. Shame he is not around.
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The government do not care about savers. Savers do not consume. Lack of consumption makes for a weak economy.
The government do want people to borrow. Borrowing increases consumption making more people better off and so increasing their likelihood of re-election.
If QE works - and inflation results - the value of debt will go down in real terms. The value of any cash savings will be obliterated.
Read this web site and you will see why investment in bricks and mortar will become fashionable again very very soon - and when I say investment not some buy it, wait for a year, and flip it for more money scam either.
I predict that very soon long term investments like property will find favour.
The web site is called www.getrichslowlybutsurely.co.uk
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Why is the Banks not being forced to cut interest rates on credit cards?
Banks are making a fortune, as some cards are 34.5% interest.
When is it going to end the cartelof Banks.
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RE 15 Steve the chauffeur.
I used to be a banker (boo! hiss!) In that life I worked with Swedish companies in the early 1990s. As you may know there was a secondary banking crisis. This had been caused by the behaviour of the main banks. They tightened their lending to individuals and companies and in many cases stopped lending. Those companies and individuals still needed to borrow. They went to the secondary banks who let them but on more punitive terms than the prime lenders. Who funded the seconadry banks? Why the prime banks! the prime banks then realised their exposure to the secondary banks was growing too quickly so cut their lending to them. In turn to meet their reduced limits they had to cut lending to the individuals and companies which had a knock-on effect and Sweden had a recession and Nordbanken one of its Big 3 banks was nationalised to prevent it failing and the ensuing contagion.
Second step was to split Nordbanken into good bank and bad bank (called Securum). Securum was well capitalised and staffed with some exceptional people and given a 15 year life. Result? The banks could continue doing what they should do and oiled the wheels of commerce. Securum by motivating some very highly skilled operators (bankers, lawyers, accountants and property experts) the process was completed for only about 30% of the budgeted cost, in 4 years. The economy stabilised and grew again and a new Pan Nordic bank (Nordea) grew from the Nordbanken ashes.
Did the bankers learn from this? I believe they did and I believe not only in Sweden but elsewhere. Did they learn enough? No
We need to return to a bank's greatest asset is its name. That in turn menas that you have to move away from short-termism encouraged by, in many cases, obsecne levels of bonus. That means that bonuses have to be paid for in stock / options. In turn that means that you can attract good people to your credit function assessing the risk and protecting the bank's name just as much as you can the business originators.
If we learn that lesson (or the FSA and other regulators impose limits on cash bonuses) we can move away from a short-term bubble economy whichj will be in the long-term interest of us all, bankers (boo! hiss!) included.
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Many years of government
failure to regulate personnal credit, the banks, their reserve levels and mortgage lending policy has led to the current crisis.
Tax payer support is required and will come from the reduction of borrowing, prudence. and accepting lower interest rates on pensions and savings
It has suited Mr Brown and Mr Blair to allow access to cheap money and watch as house price inflation has provided our only economic stimulus.
If the crisis is to be dealt with quickly, the government will need to maintain the tax paying population, tax revenues must be maintained. Otherwise social costs add to the governments burden.
The government has already created money to support the banks and will be forced to print more money, hopefully to develop infrastructure rather than meeting the costs of unemployment benefit over the next year or so.
The dilemma the government faces is ensuring that unemployment is limited and senible long term economic planning introduced.
This will mean that the economy, energy policy, industrial output, health, education and training all the aspects of life New Labour claim to hold so dear will require careful management not knee jerk expedient reaction.
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I can't help but disagree with Robert's diagnosis that the problem is "lack of credit". The problem is lack of money. We have been generating our money supply through bank debt and this has now dried up. The Government must therefore just print more, as suggested today, whilst at the same time regulating banks against increasing their own debt-fuelled money supply. To suggest that this would somehow fuel inflation is old-school Tory nonsense. Debt-fuelled money supply has increased exponentially over the last 30 years and we have coped with a modest increase in prices. Modern economies need money and it is the task of Governments to supply it - free of debt!
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7 Jan, somewhere in London...
"It's getting worse. What shall we do?"
"I don't know"
"We could cut interest rates again"
"We've tried that. It's not working. If anything it's making things worse"
"I know, but I've no idea what else to do and it will look bad if we do nothing. That may be the right thing, but we're doing pretty well pinning that approach on the other lot"
"OK then, interest rate cut it is. Remember to use some of the key phrases; 'Help for the hard working family', 'whatever it takes', 'we are well placed'. If you can think of any others even more patronising and sanctimonious so much the better .... and remember to keep a straight face, look concerned and try to goive the impression that we know what we're doing".
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Sorry Robert - I'm still at a loss.
If we the taxpayers are now the main providers of capital to the banks, who were the main suppliers before we were dragged in?
One blogger said the Forbes list - but is that so?
And if whoever the dried-up sources are are holding on to their money now - where are they keeping it, under the mattress?
I would just like to see some discussion of this mysterious dried-up river bed of money.
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The interest rate is going down but banks are not passing to their customer. I had my mortgage with one of the building society with a variable rate. It was .35 % above the bank of england rate in 2006 and every time with increase of BOR , the society were charging .35 above BOR. But now with the decrease of interest , they are not passing to their customer.
There are so many doggy stuff in terms and conditions that lenders can make you fool.
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Once again let's all find reasons why things won't work and not why they will!! Apparently there are c.4m people with tracker mortgages who are quietly rubbing their hands with glee every time the rates drop. People coming off fixed rate deals set up when rates were higher are also seeing payments not getting any more expensive and in many cases cheaper. Yes it's unfortunate that savers will be hit but to some extent the plunge in inflation will offset some of the problem for a lot of the pensioners. We will not see 15% unemployment which means in the worst case we will still have 85% IN employment and as I've said before if you don't NEED to move house you'll sit tight and get on with it. We constantly talk ourselves down in this country and ignore an awful lot of the positives out there. Has everyone wondered about the record number of new business start ups, the slowing decline in house values, Sainsbury's results all of which are positive? Yes we are seeing some businesses close like Wedgewood, Viyella etc but aren't they companies who were sustained by easy and cheap money and ignoring market realities?
Very unpopular with the pundits but let's start taking note of the stories below the headlines and not just the headlines themselves and we'll start to see far more "green shoots".
NB Not a Labour supporter, apologies to people who have lost their jobs - it must be hard.
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Excellent blog - informative and interesting.
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Gordon Brown keeps on referring to the "world crisis" though cleverly fails to address the real issue, namely the plunging value of sterling RELATIVE to the Dollar and Euro
This is a home grown (ie Gordon Brown produced) problem, and is nothing more nor less than importing inflation
I say to borrowers......make the most of low interest rates while they last...once the devaluation of Sterling (remember Harold Wilson`s "the pound in your pocket speech in the 60`s?) starts feeding through into real inflation, then interest rates will have to rise, making the recession in the UK even worse than everywhere else......happy times are here again!
I do hope that Gordon will call an election soon so that we can get rid of this thoroughly unfit Prime Minister before too much longer
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Robert Peston for Chancellor?
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The problem with Commercial Funding at the moment is not that the banks are not lending to customers, but that the banks are not lending to other financial institutions.
The 'second tier', niche, private, sector specialist lenders cannot obtain funding to lend on to customers. if this were to happen this would ceertainly kick start the commercial market.
It's a double whammy- the banmks don't want to lend to customers, but by not lending to other institutions thay are also cutting off that supply as well.
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Is it just me or is anyone else slightly confused about where all this 'bail out' money is coming from? Who are the World governments borrowing money from? Who's got the odd £60billion at hand to bail out a bank or two at the moment? Someone obviously hasn't/isn't being affected at all by this worldwide recession. Indeed, it appears safe to assume their business to be thriving as a result of all the mess. If someone can please let me know who these people are, I might well push my CV under their gold gilted front door in the hope of a comfortable an secure job going forward.
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THE NEW BRITISH BANK
It is high time that enough men and women of honour got together and launched a new British Bank with full transparency in direct competition with the discredited lot we have to put up with now.
A new Bank with say Billion 20 to 30 or so to start with would attrach premium bod holders and millions of small savers, such as the enderly and the retired.
Possibly we need a New Scottish Bank and the New English Bank to start.
This should be seriously considered as a credible option to generate real credit to real customers, whilst giving savers some incentive to save supported by confidence in their new bank Maybe the larger Saver could also be offered shares?
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166 javaman1984
Its called spreading the pain about. It is actually a good thing in some regards, digests the problem more rapidly, here you are folks force fed humble pie, plenty more, eat up, yum yum. No man is an island in a sea of debt.
Dont forget to vote for me next time, the names Gordon, and I smile alot, some people call me the Joker.
PS If you think there are grumpy folks around now just wait a month or two when it starts to dawn that it is not going to be an easy fix. Do you want the good news or the bad news. Whats the good news, we'll have that first. There is lots of humble pie. Oh, whats the bad news then. Erm; All we have to eat is humble pie. Oh.
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The best current personal loan rates are 3% higher than a loan rate I took ages ago when base rates were much higher. In normal circumstances I would have moved my loan to a cheaper provider. Now that chance is remote. The best loan rates were available long ago to lucky ones, and the current base rate slash will make no difference, not even if rates are down to 0%.
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Thank you to Mr Preston for simplifying complex financial/banking issues to the average man in the street, especially the poor who depend on their savings for income.
This latest rate cut is a new-year gift to the Conservatives as it underlines their point that this New Labour Government is out to punish those who save while rewarding those spend recklessly.
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So ..."the Bank of England has cut interest rates to 1.5%, the lowest level in its 315-year history, as it continues efforts to aid an economic recovery."
It?s alarming to see this blunt tool being used in such an aggressive and forceful way. Hope they don't slip and cut themselves.
Funny how this is only being called a 'down-turn', I wonder what they will do when we formally enter the recession?
We could all lend a hand by offering to use our home PCs to print our own money. We could lead ourselves out of recession by buying more printer cartridges!
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#170:
Actually, interest rates can go below zero. The Swiss had negative interest rates in the 1970s, according to this article: http://news.bbc.co.uk/1/hi/programmes/moneybox/7809530.stm
If I hadn't left my crystal ball at home today, I would of course tell you whether that's going to happen to UK rates anytime soon.
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Bought our house in 1997. A home - morgage paid. Neighbours on either side and next to them same.
There are new houses nearby which are the full width of our and our attached neghbour's, together. These houses are also 3 stories high.
I see the chap interviewed on BBC is saving £500+ a month with interest rate cuts. His kitchen in which he is being interviewed is about as big as my house.
Buy a smaller house if you can't afford it. Why should savers and OAP's subsidise people who can't afford their castles?
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What we have at present is a recession driven primarily by domestic policy. Brown claims that this is an international problem. He's talking total and complete rubbish. I didn't see the Yanks or Germans holding a loaded gun to his head telling him to expanded govt spending faster than the growth rate of the economy. Browns actions in this respect were those of an idiot. As for spending even more.....well......he's just compounding his stupidity and leaving generations with the task of clearing up his mess. How much is this going to cost. The interest runs into hundreds of millions per week to service this level of debt. How can this be reduced? We could allow inflation to rip or the currency to crash; each of which will have the desired effect; or we could slash spending. The do nothing approach I think Labour would say. The only way out of this catastrophe is to save, reduce spending, and pay off debt. This is precisely what the public will be doing and the govt has to follow.
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Robert,
Surely if interest rates are lower there is less incentive for lenders to lend and savers to save?
This then will have a negative effect as you say what we are trying to achieve is more lending and the banks holding more capital.
This government seem to have not only caused a financial crisis in the UK but have also completely lost the plot as to how to deal with it.
Gordon Brown's quote of "We saved the world" or "We saved the banks" will go down in history as perhaps the most stupid remark ever made by a prime minister.
This will not be much comfort for the population of this country who are suffering under his stupid policies.
How much longer must we put up with this incompetence?
Surely there must be some way we can demand a general election for the sake of our nation?s wellbeing?
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It is clear that Government Economics has now enterd the world of astrology. It would probably be just as effective if random sets of decisions were now taken based upon where Venus lay in Orion since no one can possibly forecast what might happen next, least of all economists who are now, as a collective, totally without credibility.
It is also extraordinary, and presumably a sign of deep-seated mental illness, that, in an environment where our current ills are blamed on over-indebtedness, the Government remains keen to reopen the gates to further lending by business with the "taxpayer" taking the risk. Why should we?
I for one was also really pleased that Whittard, Woolworths, MFI, Viyella bit the dust. They were dinosaurs - as is M&S - that stood in the way of new ideas and the emergence of new businesses and in most cases they were kept afloat by debt. The quicker the clear out, the better.
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#158
I agree, with banks offering zilch interest on savings there is no incentive to save with them and most PRUDENT people will be looking to obtain returns elsewhere.
Corporate bonds seem to offer a reasonable ROI if you don't mind the risk and there are bound to be many companies who won't be bankrupt after the recession - the stock market is down so there are some good bargains out there - research the companies and look for good dividend cover. Avoid high-street retailers obviously.
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#28 the1beard
I'd like to hear what you think are the idiot proof opportunities are...
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# 151 - crunched up -
I agree, it's a whole new world out there and old-skool theories about the economy and how to deal with it through tweaking this or implementing old hat measures to steer businesses/individuals in a particular direction will only cause a repeat of this mess in years to come.
Radical change to 'the system' is needed because the world has changed radically since all these old theories were originally thought up!
Maybe ideas about the future, like this -
http://news.bbc.co.uk/1/hi/business/7811481.stm
- don't seem so strange after all
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Why they should be sacked
see#24
The regualtors who we hire to manage the economy fro us have organised the economy so this it is now in the worst condition it has ever been in the history of the Bank of England. (In the last 300 years.)
We hired Mervyn King and his MPC to manage the money for us and the screwed up. They should now be sacked. A decade ago things were pottering along reasonably well - it was on their watch that things went wrong - they even admit they got it wrong.
