BBC BLOGS - Peston's Picks
« Previous | Main | Next »

Why mortgage rates won't fall

Robert Peston | 17:20 UK time, Tuesday, 22 April 2008

As credit has become more difficult to obtain and more expensive for most of us, two issues have become confused.

One is the shortage of cash in the coffers of some banks - which has been addressed to some extent by the Bank of England's new scheme to allow banks to swap their mortgages for the equivalent of cash.

But there is a second reason why banks haven't cut mortgage rates in line with recent falls in the Bank of England's official lending rate: in a slowing economy and with house prices dropping, banks believe the risks of lending have increased.

Banks are deliberately widening the difference between what they charge for money and what it costs them.

And in doing so they have the explicit support of the Governor of the Bank of England, Mervyn King.

Here are what the banks see as the killer facts that explain why consumers are wrong to moan about the cost of credit.

In 1998, the difference or spread between average mortgage rates and the Bank base rate was just under 1 ½ percentage points.

Last year that had narrowed to almost nothing, 0.27 percentage points, which meant that most mortgage loans were barely profitable.

Banks have since attempted to rebuild the profitability of mortgage lending and have doubled the difference between what they charge and the base rate.

They believe this is prudent, not extortionate. And some would argue that the insanity was when they lent too much too cheaply in the previous few years.

darling_bbc.jpgWhich is why the banks will resist the urgings for cheaper money coming from borrowers and the Chancellor. And it's also why the bonhomie between ministers and bankers that broke out at 11 Downing Street this afternoon will probably last about as long as it takes for them all to return to their offices.


  • Comment number 1.

    The gross irresponsibility of banks in the euphemistically called 'sub prime mortgages' better called extortion of cash from those who can't afford it) in America and here is the prime cause of the current financial crisis. Had the banks been nationalised outfits - the condemnation from the bulk of the media would have been continuous.

    When private companies behave irresponsibly or are let down by lousy management, we don't hear a whisper of condemnation.

    We're frequently told that badly managed private companies go to the wall - they have to perform well to survive. No nationalised company ever needed £50m to stop it going bust.

    Good management beats bad management every time. Private or public is not the distinction !

  • Comment number 2.

    While there was plenty of funds available to lend the banks lent cheaply and at higher risk. It was profitable to do so, especially to those on commission and bonuses. In fact they seem to have tried to throw it at people asking few questions in a search for customers because it was so short term profitable.

    Now there are more potential borrowers than funds available so the banks are more picky about who they lend to and how much they lend. And due to demand from the customers they are happy with being higher than supply of credit they have put the price up.

    Its just the market working. Nothing complicated about it. Nothing in it to allow us to assume that the banks have 'learned their lesson' or 'turned over a new leaf'. Just demand and supply.

  • Comment number 3.

    I agree with the sentiments expressed here Robert, but 1.5% margin is a lot and at the end of the day; if people can't afford these mortgage because of the spread, then nothign will have been achieved.

    Why is it reported that ''in 1998 the spread was 1.5%'' - was that a one-off peak for particular curcumstances? Is it normally 1% perhaps? I am always suspicious of journalists that pick a certain year, without explanation.

    I think in reasonable time, good old competition will bear down on the spread and perhaps it could go to 1.25% or 1% - not much below that I agree - but to say ''that 1.5% is it and nothing will move it'' (paraphrasing) does not really take account of the market.

    No matter what happens the banks were not given acccess to £50bn to line their pockets, HMG wants to see some of that circulated! Or what was the point.

    Dont be such a doom-monger all the time.

  • Comment number 4.

    No: 1 ''No nationalised company ever needed £50m to stop it going bust'' - no you are right - it was more like £500m - £1bn PER YEAR. In todays terms probably 5 times that.

    Either you dont know - or you have a very short memory if you lived in those times.

    The Post Office (as was then) alone needed hundreds of millions PER YEAR; added to that was British Leyland, British Airways, British Aerospace, British Rail, Sealink Ferries, Rolls Royce and just about ''British everything else''. That was also on an on-going annual basis too!

  • Comment number 5.