If anybody disagrees with me please explain why they should stay?
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Have I made a mistake somewhere?
Attractive interest rates are needed to encourage savers and grannies to deposit funds with building societies and banks, while if borrowers need mortgages and business finance, they need to the market rates that attract said savers' deposits - oh, and reward the weary bankers.
By what logic, then do more funds become available for mortgages and business when MLR approaches zero?
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Interest rate cuts won't stimulate the economy any more than reducing the VAT rate will. Lenders are very reluctant to pass interest rate cuts on to businesses or the public and this is starving the country of available cash. And why? Because they are trying to recover some of the losses made from their own irresponsible lpast ending criteria. What have our banks been doing with the hand outs from the treasury and which were meant to increase the supply and circulation of money? These two topics really need some indepth reporting and investigation Mr Peston. Its time to name and shame the banks who are not seemingly working in the country's interests and quite simply disregarding govenrment. They may well find themselves fully nationalised. Have you got any insider information on that Mr Peston??
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i have approx £100k on deposit in banks.
the threat of inflation in the next 2/3 years is so great that i am considering buying gold or gold stocks.
is this a good idea?
what's the best way to buy gold without having to hold bars and keep my capital safe?
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Put rates up to strengthen sterling and squeeze the marginal home owners and property speculators.
Savers will have greater spending power and pensioners will be better off. Most mortgages are almost certainly well above the best rates on trackers so the majority of borrowers will not in fact be very much worse off. The risk premium for lending could be restored somewhat.
Repossessions could be turned into a good thing.
The government should not pay mortgage interest. Instead, they should allow the process to take its course. Then when repossession occurs, the government should buy the property at the current market value with the profligate lender taking any loss.
If the repossession rates increase as I am certain they will the government taking the properties into the social housing stock will permit the inevitable need for social housing to be met. The government will hold assets that may eventually increase in value. People who should probably not have bought can go back to paying rent, or be supported as they are now. The total cost, I hazard a guess, will be substantially lower than the remedies being proposed.
The social housing should be subject to market rents. Those on benefits will continue to gain accommodation and those in employment can meet the commitment better than the mortgage.
Also, a side effect will be for the true bottom of the housing market to be hit quickly and less painfully.
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jonny zero
i like 'enderly'
can't say i'm looking forward to it!
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An appeal to Mr. Obama, et al:
Find out who Stubbo is (#173) and hire him!
He has common sense and a track record of success!
Unlike the gentlemen in charge of the USA, both outgoing and incoming.
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Yes, Bank Interest Rates matter a lot to the saver and to everyone else financially I would imagine. Not only did the tax payer shore up the Banks when all were feigning near poverty due to over-lending problems, a problem brought about by the very people we HAVE to trust I might add, but now, savers have no return on capital thanks to the Bank of England cutting interest rates still further. This means that savers who rely on a good rate of interest to supplement their income and pensions are now without that injection of capital. Banks and Building Societies however, have the use of savers cash to do with as they will without, having to pay decent interest. Further, let us not forget that in 1997 Mr Brown, as Chancellor, axed tax relief on dividends paid to pension funds and cost private occupational schemes £175 billion, which many companies have never recovered. This Government is crippling this country along with the people who live in it. I personally believe that it is time this country called a 'vote of no confidence' in this government, for if my memory serves me well, we can out a government without a general election just by calling, as a nation, a 'vote of no confidence!'
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# 52
Your right, fixing the housing market is the key to get our economy moving.
The housing market traditionally recovers from booms and busts from the bottom up.
So the fix is simple and proven: -
The government should part fund first time buyers and buy up suitable housing stock for social housing.
They should also scrap the plans to build lots more houses in Britain's green and pleasant countryside.
It's a supply and demand thing, with a population of roughly 61 million in Britain, building land will retain value because of it's scarcity and individual desirability.
Building materials and labour costs have not decreased, so shortly house prices will match the cost of production.
To get the economy earning, i would suggest another fix ... a root and branch reform of a underfunded, undervalued, fragmented often forgotten industry - Tourism.
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Well, my saving in the building societies aren't performing so I'll have to shift some of it to Corp. Bonds - shame my money in ISAs are stuck there getting bad returns.
What's next, the BoE forces banks to replace Cash Machines (ATMs) so that they don't give you money issued from the Royal Mint but actually print it on demand as our money becomes worthless?
Nice one Gordon, any other historic lows you are planning for our once great nation?
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We will not see 15% unemployment
When did we get 15% unemployment? I know Labour apologists like to go on about 15% interest rates but 15% unemployment?
I can confidently predict that this recession will create a whole new record in unemployment levels. A whole new record in budget deficits, a whole new record in house value crashes and a whole host of other new records that will be used by the Tories for elections to come.
which means in the worst case we will still have 85% IN employment
Have you any idea what 15% unemployment will look like in terms of budget deficits? Well, stick around. You're about to be educated.
and as I've said before if you don't NEED to move house you'll sit tight and get on with it.
Well 15% of folk won't have that luxury if they're unemployed. They'll be repossessed and that'll be working miracles on driving house prices to newer, more affordable values. Except that Gordon is more concerned with deferring repossessions for another 18 or 24 months under the guise of 'helping hard-working families' but really, as any fule kno, just deferring them until after he gets voted out so that his army of keyboard chimps can blame the Tories for his record repossessions.
Anyway today goes down in history. Today is the day that Gordon Brown's mismanagement of the economy trumps the American War of Independence, the Napoleonic wars, mobilizing several million men in two world wars, the Cold War, the 1970's and the Thatcher years as the day we couldn't afford to pay our debts unless we cut interest rates to an all-time low.
Pretty staggering economic mismanagement wouldn't you say?
I mean you'd have to be a real jackass to screw up an economy that badly in peace-time wouldn't you?
Even Robert Mugabe didn't screw up Zimbabwe in under a decade. I was there in 1989 and the Zim Dollar was about 3 or 4 to the pound and there was no unemployment issues.
Nope. Gordon Brown has achieved the most accelerated destruction of an economy in history.
It takes a special kind of idiot to manage that.
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# 46 - we don't need a new model for investment. There is nothing wrong with providing debt for appropriate purposes (for example, to provide working capital to enable a business to expand). The probelm over the past few years is that too much cheap debt has been available for use in leveraged buy outs.
There are lots of "good" business out there which are only in trouble because they are burdened by bank debt that has been borrowed to buy the business. I agree that in many cases, more equity and less debt should have been used to purchase businesses. This is however not currently a problem as there is no bank debt available! What I am currently seeing is some private equity firms funding acquisitions without bank debt in the expectation that at some future point when credit becomes more readily available, they can re-finance part of the acqusition funding with bank debt.
In the longer term, banks simply need to take greater account of risk and price risk more appropriately or simply not make the lend.
It is encouraging to see banks are now commonly pricing mortgages according to risk based on the LTV. It must make sense that borrowers with a LTV of 50% OR 60% are less of a risk and therefore should get better interest rates than a borrower with 85% LTV.
On your settlement terms point, in my view this is an impossible nut to crack. There will always be ways around the legislation if you have two willing parties who wish to continue trading. In practice, the existing late payment legislation only comes in play where there is a dispute and the relationship between supplier and customer has completely broken down.
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Try buying a pound of sterling silver with a pound sterling. Governments have continually devalued the currency to help reduce national debt. If deflation did get hold then the value of our beloved pound would increase as would our debts. This not the time to return to the gold [or silver] standard but my suspicion is that the govenment is trying for a deep but short recession because of the election in 2010. Talk the pound down now and hope for rebound spending when the vat goes back up next Christmas.
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The banks reckless behaviour helped cause this problem their reckless behaviour now in cutting credit is making a bad situtation much worse.One has to ask one self are the people who run these banks acdemics? accountants? business people? civil servants? downright thickos? or puppets.As we all know everyone or almost everyone in the country waste water and burn to much electricity,Just imagaine what would happen if all running water or electricity was turned off today well what is happenning at banks is that they have lent vast fortunes of money now the only the way that there is any chance of this or part of it being repaid is for the companies and individuals to be allowed the time and working capital to allow that money to be repaid but what do the great fools in the banks do they cut off the working capital to be quite honest if these people had brains they would be dangerous
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Yvette Cooper on the World at One, Radio 4, 8th January 2008 said: "Lower interest rates are good for savers".....
i honestly despair for the future of a country run by such obvious fantacists!
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Gvt wants us to spend spend spend. Tories want us to save save save.
Politics just got interesting again.
I would like to suggest a course for steering us BETWEEN the horns of the apparent dilemma....
I have in mind the creation of a number of government owned corporations charged with specific areas of industrial reconstruction. Eg Renewable Energy, Public Housing, Military Retooling, Low Carbon Transport etc.
I would suggest that these corporations be empowered to issue their own 3yr, 5yr, 10yr etc bonds to domestic savers, paying say 4% to 6% coupon.
I appreciate this is not the most original idea in the world but it may at least focus a bit more thought on the detail of the recovery plan.
As an aside I find the notion of UNFOCUSED spending ....well.... sort of unfocused
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"the biggest problem for our economy is not the price of money but the availability of it"
Mr. Peston makes this very astute point in the second paragraph of his blog today. The severity of the fall in UK economic activity can only be explained by the severe monetary squeeze in the economy, partcularly in the corporate sector.
It is a massive shame that Mr. Peston's proposed solution is a country mile from the optimal one. Crucially though, it is a squeeze on money NOT ON CREDIT. The amount of money in the economy can be altered by the authorities without changing the price of money or boosting bank lending. When bank balance sheets expand (because of lending to the PRIVATE OR PUBLIC SECTORS), the amount of money (primarily bank deposits) goes up. The relationship between the demand for and supply of money matters for the economy not credit. Private sector agents cannot purchase goods or assets with credit ONLY THE DEPOSIT CREATED BY THE LOAN. Boosting the supply of money directly can be done in any number of ways. Issuing fewer gilts than are needed to cover the government deficit (underfunding). The central bank can buy securities directly from the private sector (e.g. commercial paper, corporate bonds, equities, property) and in the process boost the supply of money.
In an environment where banks are loath to lend (AND THIS IS PRIMARILY TO DO WITH LIQUIDITY NOT SOLVENCY PROBLEMS), the solution is not to force feed new lending on an overly indebted priavte sector. Instead, it is to return money to them via quantitative easing policies.
If policymakers persist in using this fallacious view of the transmission mechanism of money, there are two clear consequences: 1) the recession will be far worse than was needed and 2) the UK banks will have to be nationalised.
The second conclusion stems from the fact that it is not in the rational interest of banks to lend. They have no liquid assets to speak of and only the exceptional liquidity support of the BoE is preventing a severe LIQUIDITY AND BANK FUNDING crisis. Capital constraints are not the major problem but there is still plenty of balance sheet consolidation that needs to be done. Banks need to rebuild their interest margins. That means higher lending spreads and lower borrowing spreads over risk free rates. In plain English that means banks SHOULD NOT BE PASSING ON RATE CUTS IN FULL as the press and government like to tell us. If the belief persists that bank lending is the key to this mess then the likely result is that banks will be FORCED to do so.
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Cahoot sent me an email advice that interest on my account had been reduced.
They also said the overdraft rates would remain the same.
Doesn't this say it all?
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You state "Capital is scarce".
Usually when things are scarce one has to pay a premium to get them not a penalty.
If the banks are going to pay a pittance in exchange for my savings, then perhaps I as well as the other 20 million savers should consider the potential clout of widespread withdrawal and burying it in the garden for a while. How would that be?
Why should we, the "prudent" take an unfair hit to soften the blow for the reckless lenders and indeed borrowers?
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Just before the premium bond prize fund was reduced to only 20 prizes in total from 5K up a month from of all those billions invested in the NS&I, I decided to pull my bonds and invested in a high street Bank at 8% pa over 12 months.
I have sinced changed my salary to go straight into an instant access savings account paying 5% interest paid monthly over 12 months. And its all guarenteed by Gordon
In effect, my savings are growing above inflation and I have given my self the equivelant salary increase of 2% pa.
Loving it
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Dear Mr Peston,
I think that you need to do some work on that word "savers". Underanalysed....bundling all sorts of situations together.
In 2q2007, my health failed. Had to sell the house, move to Germany (don't ask) and rent with remaining equity in UK savings a/cs on a Bond (hah!) with intention to buy. I had a small pension.
Interest rates have collapsed. In December GBP went to near parity from 1.2 in 30 days.
As a ill heath early retiree aged 57, with deteriorating health, shall I just forget to take the medication?
I have no means of earning, and have saved all my life... SO,,,,,?
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RP sets out the bank lending dilemma clearly. Is not some degree of lateral thinking required by banks & government, such as paying savers annual dividends from Bank profits instead of zero interest on savings account balances. This might allow more banks to pass on interest rate reductions to mortgage holders who are short of disposable income.
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The following may be of interest to regular readers of this blog.
http://blogs.ft.com/wolfforum/
go to Martin Wolf's article and then click on the words 'seminal paper'
The lessons seem to be as follows:
a) we have much more pain to go through and
b) it seems to matter little historically what measures gvts take. A slump is a slump. All that happens in a massive increase in gvt debt
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I'm absolutely thrilled to bits that the media have pre-empted government plans to print money. They are running around like headless chickens trying to deny such a thing.
The falling interest rates are already setting the scene for this.
Quantitive easing it is called. Seemingly that is a more acceptable phrase than 'printing money.'
Just a new expression to confuse the masses.
Some are all for it but the sensible spokespeople like Norman Lamont are far more cautious. It may be needed as a last resort but in Gordon's spendaholic hands it could lead to rampant inflation for years to come.
Like everything else it will ease the credit crisis temporarily but worse is still to come.
Mortgage interest of 15% upwards with no increase in wages is a distinct possibility. The last Labour government under Callahan left inflation at 15% and that was the official figure.
At least the savers would be happier.
This is what the people really need to know about rather than hearing from self interested individuals looking for ways to make even more money out of such a disaster happening.
What a legacy that would be to the next generation and beyond.
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Government has to pump money into the market, better to do it by setting up a government bank. In this process it will not matter much even if banks are allowed to go under.
Like in US government has to pump in trillions directly into the economy. It is very sad what is happening to savers but there is no choice as the ship is sinking due to over load.
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I do not see how this cut is going help.
The Banks are not passing it on to NEW customers, this also means many of those who are not first time buyers as you need to take out a new mortgage when you move up or down. The housing market is still in trouble, I suppose there will be those who are living hand to mouth because they have so much debt who will be able to pay their mortgage this month, but this is not helping the country as a whole.
This just gives the banks MORE cash, as they will certainly cut the interest they pay their poor savers!
These cuts (Yvette Cooper please note!) are NOT good for savers, and NOT good for the big banks who are offering low rates - hence the world and his Labrador saving with Dutch and Irish banks which are offering much better rates and have EU protection.
The big banks may have more cash BUT they are too afraid to lend it to anyone, so how exactly does this help?
So far none the great plans seem to have worked, time for a change at the top?
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Unfortunately for the miracle economy, banks have stopped lending to people who can't pay back.
I know, it's a real bum*er isn't it?
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As I'm living abroard, it's noticeable that while the Swiss and other offshore banks are awash with safe-haven cash; the UK has become the opposite; this suggests to any clear thinking person that the UK has been for eons financially hopelessly mismanaged, and worse is to come. That's why I left those shores some 20 yrs ago. The way things are going on, companies are getting rid of people like flies just to polish their own share market portfolios with the dummies on the stock exchange..Looks good doesn?t it, but?s it?s a disaster in the making, so now there is no consideration to firing expertise and innovation if and when a business upturn happens. So knee jerk goverment corporate struture greediness is soley to blame for the malaise.
If we are going to save the day and it?s getting late at that; a total hoedown overhaul of local business taxes and finance is one of many options; scrapping council tax and the introduction of a local sales/income tax; cutting all irrelevant goverment expenditures; the UK is way behind in reforming old antique policies which are ripe for change. Draconian, but it could act sooner than anyone else if Downing street had any guts and politicans listen to what the people are screaming about.
rich, switzerland
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Does no-one know the answer to my earlier question?
WHY ARE SAVERS RATES pegged to the base rate?
Is it because banks only give a return on savings based on their own income from LOANS? Is this why the savers' rates are always low and now dropping in line with the interest rate cuts?
If that's true, why put money in banks at all? Better invest in something with a return based on profitable commercial growth? Though I daresay some smart alec will imm. tell me there are aren't any 'risk free' good-return investments..
I do wish someone would tell me.
GC
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It seems clear now that the public sector is broke. There is no other logical reason for this rate cut.
The Gov will have to print money soon to pay for its staff and pensions.
That's all there is to it imo..
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#217 Peterskitchen
'loving it' you say. 2% above inflation you say. I think not.
Inflation is still above 4% and you said you are getting 5%.
That is your gross interest rate. After tax you get 4% as a basic rate tax payer and 3% as a higher rate tax payer.
So if you spend none of your return you are losing between 1% & 2% per annum.
Check your facts or declare your tax but stop talking tosh.
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It would be good if the interest on Bank Loans reduced, they are still the same as when the interest rate was 5%, the credit card interest is no different either. The vast majority of mortgages are fixed rate and those people are not benefiting. Even new mortgages are not reflecting the reduction in interest rate..that is for those who can find a mortgage.. The only people who are benefiting are the Banks as they are now paying peanuts and still charging what they were 9 months ago..
This wonderful government Tax rebate was a con as they had taken £240 off us from April with Tax changes and then proceed to tell they are giving us £120 back. When I went to school that would make me £120 worse off.. The fantastic 2 1/2% reduction in the VAT rate really stimulated the economy didn't it.. Do the powers that govern us really live on a different planet from the rest of us mere mortals.
The cost of oil was used as an excuse to increase Gas/Electric, what is the excuse for keeping the prices so high...What are the Powers, so called, running this country doing about them. Not much from what the average man in the street can.. Once upon a time the Labour government looked after the interests of the average working man This government does not seem to even remotely care about the working man and the problems they are facing..
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#227
Yep. That's it. The PBR flagged up[ that along with Brown doubling national debt in the 'good' times he's going to be doubling it again to over a trillion quid in the - errrr - downturn which will end in six months times (his figures).
Gord knows how much he'll have to increase it by if we get a really long recession.
Anyway - a trillion quid loan at a mere 5% will cost you 50bn a year to service. Which is something like 10p on income tax. Essentially we have no way of paying back that kind of money so we are left with the choice of slashing interest rates or printing money.
Looks like the Maximum Idiot will plump for both.
Astonishing. Two world wars and we could afford to pay our debts at higher interest rates. Ten years of this government and we can't even cover the interest at 2%.
Jackasses.
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"Unfortunately for the miracle economy, banks have stopped lending to people who can't pay back.
I know, it's a real bum*er isn't it?"
It's far worse than that actually. As comment 225 and others have hinted at, the success or apparent success of our economy depends on lending and the promise of jam tomorrow to give us the impression that we have more money than we really have. It's hopping from one lilly pad to the next. If the next lilly pond is not there to hop on to then we are screwed.
We don't have any safe-haven, real cash reserves to call on, and our government cannot sustain the levels of spending it is with an increased budget deficit and a balance of payments that has gone even further south. Then there is another debt of Public Private Partnerships to kick us when we're down over the next few years......................
Mr. Prudence himself could have got us out of this slightly by actually being prudent and keeping enough cash backed by something tangible for the bad times, but of course, Gordon Brown decided to try and make a quick buck and sell all our gold - resulting in even bigger losses for us.
In the absence of something tangible, as others have indicated, printing money then becomes a desperate option, but as Argentina found out when it actually got around to printing the stuff, it merely devalues the currency much further and takes you into a massive inflation nosedive.
We are in deep doo doo over the next ten years, and we might not even have a country in twenty or thirty years because our public sector and economy have been incompetently managed, and still are. We've lost any sense of our self-interest which is what we need to survive.
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'loving it' you say. 2% above inflation you say. I think not.
Inflation is still above 4% and you said you are getting 5%.
I'm getting 5.75% on a Fixed Rate bond from Northern Rock from the sale of a house. House prices fell 16% last year so even after tax on interest at 40% I've saved almost 20% on the purchase of a replacement house.
Brown can cut interest rates to zero and house prices will be off another 15-20% this year.
He could print money which would rather stuff me but since it will totally destroy the economy if he does that then we'll all have other things on our mind aside from having no money. Having no food for example.
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Robert, you and Evan are economics journalists, and so to you it really is all rather academic what happens to interest rates.....because you are not running a business .......but to me and millions like me this further rate reduction has thrown a lifeline and will make an enormous difference to the viability of my business.
I was drowning and now I can swim. The chance I will default on my loans has receded.
And that is what this credit crunch was about....not just the Banks and the phony leveraged derivatives and products....it is about the real economy and how variable interest rates damage credit by sqeezing existing good and conscientious lenders to the point of default, triggering sales of assets ,further depressing the value of those assets and triggering further sales of more assets when loan-to valuation ratios rise.
The Bank of England move is welcome, necessary and exactly right for the moment.
Comments critical of this are damaging the prospect of further rate curts and are counter-productive.
I do hope there are more to follow.
As for savers, well they had their turn for years when interest rates were high....savers have to live in the real world and any percentage greater than the rate of inflation means that someone has to pay for it. And if inflation is low there is no need to pay high rates of interest.
And businesses really need to borrow to expand, to modernise, to develop new products ,services and premises, to reach new markets, .Young families need to borrow to move onwards, divorcing couples need to get new houses, people whose cars are breaking down need decent cars to get to work and that means they need a car loan.
So it is not just about bald men....if you are young are if you are balding you would not want to see and end to the production of combs.
And for balding men, that comb makes all the difference.
Ask Rab C Nesbitt!
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If the Treasury decides to proceed with proposals for quantitative easing and gives exclusivity to the Bank of England, then in my book that's just a license to print money.
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#212:
Much as I have no wish to defend Yvette Cooper, and would agree with the general thrust of your post that it's pretty scary that people like that are making decisions that affect real life, are you sure she actually said that? I've just listened to her entire interview on iPlayer and didn't hear that bit.
Could you give the time into the program when she says it?
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Nobody is being forced to remain invested in cash accounts offering a negative real return. However, the alternative does force a choice to between certainly losing some wealth by accepting what the banks give us or be prepared to take a bit of risk.
By lending directly to the best blue chip companies - Tesco, BP etc via the best investment grade corporate bond funds we can still get a yield of close to 9% for a fairly low risk In exactly the same way as cash has fallen off a cliff and gone from being a great investment over the past few years to a terrible one now, corporate bonds are now offering the best yields to risk rewards for 80 years. There is also some potential for capital growth as well. In this age when even UK government debt is beginning to carry risk and the value of our cash is slipping away doing nothing but complaining may be a big mistake. Perhaps better to ask oneself if you think that BP etc are all going to go bust and default on their loans or not. If you think not then lend to them not the banks.
PS I do not work for any provider of bond funds but do have considerable savings built up over 7 years which are to buy a house at some point.
Inflation is coming.
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"Does no-one know the answer to my earlier question?
WHY ARE SAVERS RATES pegged to the base rate?"
Put simply, you're being screwed. Banks are obviously going to be very reluctant to cut interest rates for borrowers, but will happily cut the rates on your savings account because they want to hoard cash.
This rate cut doesn't bring down the cost of borrowing, decreases savings returns and devalues the currency further. They are actually perpetuating the nightmare spiralling scenario.
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Interest rate cuts
What about the poor sods in rented accomodation.
Not 1 cent of extra free income to be spent to stimulate the economy from say 10-15 Million.
The only drop should be a long one from the incompetent financial Guru's running the economy on a short rope.
oh what a lovely war!!!!
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Re fractional reserve banking
Assume interest is only paid on loan- no capital repayment- say 10%
Assume depositor leaves money in bank- happy with his 1% interest
The bank take a deposit of 11,000 and can lend 100,000 on the strength of this, then the bank will earn 10,000 in interest alone.
The bank then pay interest of 1% to depositor- thereby earning a net profit of 10,000-110=9890.
All this for a deposit of 11,000
If this is the case then how the hell did they get in this mess- this is in fact a licence to print money.
This is the economics of the madhouse.
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Yes, Brown and Co have trashed the Pound, opened up the inflation box, slashed the deposit rates and are now turning savings into reducing value items.
Which means that savings need to be taken out of UK Banks and invested in some country which
a) does value investor savings and
b) isn't set on the NewLab madness course of capital destruction.
Why should anyone carry the risk of saving with a UK Bank or any UK savings vehicle when the 'reward' is all negative ?
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The Bank of England and the Government, together with it's treasury "wonderthinkers" have destroyed the finances of UK land.
For the Government to borrow megabucks, the Bank reduces interest rates so the borrowing costs less.
The big banks we have bailed out can now make big profits to rebuild their balance sheets, by lending at large differentials from this low B of E base of 1.5%.
At the end of this year as the economy picks up and becomes hugely inflationary thus reducing the relative cost of paying back the Government debt, the benefit of the VAT reduction will help surviving companies to buy machinery and plant.
Sorry, I seem to missed any benefit for the population and especially savers. Savers will not only earn no interest but their capital will be worthless, because of raging inflation.
Any one got a glimmer of hope?
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Hopefully this will mean another nail in Brown's coffin. I am afraid if labour do not get rid of him soon they will get less seats than the Lib Dems.
McNulty should replace Brown now!
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A presumption is that banks are the principal mortgage lenders. From data published last year banks (including mutuals that became banks). provided a quarter of all mortgages. What has happened to the other providers? Insurance companies, etc?
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Problem: At existing interest rates people want to borrow, but no one wants to lend.
The Govt Solution: it CUTS INTEREST RATES (and then wonders why matters just keep getting worse).
Question: So what, then, should the rational trader do? (What ARE rational traders doing?)
Answer: Accept that this government has no regard for savers. Borrow what you can, re-mortgage your house, mop up every last drop of remaining credit in the economy and use it to buy gold or foreign currency so that you'll profit when the inevitable hyperinflation hits. Meanwhile the government will just keep wondering why matters keep getting worse.
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I have to admit I am somewhat baffled by some of the perspectives on offer generally.
Obviously if you turn off credit the economy slows. Starting credit flowing helps the ecomony. But credit will flow in time and pressurising the situation does not necessarily speed the process up QED really. Obviously if you are a politican with a GE looming you are only too happy to spend somebody elses money to buy some progress. You have finite time. Spend spend spend.
There are no statutes that say just because you want to borrow money you can have it.
The business that is complaining that they want somebody elses money to run. Its somebody elses money, generate your own. You can't. Have to wait then. Thats the marketplace. Claim you are viable, profitable, sorry the bitter truth is you are dependent on somebody elses money so you are not independent. Somebody else walks you got a problem.
The guy who pulled six figures out in a property downgrade and who is now complaining about interest rates on that capital, doesnt it ever cross your mind that you gained enormously due to a overheated housing market and somebody else is now having to pay that figure off.
The public sector beefing about future budgetary problems - its somebody elses money you are spending, you dont make money you just consume it. Shrink to match the available money.
Concern about unemployment, fair enough, it is an individual catastrophy, but what on earth do you think happens when a economy contracts. You have to try to migrate on to safeground before the landslide. Didnt think it would happen. Enough people said it would including the IMF, mind you they were ridiculed, even up to summer 2008. Some excuse, but if you heard and ignored it have a hard think.
Listened to somebody with a vested interest. Hmm. First rule - check if independent.