    I have noticed a little trick banks have been using over the last few years to push up mortgage rates. They put out very good deals and products on mortgages to attract new customers. Every time the BoE increases base rate by 0.25%, they match the increase. When BoE reduces rate by 0.25%, they reduce the rate on that product by only 0.1%. After 3 years, the BoE may have increase rates 4 times and reduced rates 4 times, i.e the net result being the base rate is the same after 3 years, but customers on the original deal find the rate is almost 1% higher. Meanwhile, the banks keep putting out new and attractive deals and products with high arrangement fees and exit fees, which customers have to keep chasing after etc etc.

  • Comment number 6.

    As Robert says, people have short memories.

    When they talk about things "getting back to normal", what they really mean is when will things go back to the recent, exceptionally small base rate - mortgage rate delta. The answer is that they probably won't, definitely not anytime soon.

    Sorry, but that's life...

  • Comment number 7.

    Robert says:-
    "In 1998, the difference or spread between average mortgage rates and the Bank base rate was just under 1 ½ percentage points.

    Last year that had narrowed to almost nothing, 0.27 percentage points, which meant that most mortgage loans were barely profitable."

    This is not strictly true - the mortgage lenders foolishly acquired cheap short term money from the money markets and sold it on to their customers as long term mortgages and still put on their 'normal' profit.

    I believe you will find the REAL difference between the BOE base rate and most lender's Standard Variable mortgage rate has increased since 1998.

    To suggest most lenders have been lending with a narrow profit margin of just 0.27% cannot be true - this would not even cover their overheads !!

    Anyway mortgage lenders such as Nationwide have not been posting losses - they have been reporting hundreds of million pounds profits.

    The 'Honeymoon' period of cheap finance seems to have come to an end and their is going to be a lot of PAIN for quite a number of borrowers who have assumed their borrowings would continue on the cheap for ever !!

  • Comment number 8.

    I would like to know where the comparison of margin comes from - the banks PR perhaps? It is probably true but does not indicate the true margin made on mortgages so Robert your comment about recent mortgages being unprofitable may be incorrect. The overall 'deal' offered nowadays tends to include a chuncky 'arrangement fee' - not part of the interest rate so not included in your comparison. For example amounts of £1k - £3K are not uncommon - allowing for a perceived subsidy on the interest rate and therefore distorting the true picture. Perhaps you could investigate further to see if the bank's winge is reality or misinformation.

  • Comment number 9.

    I see a lot of people whining about how the "nasty banks" are taking peoples homes away.

    This is something that happens if you don't pay back the loan secured on said home.

    People are complaining about current mortgage rates when less than 20 years ago, a double digit mortgage rate was the norm.

    What was NOT the norm was people having 20K plus in unsecured debt, consolidating it onto their mortgage, getting into the same amount of debt all over gain, and then consolidating it into their mortgage again, and so on.

    If you don't know how to stop spending, and you mortgage beyond your own means, then it's your own fault for trying to live a lifestyle beyond your pay.

    I work in a privileged position to see how this happens, and believe me when I say that the majority of people in mortgage problems got into these problems this way.

  • Comment number 10.

    Possibly another reason why the banks' margins may have widened is that it is now more difficult to sell associated (and profitable) insurance products (e.g. PPI) alongside the main loan/mortgage.

  • Comment number 11.

    Banks loaned money at what looks like little profit because the last 20 years have seen the growth of disintermediation through the originate-and-distribute model. Instead of holding mortgages on their balance sheets in return for a small profit, they sell (sold) them into the capital markets.

    Banks cannot finance the whole world. Nor should they. Pension funds and other institutional investors need to generate better returns on investments than simply putting our money in a savings account. They want shares, they also want debt securities, such as mortgage-backed bonds.

    In place of a return on capital, banks and other players in the market have, for quite a few years, focused on fees. The mortgage broker gets a fee for selling the mortgage; the lender then sells the mortgage to an investment bank for a fee; the investment bank pools it with a load of other mortgages (subprime or otherwise) and sells the product on in return for a fee.

    The problem is that no-one did enough analysis of whether the underlying mortgage loans were as safe as people thought.

    They weren't.

  • Comment number 12.

    Banks and building societies need to attract savers.