None of the people in businesses which clearly have been carried along on Browns bubble seem to think they have actually had a good run, in reality many of those jobs would not have been there but for Browns stupid bubble blowing. But no they want the good times back come what may.
It is quite obvious that overconsumption has encouraged the setting up of facilites providing oversupply. Does anybody really think there is the need for the level of double glazed units that are now capable of being produced. That says that some capacity has to go but it just does not seem to be accepted by those businesses. You can say the same about car production, and a load of other goods and services.
Too many people seem to have been swallowing Browns fairy tales. All this stuff about a new structure needed - what is happening is the underlying economy which has been under the bubble is re emerging and it is sound. What you are saying is you dont like the landscape. Sorry just because you dont like it doesnt mean it will disappear.
That is not to say that I dont have sympathy for individuals or businesses in trouble - or that I dont think credit needs to flow or that intervention may be needed - but the sheer lack of reality of some is just an indication of how this jamboree developed.
My comments probably sound brutal to some. That is because they reflect some of the reality, which like it or not is brutal. It is ignoring the potential for brutality that is the problem.
It is very hard to communicate to people having a good time just what the potential dangers are if they are over the horizon. I ignored the potential dangers at one stage and I dont anymore. That is not to sound smug, it is result of aversion therapy.
My bet remains intervention in the housing market, but not yet. It offers a high lever on any input and provides widespread uplift.
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Earnest Dave must hope Vince isn't tempted to join the Brownies.
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Surely interest rates matter. The directly or indirectly affect just about everything.
But as Gordon Brown pointed out in his 1989 book "Where There is Greed..............." Interest rates are a very blunt instrument for managing a complex international economy.
However, the one thing interest rate reductions offer is the ability to continue paying mortgage repayments at the levels "enjoyed" prior to the recent base rate slash and burn policy in order to make a hole in your mortgage debt.
I have always had a flexible mortgage and overpaid heavily. I look upon this as a huge opprtunity to make a real dent in what is my only debt. I am sure that many others do the same and that this is going to be a factor in rehabilitating the economy. The banks will be receiving increased mortgage receipts and lessening their exposure all while - I suspect - enjoying improved margins.
The savers well that's another story............
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226....WHY ARE SAVERS RATES pegged to the base rate?
i asked my bank the same question, here is the reply.....
..."Our current policy is to price all 'instant access' savings, off Base Rate. This is because customers have the facility to move these funds away at short notice and hence as a Bank we are more reluctant to lend this money out. "
i then asked at what rate they lend my money out to borrowers......"the average loan rate is 12.9%".....
I then asked how the justified what was in effect a 600% margin.... no reply but when i then threatened to close all my accounts an additional x% of interest was miraculously found!
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The shortage of credit results from the dead hand of government.
Remember the Soviet system? Commodities were as cheap as chips, but there were none on the shelves. Credit is a commodity and the supply/demand relationship is being distorted by government, nowhere more so than in the UK. Get Labour out.
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Everyone is losing their jobs, what does it matter, if the rate is cut, they still can't pay the bills !
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226.
No-one answered your question because savings rates are not pegged to base rates. They are pegged to any rate a bank wants to peg them to and which will help them preserve or increase their margins.
The base rate is not the same as the banks' cost of funding, which is linked mainly to LIBOR (what it costs to borrow from other banks) and the rates they pay depositors. It is also linked to the cost of their own debt (generally floating rates above LIBOR, I believe).
If LIBOR does not move down and they do not reduce savings rates they "cannot" reduce the rates they charge in mortgages. If they preserve savings rates they get the boot put in by borrowers, if they lower borrowing rates they get the boot put in by savers. Poor "soles".
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238 Pru-dense
Those" poor sods in rented accommodation" will benefit too from the interest rate cuts.
The rise of Buy-to lets created an oversupply oF rented accommodation and the credit crunch wiped out new buy-tolet-purchases.The return to viability of buy-to-let will improve the supply and quality of rented accommodation which will keep rents at a reasonable level.
Renters have done well in the past 20 years. A flat renting for £500 a month in a major UK city in 1985 was only £900 a month in 2008, even though the value increased eightfold.
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Wake up and smell the coffee people. 1% return on your savings is useless.
Take a chance and invest the money in quality shares / property etc.
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Of course, to quite Alistair Darling, no one is talking about "printing money," because everybody is talking about "quantitative easing."
Today's rate-cut seems to me to be a waste of time, because it is the availability of credit at any price which is the problem. A little "quantitative easing" might have been a far better idea now. This would not increase inflation, merely reduce deflation. When, eventually, a recovery begins, any incipient inflation could be reined back by a complementary "quantitative tightening", selling by the Bank in the market government and corporate bonds it had bought during the "easing."
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Note to guycroft
If you have been making money on a low percentage skim on a large turnover and suddenly your turnover drops you keep the same profit by taking more of a percentage on the smaller turnover. You have to keep the margin up because you can't cut your staff beyond a certain level without them becoming skeletons. Plus they have to pay a high return on the Treasury short term loans. HMG know all of this they are intent on trying to lay the blame on the banks by saying interest rates are low it is the banks fault. Not my fault, not my fault. Basically with this lot if you invert every utterance you understand what is going on. Basically the customer always pays, because there is nobody else to pay. In this case we are all customers of El Gordo and Comical Ali. Same elsewhere - Costs will go up alround in the supply chain, forget the sale nonsense.
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Am I missing something here? People are saying that because base rate (MLR) has been cut, their cost of borrowing will also be reduced. However, the banks/building societies have already stated that they are not passing-on the reduction. Loan rates to business or individuals are set by the banks themselves and will not decrease automatically. Therefore where are these "savings" supposed to be coming from?
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#8 When you get your cash out, don't put the notes in a box under the bed. Buy gold coin or bullion and tuck that away somewhere safe. With what G. Brown is doing to the value of sterling the notes will not be worth much in a few years time.
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( #196 dknotty wrote:
#28 the1beard
I'd like to hear what you think are the idiot proof opportunities are...)
Depends on time frame the simplest is Buy to Let Residential property in the best rental locations.
Property yielding 8% plus is in my opinion idiot proof there are property funds, which will be giving strong returns.
Borrow at 4% rent at 8%. 2X coverage.
Or if you only get 1% on your deposit thats a 800% improvement on your income.
The capital values may decline short term but over the long term that is not going to be a problem as property keeps pace with inflation over the long term.
Any inflation-linked product will be worth investing in, as we are certain to see a rapid rise in inflation in 18-24 months time.
Stocks in cash rich companies are good as are energy co?s and a number of construction firms who will benefit from infrastructure expenditure on power stations etc.
Avoid currency speculation (which is for Idiots)
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We are in a mess and their will be lot of suffering until there is confidence in the valuations behind lending.
People do not have cash because they are maxed out and not saving enough.
Purchases come mainly from abroad.
What on earth are the government doing trying to encourage more spending to pay for more goods from abroad.
How can the banks operate when the government takes 12% off them. If they judge this reflects the risk then how can my pension savings be judged to be worth less than 3%.
Disaster will be dripped out for a long time.
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253 a 1% return is far better than a 20% minimum loss for the coming year .
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#245
Can I add to your list:
Timing - ie some things take a while to happen, others need necessary infrastructure in place first. You can't repair the water supply without brickies and miners - but then again, you've got Tower finishing, so persuade their lads to keep the team together a bit longer and come and help get the water distribution working.
Materials - do we really need scarce materials, or to continue shipping things to China?
Then as a reaction:
Public Sector includes such people as the IMF you praise etc etc. Kill that and you lose all hope. What you're really after are the middle-management who are just wolfing huge amounts on ridiculous projects which all make the same mistakes time after time. There's only so many times you can rehash someone's identity, add a few extra data fields, they all need pretty much the same interrogation and infrastructure, so why is it we don't have a recommended battle-hardened data core using standard hardware and software?
And a personal hate, offshoring: kill all call centres, make decision-makers personally accountable.
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An old adage says that "When up to your genitalia with crocodiles it is easy to forget that your original intention was to drain the swamp".
The swamp in question today is DEBT. Not the banks, not lack of credit, but DEBT. As I see it, until we grasp this nettle nothing is going to improve. Adding to debt; trying to lend even more money; is NOT going to alter the basic problem.
What worries me is that this debt, which has to be paid for one way or another, is in point of fact going to be serviced by me and the few other remaining solvent people by nil interest on our savings and a wholesale depreciation in our (property) assets.
I am 68 and I will never forgive this futile government for failing to tackle the problem of debt, indeed for fuelling it in hte first place, nor the hosts of profligate people who are bent on ruining my future, not to mention the well being of the nation.
Am I right Robert? Or just being paranoid?
W.R.
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253. I think you're forgetting that most people are risk-averse and what would you suggest to your average pensioner? At the moment it seems the volatility of the stock market is probably the best means of investment - not sure on the property front!
As to these rate cuts. I agree with much of the sentement already expressed; this is doing nothing but devaluing the pound. It also seems the case of 'too little too late' and perhaps holding back from a cut (as someone suggested) may have been a more sensible move! This is just ludicrous. Also, can someone please explain to me what exporters we are 'helping'? What does the UK even export? I thought this was mainly a services-based economy and without any substantial industry anywhere (cars, for example) i'm at a loss how cutting rates, devaluing the pound and saying exporters are gaining actually outweighs the increase in cost for importers and savers!
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Given that interest rate reductions appear to be meaningless as a direct policy tool, the only clear effect is to reduce the value of the pound. Is it possible that they are being used as a disguised form of the beggar-my-neighbour competitive devaluations that used to be acceptable national policy? Surely a (probably, eventually) welcome by-product if nothing else.
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245. Glanafon
Lots of sense as usual. Not brutal, just a description of something we need to go through (again), which will be more painful than it needed to be because of useless govt. policy and lax regulation.
I particularly like;
"what is happening is the underlying economy which has been under the bubble is re emerging and it is sound"
Every now and then (the Peston-ignored Sainsburys results, for example) we see evidence that government policy has not ruined every decent business. There are even a fair few high quality manufacturing and engineering businesses that have not over-reached themselves and are quietly doing very well. You wouldn't know it, though.
Also, and it is not fashionable to say so, but we will be grateful in years to come that we have a world class financial services industry (which exports loads, even if you cannot see it) and we would be as well to do everything we can do to preserve it. A few failed banks does not change that. It is no use harking back to a Victorian manufacturing base that will never return.
As for those who continue to say that the interest rate reductions and bank bailouts have not worked. How can you possibly know? Only 4 months ago three-month LIBOR was 6.5%, it is now 2.5% (and about to go lower). The effect is not yet being felt. RBoS only completed their rights issue last month and Lloyds/HBoS haven't yet completed theirs. How can they spend money they don't have? (oops - silly question). Anyway, as to whether they should splash out again or use our money to shore up their own positions, I prefer the latter course. (Although a bit of both may be best, if done in a sensible fashion).
That is why I would have preferred to see rates held this time round. Give it time to work, keep something in the tank, and show a bit of confidence. But what do I know?
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Despite the best efforts of a number of financial experts, many people just don't get the idea that what's good for them as an individual is not necessarily good for the economy as a whole. In the short term the government is surely correct in trying to boost consumption, through tax cuts and increase lending. Those with savings are in effect, being encouraged to spend more and save less.
There is a long term need to boost savings, and the public sector deficit will need to be substantially cut and there will probably be inflationary pressures that will lead to future interest rate increases, but in the short term the economy needs a boost through increased spending (both public and private).
Changes to interest rates will always create winners and losers (in many cases individuals can be both at the same time). The issue is not how it the decisions affect an individual, but how they affect the economy as a whole. Times are tough for savers - governments won't say so, but this is deliberate - they want us to spend not save. A year from now this may change and government policy may change at which time savers will benefit.
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Nearly 6million public sector workers and growing - gold plated pensions, higher salaries than the private sector, better job security. Anyone like to guess what percentage are the pointless bureaucrats, multi-agency co-ordinators, diversity officers etc. 15%? There's a saving.
But that would go against Gord's plan - 'cos a big public sector plays to his advantage electorally.
National databases, computer schemes, ID cards, other ways of snooping on and controlling we poor citizens. Billions more savings. Oh dear - against the plan again.
If our leaders really can't find ways of saving money they could always give me a call. I'll work for no fee, just a percentage of the take.
Goodness knows why but I logged on to the Guardian jobs page. Oh dear! Numbers of vacancies: Govt 345 vs Engineering 49, Construction 36 and Science 26.
I have been trying to look on the bright side. Think I'll have a drink instead.
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i thought the lack of liquidity was about the tide going exposing those without costumes ,but now it is bald men arquieng about a comb!
in these difficult times we need diversion .
but for goodness sake the govenrment /bank ouf england/treasury needs to get on with it or we will all be bald men with no swimming costumes!
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228. At 4:05pm on 08 Jan 2009, Daytrader1 wrote:
#217 Peterskitchen
'loving it' you say. 2% above inflation you say. I think not.
Inflation is still above 4% and you said you are getting 5%.
You maybe some sort of trader, the sort that got us into this mess with your high school math and "its in the paper so it must be true" mentality
Inflation is not anywhere near 4% at this time. You are quoting the published figure which is not current. It has a lag.
Wait until the next published figure and it will be around 3% and remember that will be behind as well.
I suppose you think the slump will be over by Easter because Gordon says so? Dear oh Dear!
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What many of the moaning minnies on this blog forget, is that monetary policy is not about being "fair" to savers or borrowers, its designed to movitate their spending decisions. Lower (real) rates are designed to movitate borrowing, and demotivate saving - both of which should boost economic activity. Without such a boost, the recession goes deeper, and lasts longer - resulting in more tax or government borrowing.
In a recession people instinctively shift their behaviour towards the saver end of the spectrum, which means rates have to move further than would otherwise be necessary.