    The money market will never return to it previous(pre spring 07) profligacy in our lifetime.

    Banks borrow money from savers and lend it to borrowers. Give savers good returns and the banks will have the money to lend that is how the market works!

    By-the-by this will also redress the problem of the historically very low savings ratio.

    The artificial BoE fiddle will NOT do the 'trick'. None of this will fix the huge problem of the 50% over valuation of the UK housing stock - even the BoE is working on a 30% over valuation of prime mortgages and that is over 9 months!

  • Comment number 13.

    So Mervyn King is now running a cartel?

    Seems to me he has put his jacket on inside out. Turncoat.

    No more Moral Hazard.

    Except for taxpayers.

  • Comment number 14.

    all this talk of helping people is an absolute scandal...people voluntarily took on these mortgages...they should sort themselves out...from what I read it would appear that everyone has the right to own a is not a is a luxury and there is no need for everyone to own a home if they can't afford it. We have never stretched ourselves and live in a modest detached house despite my significantly above average earnings. When my business partner stole £175k from our business and went bankrupt the banks pursued me for the avoid bankruptcy myself we had to use all our savings...the banks and government didn't help us for one bad decision...I trust that future profit from the dwellings will be refunded to the government

  • Comment number 15.

    The other side of the coin, so to speak Robert, is that higher interest rates have historically affected investment adversely. The issue is not black and white but neither is it amorphous. If general investment declines this is bad news for the economy and consumption will receive a blow on the head. One fear is that cheaper credit in consumers hands would simply stoke the fires of property excess and endebtedness further. Unfortunately, the constant soothing noises from the chancellor are in danger of lulling (at least some) borrowers - possibly institutional - will contribute to reinforcing the reckless sentiment that one can feel good about borrowing as the government has the wallet out anyway. While the chancellor rightly frets over the mortgage market,he should be equally frettiing over industry and investment seizures. From the outset I have held the view that the excheqeur reaction to NR was confused, ultimately botched and is trailing a terrible legacy. I understand political concerns about securing a few thousand jobs, but is the price being paid too much? Yes, it is. Better to let NR go to the cheapest private bidder than to write a blank cheque for the sector. What the chancellor has not grasped is that interest rates are bound to stay high because of his intervention, and not in spite of it.

  • Comment number 16.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 17.

    I recently remortgaged on a tracker 0.5% above base. This tracked down immediately when the BoE reduced rates. A quick trawl of lenders websites still reveals fixed rates of 4.99%. Will the BBC accept that much of this mortgage melt down nonsense is all in its own mind and a blatent attempt to create sensationalist headlines through scaremongering. I expect more for my licence fee than this one sided, biased, Daily Mail type nonsense. Please stop playing games with the British Economy and return to the honest, decent reporting that the corporation used to do best.

  • Comment number 18.

    Brown and Darling have laundered the banks' £50bn for them, and are now standing there like fools waiting for the banks to scratch their backs in return.

    The banks, who let's remember are commercial, profit-driven organisations, have said thanks very much for the cash, and have simply gone about their usual business.

    Meanwhile Brown and Darling are probably wiring a deposit over to that exiled prince who emailed them from Nigeria, asking for help moving his funds.

  • Comment number 19.

    Following on from this story is the headline "Govt won't allow banks to reposess homes"

    So what other help will the govt use to help those of us who don't over mortgage and otherwise overstretch our finances - or will we subsidise those who naively think a fixed rate finance deal is a good thing and a philanthopic gesture by the banks?

  • Comment number 20.

    Nothing will change unless rogue bankers are jailed for fraud / deceipt / breach of trust. They have created and run a pyramid debt-selling scheme, or rather scam, which has now duly collapsed. Homeowners must borrow responsibly but they also need proper financial advise on things like mortgages. The lenders missold mortgages on misrepresentation of risks and must face the music. I am glad that, in response to the childish plea from PM about 'helping the borrowers', the bankers will have to show their true (ugly) faces at Downing street. Perhaps the TB era of being blinded by light (coming out of the City offices) is nearing its end. Alas, market forces increasingly fail to prevent endemic price-fixing, be it roaming charges, energy bills, crude, commodities, etc. The lending crisis (agreeable incorrect evaluation of debt for the profit's sake) looks like a reflection of this rather sad trend.