Of course with a credit crunch going on, the "borrower" motivating effect is badly compromised, so I'm afraid its the savers who will likely have to suffer, in an effort to get them to spend some of their capital - either by being forced to through a lack of interest income to live normally, or through choice because they are fed up with the dreadful returns on their prudence.
It's of course fair to say, that this hasn't been the experience of the recent past, because we have had inflation issues to contend with. Perhaps a little bit of inflation is after all the savers friend.
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Put your carpet slippers on Mr.Cameron, Mr Brown has given you the next election the savers in this country are very many and they all vote. Once a saver always a saver you won't make us into spenders.
Must start moving my humble reserves to other countries.
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OH! GOOD GOLLY MISS MOLLY...what are we to do ?
(A) Bring back the birch for devotees of credit. Take the number 100 less the Base Rate to work out number of strokes to be applied. 98,99....soon perhaps 100.
***************************
(B) Sell off the BBC and turn Broadcasting House into A House of Penal Correction. (See (A) above.) But hold on to 'Sir' Rob Peston. Please, just as a personal favour.
***************************
(C) Start Nuremberg-style Trials for all those involved in the making of the current situation.
FIRST in the dock:The TREASURY ! The hopeless, arrogant, incompetent Treasury, full of the top brains of the UK. Its individuals seem so hardworking... to so little effect... It has been so quick to pass the buck to others . It has made a shameful conquest of itself.
List its upper ranking civil servants over the last ten years, with details of their pay and pensions . Explain the term 'FINAL SALARY SCHEME benefits' to the British Public.
Cut above benfits by 90%.
___________________________
SECOND in the dock: MPs.. nearly ALL of them.
Gutless, stupid fodder for the Party Whips in the main.
The Treasury Select Committee's MPs and all Whips to be sent as Forced Labour to a Penal Correction Centre (see (B) above) if deemed appropriate by the Courts.
Cut their salaries by the Base rate mathematically raised to the Members found guilty. EG 2% raised to the power of 550. Even if that results in a very high number. NB Ask the Risk Management Committee of the RBS to undertake such calculations.
Cut MPs pensions only by a quarter to make retirement VERY VERY attractive.
___________________________
THIRD in the dock: A Grand Swathe of the Great British Public motivated by consumerism, greed,
and life on Easy Street.
If found guilty ...a diet of gruel and humble pie in newly created Debtors' Prisons. Lesser offences would attract the Base Rate Birch. (See (A) above).
___________________________
FOURTH in the Dock: Sir Fred Goodwin, ex-CEO of RBS, and others of similar caliber. If found guilty they should be forced onto every Reality TV Show going so that they can learn about real life and real people.
FIFTH....
SIXTH....
nTH....
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Exactly my point. The poor souls who have been servicing the debt of the 8-fold winners on the buy-to let are still having to pay the same when the lending rate is at the lowest ever recorded levels.
Has any landlord passed on the saving on his/her mortgage?
wake-up and smell the roses
#252. At 5:05pm on 08 Jan 2009, onward-ho wrote:
#238 Pru-dense
Those" poor sods in rented accommodation" will benefit too from the interest rate cuts.
The rise of Buy-to lets created an oversupply oF rented accommodation and the credit crunch wiped out new buy-tolet-purchases.The return to viability of buy-to-let will improve the supply and quality of rented accommodation which will keep rents at a reasonable level.
Renters have done well in the past 20 years. A flat renting for ?500 a month in a major UK city in 1985 was only ?900 a month in 2008, even though the value increased eightfold.
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Say it again, it's not the cost of credit, it's the availability, like trying to get an overdraft in the 1950s. I suspect that a lot of firms would pay 5 percent with a smile, if they could get the loan. The banks' business is lending out what they've taken in as deposits, but where's the incentive to deposit anything? And although everyone's talking about zero deposit rates actually meaning a profit when inflation goes negative, that hasn't happened yet ? nor will it in the real world, as opposed to that occupied by the National Stats Office.
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This is the most haphazard handling of an economic crisis I could ever imagine.
Government comes up with an idea and makes the crisis worse.
It comes up with another idea and the crisis gets even worse.
Every idea it comes up with just compounds the problems and adds to the national debt while the crisis deepens.
They have to do something they say.
When you do something it is supposed to improve the situation.
Only this government could do something which deteriorates things even further.
Never mind they can still turn on the printing presses and then we can have as much money as we want.
Unfortunately no one outside of the country will take it and it may cost an arm and a leg for a loaf of bread if you can get one.
AD said it 'It could be as bad as 1948.
He wasn't kidding.
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The bubble in house prices is the biggest policy failure in recent history, and as a result I still can't afford a decent house. On the other hand, since June 08 I have a HBOS regular saver paying 12% interest (!!). I fully expected the bank to fail, but relied on the implicit government guarantee for savers. If the government is doing everything it can to keep house prices artificially high, it seems only fair that I get a small financial reward, too.
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261 rahere
Not a lot to disagree with.
I do not favour disbanding teams. In fact I do not in favour anything which is a sharp discontinuity. What works best is smoothed transitions. That demands intervention or good management or both. Something still has to give though. The big difficulty in cutting size is capability in the system which is hidden but critical, usually some form of common sense or native cunning used to safeguard the system gets chopped to the detriment of what is left.
There is nothing wrong with shipping materials in providing you then ship at least some of them back out with added value.
Manufacturing. Well it works very well here, smart and small very flexible, worldwide customer base. Old school manufacturing growth, no way, I expect it to decline. Transiton not completed.
I am not against the public sector as such. I have worked in the public sector. I referred to the IMF because it is recognised as an authority. I could have referred to the CEO of Alchemy the VC outfit. I think he got sick to death of saying a problem was brewing. I do think the public sector needs to realise it is spending taxpayers money, not a god given budget supplied by Whitehall, or in Wales the Weslh Assembly.
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'and the 0% rate banks always pay to the millions of us who keep some of our money in current accounts that never pay interest. '
Your above statement implies a criticism of the banks Robert. The banks may pay you 0% on money in current account but they also provide you with free cheque books, statements and cheque cards as well as maintaining websites, branch networks and telephone banking facilities. Do you think your average balance at current interest rates covers the cost of these free services? The UK public is lucky to enjoy free banking - almost every other country charges fees for holding current accounts. Come on Robert our banks have been pummelled enough - give credit where it is due - literally.
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I urge everyone on this blog to watch the video below. It may help you understand how money is created in our financial system.
http://video.google.com/videoplay?docid=-9050474362583451279
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let's just accept that if you're a borrower or a saver you're doomed. Britain is now unofficially bankrupt and insolvent. Soon we will resume our status as the sick man of Europe with hyper inflation and weak growth if we are lucky! Raise a glass and toast all those morons who voted three times for ZANU labour! If you ever put your cross against a labour party candidates name at the ballot box then not only should you be ashamed of your actions but you should also be paying the price of crash gordons wholesale mismanagement. What fools you have been!
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Glanafon - if you believe that the underlying economy is re-emerging and is sound then you are self-delusional.
Pray enlighten me as to any leg of the UK economy that is sound.
Like you, I believe that this slump is going to be deeper and longer than any of our politicians or business leaders care to admit. Yes people need to know the truth but they also need to see plans are going to be implemented to help see the country through it.
At present, no such strategic thought is coming from either the Labour or Conservative parties. Politically, it's like a re-run of the sleepwalking prior to WW2
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Well they had to do something, otherwise they would be accused of being the 'do nothing treasury'.
I have reached the point now where I involuntarily physically cringe every time Gordon says 'Gloooobal' or 'do nothing party'.
He thinks he can brianwash the nation by repitition into believing non of this is anything to do with any decision he made ...ever.. the sheer arrogance is breathtaking!
On the other hand he accuses the opposition of being the 'do nothing party'. A catchy soundbite but arnt they in opposition?
What are they supposed to 'do' for goodness sake except point out noboddy actually voted for him to be an MP let alone PM out side of Kirkcody in Scotland and the people should have an election!
But oh no, Gordon knows what is best for the nation....despite noboddy giving him a mandate to run it. We should be out in the streets!! Arrogance, arrogance arrogance combined with naked ambition dressed up as a strong desire for social justice.
I feel better now. Somthing a bit more measured to follow.
The interest rate cut will help the short term pain in terms of mortgage re-payments for those struggling and on tracker mortgages and promote some direct investment, possibly even from those self rightious and currently complaining bloggers (here I go again!) who usually never do anything more dynamic or risky with thier money than put it in a bank (I am laughing at this point). I reckon most of them must be in the civil service!
Well guys and galls pull out the bundles of cash from under the mattress and look for some direct investment opportunities. Take some responsibility for making dynamic decisions about your future and help the nation. Who knows, you may just find a whole new lease of life!
Or if you feel really daring and want to take a chance on a lose - lose situation...you could just leave it in the bank!
Jericoa
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#245. You make some good points, but I don´t see how you can conclude:
"...the underlying economy which has been under the bubble is re emerging and it is sound"
Other than noise what is sound? What part of the economy do you regard as sound?
I think you are only partially correct in your analysis of the over supply that has built up under bubble conditions. It is true for the examples that you give - but less so for core essentials such as food. Take a look at supermarket policies toward their suppliers. Do you really think primary suppliers are in good shape to weather a sustained downturn? Take a look at global agri business and the diversion of resources from food production to bio fuels. You´ve already had food riots in Mexico, but not in the UK. Why? What is the difference between the UK and Mexico? Historically the answer is money. To paraphrase your own argument there is no statute that says money must reside in the UK and not in Mexico.
One of the big supermarket chains has instituted a strategic review to develop a plan to cope with a widespread failure of their suppliers. Think about the inanity of the thought process. These people never learn - they´d most likely be sacked if they did.
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An excellent blog - Keep up the good work!
However, one area not mentioned so far is the Small Business Government Guaranteed Loan Scheme.
This scheme involves high interest loans with an additional high guarantee premium, to businesses who were the most vulnerable.
Small businesses with these loans are still paying in excess of 10% interest due to having agreed to a fixed interest.
If only these rates could be cut in order to help these companies, who took them on as a last resort, and are paying extortionate interest charges when they should now have the facility to use that money to keep their businesses going.
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267.
The profile of the vacancies in the Guardian may say more about the Guardian than the actual profile of vacancies out there. Try a few more.
The FT today had a vacancy for "Head of Financial Stability" for the FSA. Plenty of applicants on here I shouldn't wonder.
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Real interest rates are set by the market, not the Bank of England, which chases them with a target it attempts to defend by adding and draining liquidity. The lessons of the ERM fiasco have been forgotten. If a sterling or gilt crisis forces rates to 10% or more, the limits on the Bank of England's power will be plain to see. All this talk of printing money only makes it more likely.
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273 pru dense
I have never really understood buy to let. Years ago I read that a landlord needed 10 percent of property value pa as rental to cover finance, upkeep, a factor for bad tenants, and a profit margin, and they could never get it, 8 percent was the best. I appreciate that interest rates were probably higher then, well they had to be following todays low. BTL for the small investor has always seemed to be mainly a property speculation in the hope of rising prices in the near future. The only way is up until there is a equity buffer. Rental income around here appears to be 5 percent at best, but that is not a survey it is just casual observation. Huge increase in To Let signs, many holiday homes, which tells you that the main house is probably the one under threat, but again that is probably the one mortgaged to buy the holiday home. It all looks for some of them a bit like those never ending be a property developer programmes were a profit was made despite massive overspend simply because property went up like mad, except now its on th way down. Over 5 years there was a 3x increase in property price in this village. As 60 percent of the property price at the start was the cost of building, and that did not rise much over the 5 year period, there was a 5+ fold rise in the plot value but nobody seemed to question it. If you said the plot had gone up not the house you got a blank look. If you go back to 2000, at that time around here most locals used to drive bangers about, mainly because you could take a hit without witnesses on the backroads, loose livestock, loggong lorries, farm tractors and equpiment. Now there are a lot of 20k to 40k autos, virtually all imports.
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The problem seems to be one of lack of lending to business and public caused by the banks spending money they didn't have and creating bad debts. Consequently other banks will not trust them with their money which means none of them have money to lend,
Rather than the Government giving them more money to bolster their accounts wouldn't it be better if the Chancellor cut income tax rates by say 10% (£30b). This would give the public money to either spend buying goods and services and keep people in work and businesses afloat or put it in the banks who would then have money to lend to us and business again keeping peopl in jobs. There is nothing else you can do with money other than put under the bed.
This would be less than the £37b already put into the system.
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Robert
I share your analysis of why banks are contracting the supply of credit - tightening lending ratios / need to build up capital to stop them falling over etc. What I find surprising is that this factor is barely visible from the Band of England's Credit Conditions Survey Q4 2008. There is something vaguely referred to in the opaque questionnaires and weighted anwsers in the annexes which only the Whitehall mandarins understand.... there's lots of good stuff in there about lessened appetite for risk, poor economic outlook,falling collateral values and higher costs / availability of funds as well as comment on falling demand for credit in obvious cases. I suppose this is an industry survey so we should not expect a fully objective analysis.
Risk pricing and profitability by and of the banks will surely be the real issue governing the cost of funds to the rest of us, as opposed to base rate fixes.
Back to the profit motive being the key with fine-tuned credit terms tightening in a recessionary and less competitive funding market.
So, the super Treasury brains who didnt see this disaster coming are now sweating it out to find a way of expanding credit supply without giving the banks more than the bridging loan of October 2008 when real economy recession is causing demand for new credit for capital investment / mergers / acquisitions etc. to contract...perhaps its more about the fear of big corporates losing access to money market funds as the banks have with the danger of the big boys of the FTSE and over extended private equity ventures starting to fall over.
If the conduit for more public funding is to be through the banks' capital base underwriting their profit I hope someone is doing the maths for the taxpayer ( see my previous points on the bank balance sheets ). If the BoE is going to become our own direct banking outlet the objectives and lending criteria should be a matter for all of us to decide....not just the Treasury mandarins and the current majority administration with their whips. Either way, it seems to me that money is being printed to solve this mess.