  • Comment number 21.

    That's right banks need to attract savers.

    However ,when inflation is running north of 4% do you think I am going to give my capital to a bank for less than 6 to 7% ?

    The short answer is no.

    The BOE and Govt can do what it likes with interest rates ,but it should be aware that in this bright new world capital can move virtually anywhere and there are lots of places to get better returns than would be implied if low rates make their return to the UK.

    This may sound harsh ,but I am sure there are many people like me who simply worked hard and lived prudently for 30 years or more who don't feel obliged to provide capital to a generation of people who appear determined to have anything and everything they might desire and right now !
    I call this the 'disposable' society.

    I suggest the govt and their electorate get some serious expectation adjustment going ,because the 'free lunches' are over.

    Capital will quite literally vote with it's feet and go where it can be applied for a reward commensurate with risk.

  • Comment number 22.

    Whilst I agree that the spread is low and will almost certainly settle at a higher figure, the reason given that lending is more risky, is questionable. Most banks are now insisting on a 20% deposit so loans start off at a LTV of 80%, hardly lending at the extreme end of the market I would suggest (and borrowers will only get a decent rate if their credit history is exemplary). Banks are driven by profit and do not have sufficient funds to satisfy demand. This is why they will lend to safer borrowers and charge them a higher rate - because they can in the current climate. The only institution that can drive the changes needed to restore market liquidity is the BoE. Why? - because banks do not act in altruistic ways – whilst it is ultimately in the banks’ interest to restore liquidity to the market they will not act individually – that is why it needs to be a solution designed in conjunction with the banks but orchestrated by the BoE. The swap arrangement currently in place gives the BoE the power to do this and now Mervin King has seen the light, that it is not a situation that justifies punishing the banks, hopefully we can start to make the progress needed to solve this problem.

  • Comment number 23.

    #17 - 4.99% fixed? unless you have a 5 digit fee attached in the small print - if not please point me in the right direction

  • Comment number 24.

    Agree with post 23 4.99% fixed deals went a long time ago!

    Unless you are prepared to pay a big fee on have at least 25% as a deposit then expect to pay at least 6% for a 2 year fixed rate deal.

  • Comment number 25.

    I agree completely with your analysis of this situation, and can add:

    "..... and about time too!"

  • Comment number 26.

    Er, don't entirely agree Robert. The main reason rates won't fall is that the banks want to make the same amount of profit (or as near as possible) on a vastly reduced amount of lending.

  • Comment number 27.

    The Government gave GP's a huge financial injection. They are still waiting for the quid pro quo on the back of this ludicrous generosity. Can anyone see a similarity to the Banking crisis??

  • Comment number 28.


  • Comment number 29.

    Most reporting seems sensationalised and dumned down which is a dissapointment.

    Most people are worried, but some for no reason. The positives as a homeowner are that we are still under-supplied in the country, and if your fixed rate or discount isnt due in the next two years you may escape without penalising variable rates and no discounted rate from anyone.

    What Banks / BS's need to beware is that they dont cause or spur a house price downturn. By preventing lending and causing reposessions or defaults, they could run the risk of flooding the market with cheaper housing, which in turn puts off FTB's as they "wait for the bottom", which in turn panics existing sellers into dropping their value to sell quick, which in turn... and so on and so on.

    As for me - Im well and truly up the swanny - I have a mortgage with NR which expires May 2009 - The redemption fees are extortionate, NR Variable rate is well above the norm and my LTV is ok now, but any drop in prices of more than 5% and currently no bank will want to give me a discounted mortgage rate.

    Anyone out their with a good suggestion for me other than cross fingers let me know!

    While its dissapointing that those who gained on the up-turn will no doubnt gain more in the down-turn - unfortunatly thats life:

    Bankers have learnt an important lesson at our (Some of you saw it coming - but please dont gloat about it!) cost, speculators with large funds are rubbing their hands in glee - and the politicians scramble for short term fixes which in the medium and long term they (And us) will have to reverse or will regret.