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The stubbornnes with which the BOE and the UK Government maintain their goal to keep Britain the mother of all overindebted nations it breathtaking. Against the clear evidence that there is already far too much debt, leading to a catastrophe already, they want to continue to run the country on debt, no matter what or who has to be sacrificed. That reminds me of a country which brutally occupies another forever, maintaining they have a god-given right to do so. The occupied in this case are the prudent and the productive, bullied by an army of finance junkies.
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I recently contacted the local authority which collects our Business Rates. On questioning their treasurer to try to delve into the wonders of their policy on using and depositing monies, it became clear to me that significant cash is being held on deposit (notwithstanding that kindly being held by those nice Icelandic Banks). This cash seems however to emanate from "property sales" (i.e. Thatcher's Council House sales?) and is being held on a very Long Term (2 or 3 year) deposits. The gentleman concerned couldn't assist me with details of what this cash would actually be used for, save that there were "Government restrictions" on how this money might be spent. When I suggested that local ratepayers might actually need use of that cash given the severity of the recession, I was met with silence at the other end of the phone. So why can't this cash be "untied" for local capital projects now?
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This comment was removed because the moderators found it broke the House Rules.
"To return to my boring refrain of the past 18 months, the biggest problem for our economy is not the price of money but the availability of it." - Robert Peston
Actually the problem can only be both, as price and availability of credit are inextricably linked. I am surprised you can claim otherwise, as every reader of the dismal science learns this in the first chapter.
The problem is too much money made available at too low a price to cover reasonably expected losses from available reserves. This has resulted in widespread excess leverage and failures of banks and businesses.
However, on the highest level, the monetary base has been inflated to a size at which the paying of interest cannot be financed by production. The government's own figures point to this. The result will necessarily and inevitably be defaults and the government seems determined to take a longer and more painful route than that suggested by the market.
"What's still unclear is what form this nationalisation will take." - Robert Peston
The nationalisation of default.
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Poepl keep on asking 'what do I do with my savings'
Aint you worked it out yet? They are engineering a property boom, why will this happen I hear you ask?
Because,
1 Rampant inflation WILL wipe out your savings,
2. Equities are not safe,
3. Government bonds will lose you monies too,
|Its all part of the big plan, and a few on here have sussed that so far. A recovery in property will be on the way, but it will be brought about by fearful savers - fearful of losing them via inflation.
I keep telling my dad the same, if you buy a couple of flats outright you get the rents (an income) then your assets rise anyway i.e they are inflation proof.
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#17
Not so I'm afraid. You didn't take into consideration the effect of fixed costs and bad debt which stay the same irrespective of reductions in cost of funds (base rate). In fact, as times get harder so bad debt increases and may even wipe out any profit on some lending.
Any bank that is paying savers over the odds (say base + 2%) on the bulk of it's savings has a serious profitability problem brewing and it's indicative of a real need for funding. In this current climate I'd recommend people to seriously consider paying off debt once they have 3 or 4 months nett income in a savings account as this will give a far better return. If you are on a tracker or SVR mortgage don't let the bank reduce your repayments. Keep them the same and wipe years off your mortgage and save thousands in interest.
As an ex banker who lent through two previous recessions I can confirm that monies are always available for well run and capitalised businesses for it is in the banks own interest not to lose a good relationship. I spent many months nursing companies through bad times. There will always be exceptions though. Often to show good faith additional security might be requested such as a guarantee. Surprisingly, often the last people to know that a business is going to fail are the bankers.
For those that condemn banks for "encouraging" people to get into debt, in my 40 years I never knew of any manager that forced a customer into taking a loan yet saw many many fraudulent loan and overdraft applications. In recent years front line staff have had to endure abuse from customers if they had the cheek to say no. I've lost count of the number of times people have threatened and made formal complaints just because I had politely, with reasons, declined a request. There is a lot of talk about responsible lending, what about responsible borrowing?
Amazingly I daily read about people trying to talk up the housing market. We will not see the huge increases in price for many years as it was directly fuelled by the CDO market, and banks lending beyond prudence. 125% mortgages and lending long 160% of the value of your deposits against short term finance? Sheer madness which is unlikely to be repeated and will therefore ensure that property increases broadly in line with inflation once the bottom is reached. As for talk of demand outstripping supply, I dont yet see hundreds of thousands of people walking the streets of Britain looking for somewhere to live. Where are they living now?
One plea for the ordinary men and women who work in the banking industry. Please do not condemn them by association with all this talk of fat cats. The vast majority are ordinary working people, many of who have seen their life savings wiped out at a stroke through the share price collapse of their banks. These shares were not given as fat cat bonuses but bought and paid for out of taxed income. Tens of thousands have literally been wiped out and yet they have to suffer daily abuse at the hands of their customers. Many are now facing redundancy like everyone else and are just as much victims of the credit crunch.
For what it's worth here's my take on who is to blame: The American banks for neglecting all of the common sense safeguards that had been built over many years and the other banks for following blindly. The Rating agencies who were paid large sums by the very firms peddling the AAA rated muck. The highly paid investment managers who couldn't resist following the herd, didn't have the moral fortitude to stick to their guns and began believing their own hype. A system that rewarded short term profit at the expense of longer term sustainability. Crimally poor regulators and Central Banks that amazingly haven't yet been held to account. Politicians that crowed loudly how they had beaten the economic cycle and mortgaged our futures on off balance sheet projects simply to ensure they were re-elected. All of us for voting them in again and again and believing the hype of ever increasing house prices.Investors who neglected doing their homework by checking cash flow, liquidity and understanding the balance sheet of the businesses they were buying shares in. Finally, we will get through this mess but not until the back end of 2010. Those of us fortunate to remain in work will be ok but don't forget to say a prayer for those not so lucky.
Peston is right, there is a major dislocation coming in the western world. The relatively new kids on the block (for we have only been centre stage for a few hundred years of recorded history) will have to make room for the far older Asian giants that will soon be taking back their historic place on the top table. If we can't adapt and change our ways I worry for the future of my grandchildren.
Apologies for the length of this post.
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While the Bank of England cuts interest rates, what do the banks do to the interest rates on borrowing that generate small ticket purchases? ie credit cards - they increase the interest rate!!
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Does a 'follicularly challenged economist' suffer from Quantitative Easing in the hair dept?
While you ponder that, try singing 'Quantitative Easing' to the tune of 'Some Enchanted Evening'.
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Lowering interest rates in an attempt to increase borrowing is totally ineffective if nobody actually wants to borrow. You can drop rates to zero in such an environment and still people won't borrow. Until the damage to personal and corporate balance sheets arising from the asset price deflation we're experiencing is repaired, monetary policy is a lame duck. Balance sheet repair is going to take several years at least. In the meantime, the best the government can do is to stop us getting into a deflationary spiral. We have some painful years ahead.
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266 stevenpalmer
Yes all very clear and sound.
However -
Pick a date pre bubble, say 2000.
The proposition is that the economy was sound then. Maybe not, but you have to start somewhere. Assume OK.
Tax income, direct and indirect, listed as 43 to 46 pence on the pound 2000 to 2008. 46 at the close, last 3 years I believe, I am sure somebody will correct if wrong.
Economic 2000 to 2008 listed as roughly 3 percent.
Start of Bubble domestic deposits match domestic borrowing. Bubble funded by massive inflow of overseas money in this time. Mainly into UK property, one has to presume.
Take bubble away. Looks like underlying economy declining. Some interaction so difficult to judge but a reasonable proposition.
Take bubble away. Businesses floating on disposable spend funded by overseas money run into trouble.
Things drop back to where the hypothetically would have been without bubble, at least somewhere in that region. But bubble debt not gone - long term debt in the main. Must depress after bubble economy. For some considerable time.
So you have to consider at least the possibility that the economy was entering decline however moderate before bubble, and will revert to that curve post bubble, and have further drop in activity due to debt carry forward.
Depression or Recession whatever you call it will hit the economy as well, scare effect, gives some 'growth' at some point, just rebound really. Gone quickly.
So lets spend in the public sector. Yes, well smoothing step discontinities is a good thing. That is not the issue, the issue is at what level will the economy resume the new definition of 'normal'. The concept of public spending to leap the gap is fine but how big is the gap and what is the drop from one level to the other. Get it wrong and overspend and you are in very bad shape when you land. Not worried?
So my question is rather than a policy of spend and jump, which has to happen whatever, so stating it does not mean much --- At what level is the new economy to settle out at, and therefore how much spend should occur --- Furthernore as taxation take has been running at 46 pence in the pound when times where pumped good, and it is difficult to see taxation running much higher than 46 and the economy has to shrink, and probably more than is being admitted, just how is the current public sector expenditure going to be funded as it has to shrink at sometime comeserate with the new dropped economy, and the extra burden of social costs casued 2008 onwards and funding the public spending during the jump has to be paid. Or are we looking at the near bankruptcy of this country as occurred after WW2, the mortgage for which has only just been cleared. 2008.
In view of just how difficult the situation can be and just how deceitful HMG has been in many matters I for one want to hear so facts not fudge and not just simple statements that spending has to occur.
What seems to be forgotten in this is entire matter is that the burden of proof of the soundness of proposed policy is not with the questioner of the policy it is with the policy proposer. No such proof or rational discussion of the downside of proposed policy has been presented by HMG or its advocates. The requirement for the presentation of sound argument is all the greater due to the plain and simple incompetence that has got us to this point, and the clear breach of undertakings made when NuLabour came to power. Or are we supposed to put small matters like that aside.
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Shurely we're shtuffed?
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#299 glanafon wrote: "So my question is... At what level is the new economy to settle out at"
Cut GDP by 30% and make your tax revenue assumptions from there. You have to go back to the point at which growth trends in debt and economic activity diverged.
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We hear all this about banks not lending money but is that not what got us into this position.
It was throwing too much cheap money about which caused the credit crunch so why is the cure supposed to be more of the same.
We cannot build an economy based on debt which is surely the lesson to be learnt from the last ten years.
Investment in power stations,severn barrage, roads and rail infrastructure is better than trying to reflate a bubble of lending out 5/6 times salary mortgages which brought our banks to insolvency.
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291 jim
You are asking at the wrong level. LGs are driven by a rulebook held at central (or regional devolved) government. In most cases there is a rather blanket and simplistic rule which is them devolved to the LG to implement subject to their interpretation of the rule, quite often technically in isolation of the central authority, ie the responsibility for the interpretation and correct implemetnation is with the LG, which can be most interesting. You can see sometimes quite partisan interpretations which do not stand scrutiny although to be fair it is probably not that common.
You should ring back and ask who holds the rulebook and write a letter asking the question to them rather politely but bluntly so it is difficult to not answer. If not satisfied with the response then the route is to draw it to the attention of your MP who is sensitive to the possibility of adverse or positive publicity. The process takes time.
Most people do not bother so the game goes on. MPs cannot act unless informed and Cabinet members frequently, in my opinion, do not know what is going on because so many barricades are put in place with overzealous zombi like adderence to rules with no allowance for interpretation once disseminated, and one has to suspect upward reporting is as rosy as possible.
I have to say that most high level people in the public sector do appear to be scrupulous in checking queries. It is the front desk who are the query zombis. I am suspicious of one circumstance where query went ever upward and appeared to force a blanket reassessment of implementation but was apparently almost immediately displaced by a new policy directive, perhaps in coincidence, perhaps due to very significant cost fears.
It remains a very difficult area because the law is usually complex and rulebooks can be large. in some areas, and a solicitor would probably say in almost all cases, the basic statute is extended in time by case law which accumulates and can be more extensive than the original statute. There are no or very few independent experts outside the system and if they were the cost would be high. What is needed is far more open government and easier FOI access. development in the US may if they deliver show what is possible given a bit of time. That is a digression. A rule can be simple or complex you do not know until you ask. A simple phone call and a letter is the starting point.
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I think the reason companies are not worthy of bank loans is because the MBA style "just in time" management of said businesses has ruined them. This management style means there is no meat left on the bone, everything is returned to shareholders. No cash in the bank, no extra stock on the shelves, and so if one part of the chain fails under this pressure, the company quickly needs cash from a bank to continue operating.
The end of this ridiculous folly will be one of the best things to come out of this recession. Businesses need to stand up to shareholder pressure to make themselves strong enough to weather storms like this one.
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@ 267
Don't start me on Public sector. this morning in the hospital corridor which is a mile long, I counted the people I bumped into.
1 Professor
2consultants
4 -5 secretorial staff
6junior docs
15 Nurses
15 physios
15 occupational therapists
10 allied heath care professionals( do not ask me what they do)
10 nursing assistants
20 admin staff
10 porters who not portering anything.
10 Years ago when I joined you could see just half of this crowd. their numers have swollen like anything. I bet properly paid nurses and a motived doctor( who can move his back side) with the help of few assistants could do most of the jobs the people I bumped into were doing . ever expanding number of workers has not done any significant change that I could see. It is well and good to give jobs to all these people, we can not afford them in a few years. . I was working over christmas when these people were away, the corridor was empty and the clock was ticking, no significant events occured that I call compromised the patient care.
I say 50 % job cuts is easiliy done with out affecting patient care. that is 25% savings on health budjet. If people want extra care and specialist help I am affraid they have to pay. I refer to @245 we have to be realistic. Sometimes that is hard and painful otherwise we would risk everything.
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#269 peterskitchen
There is no point being rude about others posts that highlight your mistake.
You did quote a savings rate of 5% and that is gross. Therefore what daytrader1 said was in essence correct.
Your net rate of return is currently negative like millions of us. So stop bragging and posturing about pulished rates of inflation because we all know the real rate of inflation for things we buy all the time - food, travel, council tax is much higher than 3% and we have seen no real fall in costs to date and that your net return is either 3% or 4%.