    If only I had migrated to NZ when I had the chance before I got the mortgage!

  • Comment number 30.

    PS. Ref #17

    Bear in mind this is one BBC representative's blog. And if you look through the BBC blog editors comments recently the BBC themselves dont have a set policy on whether their employees blog their own relativley un-edited thoughts or have a "only the facts" blog.

    While I disagree with RP sometimes, all news is somewhat sensationalised, but I think comparing the Beeb to Daily Mail as a result of RP's blog today is maybe a bit too far!

    (I tried watching ITN yesterday night and fealt like I was watching CBBC Newsround it was so dumned-down. Or maybe I am just getting old before my time...)

    I wish I had your equity to find a mortgage of 4.99 out their - can you post a hint to where you found that - if the moderators let you that is!

    PPS. Apologies for spelling and grammar - written I am fine, typed Im (sic) awful!

  • Comment number 31.

    April 21st, 2008

    Gerard Voon also known as ProfoundWhiteKnight…
    Copyright belonging to me...

    April 4th, 2008

    Gerard Voon

    The Economy

    If stock market prices (including real estate - housing) growth are in line with fundamental drivers (especially long term – corrections (profit taker investors) should cover short term blips/volatility). And temporary confidence/sentiment/perception loss/irrational, the government might want to consider intervening by balancing, keeping inflation lower than (USA currency would fall if inflation – prices were to rise), then the government’s strategy should be to ensure the GDP, overall/all country’s stock exchanges/market growth is higher than inflation. The idea of a decoupling (if a USA recession might cause a contagion) effect in simple terms is result of level of dependence on trade and investment (another reason saving Bear Stearns was important) between major trading countries…dependence of exports/imports where USA is a major importer of China’s products, but then there is the other side of the coin, whereby China is only vulnerable where China’s total GDP is not very large (not as many large importers of their goods to spread dependence on that are also not very dependent – decoupled from USA that rely on USA to export their own goods and services). The goal of the major economies of the world should be through global economic growth, perhaps the largest potential for growth for the economy is good ideas that create the most value by increasing efficiency/productivity of companies/employees…products/services that can create whole new markets (eg. the internet and the communications/entertainment market).

    When a bank enters crisis with illiquidity from over exposure to sub prime, eg. overleveraged and not highly credit worthy clients and overly leveraged risky derivatives, they can enable other financial institutions (and government guarantees) to bail themselves out by opting for the certification process whereby their books are audited for anymore sub prime and/or derivatives exposure that might not have been accounted for to date (eliminating further future write downs). Therefore the financial institutions orchestrating the bail out can not only avoid downside risk almost completely and avoid losing their money, but are able to offer the same certainty over the long run to investors who see the value in the undervalued bank (being bailed out) that when crisis hits usually causes an undue panic/fear selling in bank stock shares (corporate bonds where applicable) and deposit withdrawals that far exceeds the rational investment reactions (irrational sentiment). Once certified any and all investors/depositors can invest in banks that have no sub prime/derivatives time bomb (GV GP) that will hit the investors/depositors in the future. Furthermore the government can guarantee the debts (perhaps 30% which is a common debt to equity ratio in the real estate industry) the aim is to buy time (while keeping the weak parts of the economy stable) until the the economy rises again without actually spending or subsidizing the money away. Those banks that voluntarily opt for certification are basically putting on paper that that they can put behind this fiasco/headache and get back to doing business.

    Re: Sub Prime/Derivatives/Corporate Bonds

    I have several solutions that could probably if used together could solve this economic crisis.

    To the SEC and major Accounting Companies (also to create an impartial body of experts that can be a think tank) on how to regulate future bubbles and new financial instruments especially the highly leveraged with the tip off that are making huge returns on investments (ROI) suggesting and big risk downside if the stock market behaves in the extreme of the way the trader’s strategy was counting on…and continued the market continued to behave in that direction, and the trader tries to cover their losses by betting further that the market will bounce back… The Body said above will do an audit that will evaluate/estimate the size of not yet announced sub prime exposure of finance companies. Certifying size of total sub prime relative to increase in sales making the finance company that may be under valued because of lack of certainty. The idea is that those that get certified and turn out with less exposure will succeed most. Investors have peace of mind. The exposure could be ranked by risk (sub prime or derivative might) factors such as risk profile/credit worthiness of mortgagees eg. credit rating, net worth (overall debt to credit balance sheet - and the liquidity versus locked in) income earnings potential (possibly scrutinized by an impartial head hunter), co-signor(s) (credit worthiness), and collateral.