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295 omnimech
Good post. Good read. Thank you.
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#294 JavaMan1984:
I think you are right. When the inflation takes off, which it surely will, the value of savings will shrink. Also the equities, some will keep up but others will fail, so with a broad mix you will lose out. And as for the Government bonds, that's why we need the inflation - to shrink down the government debt. So property will look really attractive. Another alternative, gold bars, might be a bit too difficult to protect for the average saver. Although if things get really bad, basic groceries might be best, but you would need a warehouse to keep them in.
The problem is that dropping the interest rates is supporting the property prices. You can see this by just considering an empty property. If the interest rates were higher, you would be losing tens of thousands of £ per year by not selling and putting the money in the bank. With interest rates at almost zero, you are losing a few hundred £ a year - not really significant and not enough to offset the sales costs. So you might as well hang in there because there is going to be an upturn sometime. And if it goes down further in the interim, it doesn't matter because you're not going to sell until it gets back up anyway.
There are lots of houses that have been on the market for many months and people are not dropping the prices much because they don't need to sell. So the low interest rates are actually contributing to the fall in turnover in the market. The only people selling are those who are forced to sell by having to sell through personal circumstances or by repossession.
The difficulty is calling the bottom - most commentators seem to think it has something like as far to fall again as it already has. But as soon as inflation takes off at all, cash buyers with some savings will stampede to the head of the queue. Although the prices won't take off immediately, all the best properties will snapped up as soon as they appear. So probably the best time to buy is just as the bank rate turns up again.
And hey, if you get it wrong, you've still got somewhere nice to live!
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301 werringtonsilent
Thanx, answers some of my suspicions. Bust Brown Record breaker.
So even if half right or wrong - a stonking tax levy, or a stonking longterm debt or a stonking cut in public sector. Or means testing to access anything. And people query why some grumble and talk of flitting.
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When we finally come to analyse what has/will happen and truly apportion blame, we need to look much further back than the history of this present Labour administration.
I would love to settle upon Thatchers watch as the start of the rot (maybe socially it was) but with hindsight perhaps she was merely a reaction to what had gone before.
I now wonder if we really recovered after WW2. Or, did we limp along under the weight of poor political leadership, piss poor management and financial incompetence?
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Further to 308, the other point I meant to mention was that since the wider economy wont recover until the housing market gets going, it means that holding the interest rates low will prolong the recession.
- that should provoke some response!
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HMG i.e. the taxpayer is charging the banks 12%. this is so critical it overshadows all other factors.
Simple mathematics and simple common sense says lowering the bank rate is irrelevant to the banks with 12% to pay.
Diverting the media attention and public interest to the reduction in bank rate and critisizing the banks without reference to the 12% they are actually paying is perhaps misguided.
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Various ...
Query re underlying economy being sound.
We deal with a wide range of people, not jsut in the UK. They are conservative with a small 'c' not political, traditional types, save before spend. Cautious. They generally cannot understand the gloom. Yes in the UK things are tighter for them but they are still going about their business. Small businesses in the area, doing fine, full order books. Lots of catch up on building mods, extensions refits. Been unable to get the boys in until now. Shops are doing okay around here other than the debt bloated chains but so what. Yes there is going to be unemployment but it is not everyone by any means. A number of suppliers we deal with are busier than ever and have taken on staff. Local car dealership busy, which I found unexpected.
Bubble businesses like conservatories, kitchens etc they are the ones in trouble around here.
That is not to speak down to anybody it is just fact.
Without wanting to sound offensive or even suggest that your position is due to action you have taken, but it sounds to me that you are in or near to a sector that is suffering. Sorry been there done that had got the tattoo, couldnt keep the teeshirt was taken off my back.
I can only report what I see. You can only report what you see.
There are a lot of nilionaires about still, could be you have had too many of them, they are untrustworthy. A nilionaire is somebody with nil in the bank but acts like a millionaire, usually wants to spend credit. Loads of huff n puff, usually putting a never ending string of small hurdles in the way to a deal and then walks. We can spot them a mile off but dont get them often. They are the curse of any business because they give the illusion you have customers when you dont, they are a hologram like Rimmer on Red dwarf.
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How much money has the government thrown away since this crisis began? Not counting any repayable bailouts, I mean those that will be paid for by future taxation.
£18 Billion?
That's equivalent to about £500 for every tax paying man and woman and every pensioner.
Hell if you wanted to stimulate spending, giving everyone £500 a piece would do the trick!
Much more effective than silly VAT cuts and tinkering with monetary policy which is failing to work.
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314 have logged on
which means it dies not matter much
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#226 GuyCroft "Better invest in something with a return based on profitable commercial growth? Though I daresay some smart alec will imm. tell me there are aren't any 'risk free' good-return investments."
Good strategy - of course, life itself is inherently risky, and invariable fatal I'm informed. But you can spread the risk for example with unit trusts. I have no such current investment, but I did quite well out of them once. You can usually choose a trust which specialises in a particular area.
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#175 Aristotleson
What you are talking about sounds very much like the Social Credit theory of the 20th century engineer, Major C H Douglas.
He became very influential in Canada and, to a lesser extent, Australia.
Galbraith in "Money ... etc" gives him a sympathetic mention, and mentions that Keynes acknowledged that some of his key ideas had been anticipated by Douglas. His main problem, like Keynes' was that his ideas were too radical for the financial establishment to permit them to be implemented.
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has my post just disappeared into the ether?
can't face typicng it again.......
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Why oh why is every one still putting faith in banks, or should I say, those in power still putting faith in banks ?. After all that has gone before in the financial sector, and all that is to come, how can we have faith in them. The same people are still running them, can anyone believe that they have had a masive change of mind set. The mind set is, make as much profit as possible and more, with little regard to regulations or the lack of them. It is a greed motivated industry with little regard for any moral obligation to anyone. to put faith in such people is a further reciepe for disaster. They will look after themselves and stuff their customers. Get real people.
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@244. Dreaming_Ben:
That is scarily spot on, and I think it is even more spot on since I heard an insane discussion with a member of the Monetary Policy Committee earlier. Hyperinflation is more than on the cards I'd say. I'd start converting your money into something tangible.
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#164 NatWest mortgage
Advantage became the 3rd owner of our mortgage as we were dizzily sold on twice in 6 months. They placed us on a LIBOR tracked scheme. By December, LIBOR rates had come down so much but our repayments hadn't, so we rang, complained, pointed out the error of their ways, and guess what? Our repayments came down loads.
I blogged this, wondering of anyone else realised this, but no comments made.
I suspect that you could make a case for the same. If they won't change it, you are effectively on a fixed rate, and may have been mis-sold your product-then you can call the Financial Ombudsman, formally complain to NatWest, get things put right, and compensation! All the more juicy as they had the biggest bailout!
Check your paperwork-it could be well worth your while!
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#185 new decent bank
Alexander Curzon has applied for a banking licence.
I'm going to bank there for sure!
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Gold bars-the best alternative to overseas bank accounts-read several articles to this effect in the last couple of weeks.
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Dear Mr Peston, Could you please explain to me in your inimitable way what printing more money would do to the value of cash savings?
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Head of Financial Stability at the FSA?
Ooo! Yes please!
I'll start tomorrow!
I'll start by:
Investigating and prosecuting banks and their boards of directors
Instantly ban large salaries, bonuses etc
Insist all banks have at least 2 non banking, every day SME directors on their boards
Create a 'swoop task force' - a group of appropriate people with good business acumen to take over running a bank temporarily when I sack an entire board
Downsizing the pen pushers
Appoint Alexander Curzon as Inquisitor
Implement serious regulation
And loads of other stuff related to customer service, including banning overseas call centres for banks, forcing banks to put customers first
THEN
I'll start on the insurance companies!
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Sterling stronger against Euro and Dollar?
Do not be fooled!
It's the Euro and Dollar getting weaker as they've been releasing some pretty ghastly news these last few days.
Investment left Sterling in favour of these two currencies, now it's left these as well-wonder if it's gone to gold yet?!
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#324:
Printing money is dilutive of the money already in circulation, I would liken it to dilution of existing shareholders when companies perform a rights issue.
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Timberrrrrrrr....!
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The Bank of Englands brief is to keep inflation around 2%( I think house prices should be included in the calculation of inflation). The only independent tool they have is interest rates. After recent events this may be inadequate and deflation ineviteble unless other measures are taken by the government in conjunction with the B.O.E. most of which are unpredictable as to what effect and how soon it will come but the avoidance of deflation or inflation much over 2% should still be the target. Maybe the most reliable tool is for the government to invest in infrastructure projects, rather than trying to further bolster the banks unless they look like actually going bust. Talk of mortgage payers gaining, some of them are in negative equity and savers losing,deflation is their friend isn't quite right, everyone's lost because of all that subprime stuff.
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Excellent piece!
But I feel that the BOE are now feeling the effect of diminishing returns on the banks as they cut the interest rates - exactly the same as the Japanese Government did all those years ago. There is little consumer confidence, little bank confidence, businesses are not confident ? these are the same symptoms that stalled the Japanese for so long.
Each country acting alone, fighting their own domestic decline will not stop the global market from contracting.
It will take a united international agreement that will pull the world economies from this looming Global Stagflation. Such an agreement will have to be both simple and radical. The problem is, I believe, we have very little time, and the national government banks should be meeting now to start this process.
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322. At 00:36am on 09 Jan 2009, Tigerjayj wrote:
"#185 new decent bank
Alexander Curzon has applied for a banking licence.
I'm going to bank there for sure!"
+
Doesn't giving Alexander your money sound dodgy to you?
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No, the base rate does not matter.
Look at Japan and the lost decade(1990s)
Interest rates at virtually zero and ten years of depression with the stock market falling from 30,000 to around 8000 as it stand today.
Investors in the LSE lookout!
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I always wanted a CHF Account
Don't ask me why
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The rate cuts do more to stimulate the freeing-up of investor funds than bank funds.
As others have said, banks don't feel the need to borrow at high rates to lend out at low rates. Any increased liquidity they gain is only for the purpose of lending out at the highest rates of all - We're talking the double-digit rate stuff here such as credit cards and of course sub-prime personal loans!
I keep carping on about "wave two" being imminent, but until the expensive credit markets collapse as well - to bring them into line with mortgage credit if nothing else - we'll get nowhere fast.
If you are an individual saver with say, 50k of savings, then one of the best uses for it right now is to "keep it in the family" and only lend it out to business interests within the family. This might be to re-furbish retail outlets, buy new commercial vehicles such as Taxis and delivery vans, and of course to expand existing business. If your religion does not permit you to use credit with an interest rate charge in the first place, then this is nothing new. I would wager right now that the credit crunch is having very little effect on say, the 'self-employed of eastern extraction'.
Once interest rates hit zero, and it is apparent that the banks are still standing there with their collective hands in their pockets, the government will realise that they have no intention of being grateful for the bailouts already received, and may well go the rest of the way towards nationalising the banking system. The government however must not fall into the trap of "tax breaks" for banks doing what they should already be doing - lending out cheap cash. Indeed, the financial industry is the root cause of the crunch in the first place, so perhaps more punative measures all around should be considered.
The biggest con of all would be the arbitrary confiscation of capital from individuals up and down the country by shredding the currency.
A more positive move would be to free up credit among the insolvent. There are a lot of entrepeneurs in this country who could easily take off business-wise tomorrow, employ a lot of people, keep businesses open, etc. but cannot because they have large debts that are as yet unresolved. I'm not talking about improving their credit ratings so they can borrow again here.
I'm talking about giving debt collectors a strict time limit in which to finish liquidating failed individuals and firms. Forget the current 5 year IVA and so-called 1 year bankruptcy laws. These currently encourage the individual and entrepeneur alike to "remain skint for as long as possible" - lest any new wealth created be confiscated for upto 15 years beyond the bankruptcy date!
Remove that 'sword of damocles', and a surprising amount of new jobs, new businesses, and other economic stimuli will become evident - without the government, banks, or most importantly - the taxpayer ever having to put their hands in their collective pockets.
The big losers out of such a masterstroke will of course be the debt collector firms, but let's face it - they have even less public sympathy than estate agents at present.
The government doesn't need to throw printed money at these problems - it just needs to lead properly with joined-up policies. I imagine however that we need to see rates at zero before the BoE ends up explaining this to the government.
In the meantime, the few gainers from interest rate cuts - those on tracker rate mortgages - may even find their lenders starting to default on reducing payments further, invoking small print to avoid passing on full rate cuts. Nationwide have already drawn their line in the sand - Who's next?
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334
Trouble is debt collectors, trustees, insolvency firms etc love dragging things out for years to accrue whacking 8% interest or go to Court to accrue tens of thousands to justify their existence. Every one in the industry is a rip-off merchant, starting from credit card firms who sell their debt on to third parties, to the judges and barristers to the glorified expert form fillers applying to court.
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Taking a slightly different slant on the current situation what about some imaginative collectivist thinking to try to minimise some of the worst aspects of the recession? For example, what about incentives to employers to reduce all employees to 4-day weeks rather than sacking 20% of the workforce? This could be combined with special arrangements with banks to minimise consequent mortgage defaults. If the crash - which is what it is - has been due to unbridled individual-centred capitalism, isnt what we need some thinking about how we can collectively dig ourselves out of this? Related tothis, whilst money supply is obviously important surely what is equally important is what is done with the money? So where is the thinking about the new economy we are going to build once money does start circulating?
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Dear Mr.Peston,
May I comment on Quantitative easing
Quantitative easing ,in my beek,= would lead to rabid inflation.
Whilst we might not be heading for a situation which existsin, as suggested by the BBC presenter on News Night that we could be compared to Zimbabwe, there are similar dangers which were the forerunners of the collapse of the Weimar republic in Germany between the two World wars.