    Investors have the assurance that the finance companies mortgages of sub prime and/or exposure to bonds and/or exposure to very leveraged risky investments are audited, and there is very unlikely any more bad news from these 3 primary hindrance(s) to what should be a renaissance of world economic growth.

    Certification could further be used to value companies with good advantages, eg. leader in technology and low costs who’s stock price are undervalued but are strategically important (eg. Nortel…).

    Furthermore since certified companies (eg. finance companies that have proven little sub prime exposure), can stand on their own in the face of a uncertain market, and won’t fall to the domino effect, then the government only need focus on the uncertified companies for bailouts (with the red flag 10% to 150% at a cap of 80% per year, system in the paragraph directly above). And can even work with the certified companies to help with uncertified companies (when their sub prime exposure is made known).

    There are three main problems all caused by uncertainty...investors unsure about investing in USA bonds, housing, currency (probably because of the heavy debt the USA is carrying - since debt is often used as an indicator ability to pay back..., finance companies (which are the handle fuel - the reason I believe Bear Stearns bail out was a good idea because if go to any where in the world businesses/economies are driven by and even desired for most Finance Institutions with such a big name - put into perspective, Bear Stearns was an aberration caused by irrational fear)...if these sectors/industries fall, it may spread into the entire bourse and then other bourses worldwide. This spreading is believed to be caused by markets depending on each other for exports, especially USA of which manufacturing - China; Services - India and Bread Basket (bio crops) - Africa...needs USA market, although as their buying power to population grows (although this argument is controversial) apparently USA is less and less the buying engine to the world.

    Dealing with the Financial/Real Estate – Sub Prime/Corporate Bonds issued by over leveraged Private Equity firms Crisis: We create a separate auditing body with Finance Experts in particular field that are under crisis to deal unravel the workings of new important problems (eg. when the High Tech sector were in a bubble; if the real estate were in a bubble; derivatives; bonds for private equity investors; bonds for mortgages; rogue traders; loopholes in traders given too much authority to singly make risky decisions - especially if the trader is a star only in the recent past by making risky investments such as derivatives trading or betting on market timing which may presents the risk/return dilema, just because the trader is a star because he makes big money a few times, there is a large probability he can lose a lot on money too). The Auditors could come from SEC, companies accounting, our best University Business/Economic professors - to thoroughly audit and trace (of discrepancies especially) trades to cover wrong (market rise/fall) to try to earn lost money back. By offering the Financial Institutions CERTIFICATIONS that basically audit the amount and risky mortgages (eg. credit past history, net worth, incomes expectations, co-signor, collateral and debt/equity leverage) of sub prime mortgage exposure as soon as possible, we are able to ell which Financial Institutions are healthy and which (might need further right downs in the future and therefore potential candidates for bail out). More importantly investors are able to tell which finance companies are safe – therefore taking away the uncertainty of future sub prime write downs which leads to the UNCERTAINITY (of future) of the ensuing spill over effect of lack of USA (Buying) market and cooling off Stock Markets worldwide.

    Re: Response

    To track rogue trader(s) you can start with the symptoms – the losses. Starting with the people in charge authorized to trade large amounts (who authorized a lower level trader, and/or let the trade(s) slip by without meticulous duty of care when dealing with large amounts of money). Back to the tracking of those responsible, submit all losses accrued (noting the larger ones because it is harder to get away with fraud if you have to do it many times versus a few large transactions). Furthermore each authorized personnel that are allowed to trade large trades are audited for frequent trades that over a time in the same direction can lead to large losses of large trades in what can be considered mistakes (in timing (GP)) in judgement (of never seen such hot demand for derivatives instruments and housing and risky sub prime investments both of which are leveraged eg. corporate bonds) driven by (initially) by greed and brokers feeling the need to compete (in sectors where the biggest money was being made) then by desperation buy even more to cover losses in the hopes that the new strategies that made them lots of money will recover.