Subsequently I should be looking now more seriously in investing in Gold in some way and in future FOOD supplies.
One reason why the UK will suffer more than many other nations in this economic downturn is because we import too much of our basic foof stuffs.
It is ludicrous that we are allowing dairy and other farmers to go out of business.
A small diversion of the bankers rescue package into the farming industry should be a priority NOW!
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We hear all the time about ?people?, ?we? and other expressions of joint membership of our society.There are, however, several distinct elements within our society and the segmentation can be cut various ways. We do not all have the same interests, ends or problems, economically, socially or even personally. Hence the outcry from the prudent when the imprudent are bailed out by this feckless government.
We have increasingly become in our current government?s eyes a ?one solution can be made to fit all? society. Respondents to this blog may indeed be doom merchants, with considerable justification if we continue to allow ourselves to be herded into the corral of ? spend all you?ve got and all we?ll give you to save this government?s neck?
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#310 foredeckdave
That's history, we're talking about the future. Of course the seeds of where we are now go back as far as you might wish to consider, but we have to deal with the real world of here-and-now and not the world of make-believe-if-only-we-had-the-benefit-of-hindsight. We might have some lessons for the future, though. My old man, a senior mechanical engineer, always used to reckon the rot set in under Wedgie in the 60s DTI, when we ceased to be a lmanufacturing power house and became a financial one: there was no reason not to be both, of course, but Benn couldn't get his head round that because he was so union-orientated he let the Boilermakers and their ilk destroy the sector, just as surely as the current crop of bankers have destroyed the City. Now we have to reprove our excellence the hard way in at least one sector.
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What's the difference between speculation and investment?
Investment is where you buy something that is useful. In industrial terms, you invest in the capacity to produce goods and deliver services, in return for a share of the revenue generated.
Speculation is where you buy something because you think the price will go up because enough other people want it. The revenue generated is irrelevant because the perceived capital "value" is all that matters. In fact, the real economic value of an object of speculation may be zero or close to zero, like the tulips in 17th century Amsterdam.
Gold is the ultimate speculative commodity. There is more than enough gold in the world to supply the demand for jewelry and the few industrial uses. Any surplus is in real terms worthless. If it vanished from the vaults overnight it would not affect our capacity to feed or clothe ourselves, although the demise of the illusion might cause yet another financial crisis. But financial crises in general are caused by the death of financial illusion
The "value" of gold bars is just that: an illusion, nothing more. True, like religion it is an illusion sustained by the belief of millions. However, digging gold out of the ground and extracting it is one of the most pointless human activities, and it carries a heavy environmental cost.
Investment in gold is really an investment in human gullibility ..... - hmm, I've changed my mind - where can I get some?
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The big fish came along and ate the little fish and swam away.
Now the big fish are dead due to a big toxic pollution.
It's not just our banking system, it is all our systems.
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Thanks to those who tried to explain to me why savings rates go down when the base rate drops but I am none the wiser. For myself I imagine that savings rates from banks are always lower than lending rates otherwise you could make money by borrowing from a bank and then putting it in their savings accounts. Whatever the true answer it seems to me that saving and expecting a return (worth having) from a (typical) bank doesn't make any sense which must be bad news for banks, given that they are being pressed to lend more. If I ran a bank I would be thinking very hard about that.
As for the base rate cut it all has all the charm and sophistication of 4 hippies trying to change a light bulb as the old joke goes. I mean, how many BOE and Govt intellectuals in suits does it take to move a number 0.5 one way the other? Because it is just shifting a number really. They hope, I stress HOPE that it will be beneficial - good - but they have no way of knowing, so it's guessing really. So much for fuss & hype(hooha) for what is in effect now just a little number shift when so little established fact to confirm trend exists that will lead to a substantiable result.
And then imagine, if all those brains got together and said- 'let's think of 100 initiatives a day that we can implement immediately that will have an immediate result for the better at little or no cost?'. Do they do that? No, they mull over whether to move the number 0.5 this way or that and hope for the best. I could draw up 100 things that would make a difference on a fag packet over a coffee.
That's this government all over. Hope for the best with no business plan and proof-of-concept. You couldn't run a real business like that, you'd fall over real fast.
GC
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In their hearts, government/Labour/bankers don't care about savers except trying, one way or another, to part us with our hard earned and saved savings.
How about trying to get some money returned from ex-domicles who have probably saved themselves £100s billions over the years in taxes, the shortfall we living in the UK have to carry?
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Glanafon
#277
Your reply on the materials front fails because we don't get it back. It's going to all other points in the third world.
As regards the Assembly, they're so tied up in their own red tape they're a liability to all comers. I'm actually an accountant running the books of an International Organisation these days, and we do know whose money we're spending. However, we have serious problems from the NAOs across Europe because we don't spend all our budget and do return as much as possible, so once again it's a regulatory failure. however, in these times when government spending might be the blood transfusion needed, such practices may actually be counterproductive...
#299
If you're looking for a starting point for the financial bubble, try 1980 when I was teaching Arthur Andersen and their ilk about the first swap offsets. By 1985 the option cover system was well in place, and by 1988 we were seeing the first packaged deals as expansions of the factoring industry. The entire thing came together in a form reasonably recognisible as being the root of current problems in about 1993.
You're really taking about real-world, rather than mark-to-market, valuations, something which the IAS was supposed to be pushing for last year. I refer you again to the Chancellor's July paper on the Ban of England website which appears to have been either ominously prescient or to have been gullibly overt.
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#152. At 1:12pm on 08 Jan 2009, guycroft wrote:
"Cut the link between bank savings and the bank base/lending rates!!
Why ARE they in any way connected?"
Mortgage rates approx 4-5%, Savings rates approx 1-2%. Clearly they are not connected, just manipulated to maximise Bankers bonuses.
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#297:
Excellent idea! Here goes...
Quantitative easing:
You think it's the answer?
You think it's the answer
To all the credit crunch?
But night after night
As strange as it seems
The mayhem it causes
Will haunt all your dreams.
Quantitative easing:
You may think it's sounds flash,
But it just means "print cash"
Just like they used to do
In old Germany;
you have all their woes.
You'll swap your old wallet
For new wheelbarrows.
Who can explain it,
Make it clear to you?
Peston gives you reasons,
Brown doesn't have a clue!
Quantitative easing!
When you hear it calling,
When you hear it calling
Through our economy
Then fly to Swiss Francs
Or maybe to gold
Or all that you own
Will soon have to be sold!
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Well my frustration pretty much echoes the comments of others here...
Cutting interest rates further will not have a positive effect for borrowers because the banks will take the opportunity to re-capitalize by continuing to cut lending and increase margins to rebuild their balance sheets rather than provide additional lend to would be borrowers.
The government is opportunistically trying to nationalise the banking industry on the back of the financial crises. This will lead to further 'Brownian' central planning of the economy...oh joy...
The logical response to this crisis is not to grow the welfare state as proprosed but to:
- increase personal allowances / cut income taxes to put more money in peoples pockets. This will translate into a combination of spending (good for growth) and savings (good for bank balance sheets). There will be a need to increase government borrowing to achieve this but they're already doing that and they are not preparing the country for the future;
- decrease employers' NI contributions to keep more workers in jobs, off benefits, and make British workers more affordable in the world economy;
- reduce import tariffs to keep costs, both on the high street and at factory gates, low;
- restructure the civil service to reduce government spending on bureaucracy (e.g. chasing imaginary SMART targets) but increase it on infrastructure and real services;
- stop income linked pensions for future civil service employees to curtail the exponential hidden growth of pensions liabilities for taxpayers. This should be coupled with the creation of (or adoption of existing) independant pensions funds which employees and employers (the tax payer) pay into for defined benefits.
In short...we have to start planning for the future and, unfortunately, there is little evidence that the Government or the Opposition are doing either...
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oh no Bert
more good news on the High St and therefore no blog - shock horror
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Can we please implement #24 and #325's suggestions.
It also seems odd that given that we now own NR that the government can not act directly to provide the competitive stimulus to provide highly competitive business loans to the SME market. If businesses were to start shifting their banking business to NR four positive outcomes would occur
1) it would increase competitive pressure on the other banks to respond or loose their business customer base
2) increasing NR customer base should improve its profitability and thereby shorten the time to pay back government investment.
3) reduce the cost of borrowing thereby preventing sme bankruptcies
4)NR increased profitability will feed back into the treasury.
however, lending can not return to 2007 levels as both property and equity values have declined by 16% and 30% respectively no matter what you think as a result all business asset values will have fallen by 25% and therefore the cost of borrowing has to increase and the size of loans decrease.
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kikidread
At the mo, I trust Alexander C with our corporate funds more than a UK bank. I'm sure he'd be more competent! Just appointed a new director and our bank sent him a card with just his initials not his name, then another exactly the same, but a different number! Incompetence of overseas customer services!
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#239. At 4:31pm on 08 Jan 2009, sucasamicasa wrote:
"Re fractional reserve banking
If this is the case then how the hell did they get in this mess .."
Because that level of profit didn't satisfy their obscene greed, so they got involved with the likes of Madoff, lending to people who could never really afford to pay it back and other get rich quick schemes with us poor mugs always at the bottom of the pyramid.
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To play devil's advocate a dark thought occurs to me..
As banks appear to have no morals or consideration for customer service, preferring to keep their pockets padlocked for the time being (let alone do what the government wants even though GB and Ally D stamp their feet in temper)-
Would they actually pass on an interest rate rise, even if we had one?
I'm beginning to think that they won't-especially in light if their recent money-grabbing behaviour!
Also, is the 12 percent bailout charge fixed? What I read suggests that it is. In which case, and taking into account the need the bailed out have to increase their reserves, interest fluctuations will make not a jot of difference.
Even worse, banks who are not tied up with bailout conditions are even more despicable for not passing on rate cuts, even though they have greater flexibility.
All of which suggests there is still much off book debt and vulnerability hovering in the wings which we know nothing about!
Get the SFO investigating the lot of them NOW!
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Comment 201 from "oldenoughtoknow" asked whether he should invest in Gold rather than keep 100k in bank deposits. The simple answer is NO -don't touch Gold with a barge pole. Apparently when you buy Gold you get to choose whether to take delivery of the actual metal or just a piece of paper confirming your ownership of the same. What the commodity brokers selling Gold have been doing is 'selling' more Gold to investors than actually exists. It has been calculated that once enough people find out about this and try to claim their Gold (this number only needs to be 10%) then the Gold market will simply implode causing financial armageddon.
This bombshell apart, think about what you are actually asking. Why on earth if the brown stuff hits the fan would you feel better off having a heavy lump of Gold with you as you face the desperate masses trying to break into your house and steal your possessions? Commodities that can be easily traded and are genuinely useful in an emergency are what you need to unvest in.
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Robert. You ask the question "does the bank rate matter"?
Certainly it matters. Tracker mortgage holders and business borrowers would agree and so would the hard hit savers. However, what you are really asking is will the coming near zero base rate prevent the coming depression.
No it will not but it may prevent total collapse of the financial system by redistributing wealth from those that have stored it to those who borrowed. This will be done by printing money which is what Labour always does in a crisis. And since all Labour governments end in crisis its always when not if. People forget why they were left out in the cold for 20 years.
Being a doomster i still expect to see unemployment soar, inflation to return with a vengence once the money printing gets out of hand and house prices to keep falling until they reach a level at least another 20% lower than today.
Brown is a complete disaster and it will take years before things get much better. Those losing their jobs who voted for Labour are going to struggle to blame Mrs T for this. There is still hope for savers who might now consider blue chip corporate bonds for a portion of their savings. Yields over inflation are the best in living memory. Gilt prices have rocketed by over 10% in the past few months to produce but now as a consequence yields are very low and will become truely horrible the minute inflation begins to rise again. My instinct is to get out of gilts now while the going is good and bank the 10+ profit and move to corporate bonds. They did the opposite as the market panicked about the prospect of the likes of Sainsbury or HSBC going bust and hedge funds became forced sellers on top. Prices collapsed by 15% or so and now yields are not far shy of 10% and many of the bonds are backed by the government (banks etc) so represent very low risk. So far better to lend to the banks in the form of a bond than in the form of a deposit.
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Why can't the government use Northern Rock to get borrowing under way? Or encourage Tesco or Sainsbury's banks to grow?
Perhaps it would mean our (the tax payers) Shareholding in the main banks would be devalued? and cause a potential loss for the government's recent investments?
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Bed and breakfast businesses must be doing well surely? After all, where do all the families go that are losing their homes? Isn't there a shortage of LA housing?
Interesting comment about gold-more fictitious selling on the markets.
The whole darned process is rotten to the core. Selling paper certificates? It beggars belief!
Why isn't this being investigated too?
I understand that shorting is back on the menu too?
I'm going to blow a gasket in frustration in a minute!
Off to take a chill pill!
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As an example, here's why interest rates matter
From 2007 through to 15/9/08 capital raised by RBS in the market had coupon way above 6.5%
Since then 7.5 billion has been raised on average at 3.5%
If you said, on average that there is a difference of 3% per annum, on 7.5bn alone this is a saving of 225,000,000 or a little over one third the loss stated in the interims
On top of this RBS has substantial overseas earnings. Since the half year results were published these will have increased by about 25% because sterling slumped after interest rates were slashed.
Perhaps now sterling is low RBS might sell some of its overseas assets to further re-capitalise or perhaps we should say to further reduce its debts.
Quite what will happen when interest rates rise again as they inevitably will, who knows. Hopefully we'll all be out of the banking business by then.
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Kikidread
Now then theres a thought??
I dont live the HIGH LIFE on OTHER
PEOPLES MONEY.
The problem with setting upa Bank is
the levy for all the other insolvent
institutions. . . .
Oh gosh yes we need to set up a PLC
so the doubters on here could find me.
Judging by the postings and the weird
spam on the Google Engine theres a
stalker or two too . .
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295. Om