    Bailing out of Bear Stearns because Bear Stearns placed too much investment proportion of funds on sectors that have not been dealt with/experienced with before is a good idea. Bear Stearns except for this recent mistake in investing in instruments whose implications they did not understand but saw their competitors making a lot of money on these types of financial instruments is an understandable mistake (as long as they don’t repeat the same mistake and what fool would in the same sector and the same risk factors – where there is less term investors’ (client’s) to invest in the financial instruments (the Structural Financing Dept.) demand out in the world (caused by fear and uncertainty that are the result recent spate of Major Banks Citigroup… sub prime writedowns, illiquidity) relative to oversupply because for Private Equity recipients of corporate bonds to finance their deals. However, since Bear Stearns and Citigroup have handled all other areas of financing (competently) for so long and are more than brand name but are a prestigious platform, and are head quartered in USA and have their large financings in USA, it is in the interest of USA to keep the afloat and as discussed below financial hubs are what leads to successful businesses, and jobs which increase better quality of life for the most people. Probably more importantly bailing out Bear Stearns is an indicator for potential investors that the government will fight to key financial institutions from failing and even prevent irrational panic domino effect. And to satisfy investors there is a floor and eventual long term chance to recoup. One other thing that could be done is create something like 3 strikes red flag a 150% (max) at a cap per year of 80% of fair appraisal of the value of the company rule, where companies are given 150% (max) at a cap per year of 80% chance of its appraised value (eg. discounted income stream and or imputed asset values) whereby the first time bail out is possibly 10% to 150% at a cap of 80% per year the balance can be used for bail out later years…and like automobile insurance policy the red flag (premium) is slowly cleared away as the company goes year after year without bail outs.

    Traders that are not authorized or traders that are authorized - the amount risk they take caused by period of high risk taking investments, (highly leveraged) and bubble (don't know when to stop) while being driven to continue to increase performance by taking on high risk investments that made money for a while in the recent past. Perpetuate the same strategy...Because of recent past decrease in market leaves the financiers overexposed to committed high performing sectors (eg. Sub Prime; Bonds) where in the past the financiers were highly rewarded leading to over relying on high returns (leading to over leaning on) the belief in these bubble (booming sectors (sub prime, bonds...) heavily weighted exposure for expected high returns.

    Selective bail outs could be done for companies (finance companies) down stream to the mortagagees, though I personally believe that finance companies that should be healthy such as Bear Stearns should be bailed out as all companies /economies in the world depend on financing. The companies that receive this financing turn their budget into profits (added value) which as well as flowing into job creation, also grow the world economy (import/exports). I suppose to be fair, bail outs could be first come first serve.

    Central Business Distract Land and high density as well as Urban Sprawl for commuters are non-renewable, you can’t produce more land near the CBD, therefore land prices should rise again, the question is 1.) when will it rise above the prices paid for by buyers pre-sub prime crisis 2.) how long will it take for investors to get over their fear of being burnt given this sub prime crisis 3.) the growth of other sectors of the economy (of which finance companies can participate via investment) that cause incomes to rise, driving up cost of housing in desirable locations – noting that market prices are a product of competing buyers versus sellers and who are more motivated.

    Re: Long Term Investment steady growth, versus being a big loser/winner…

    Why Long Term Investing is a safer route. Supposing (hypothetically speaking) at the end of the year gains nearly equal losses (the probability are 50/50 + fundamental growth of making an amount of money or of losing an amount of money). Over the long term GDP growth companies not caused cannibalized in market share of new company in the same economy and/or where one company win over market share of buyers because it has clear dominance in the market competitive advantage which can come form any area of the organization (eg. research and development, quantity/volume, quality, operations efficiency, and/or management strategy.

    Given the above assumption where over the long term the final market price is higher. But trading stocks in the interim the stock’s market price can be volatile. If this is the case one investors loss is another’s gain…it is an exchange between investors, with a probability near 50/50 to make and amount of money or to lose an amount of money – the amount depends on the size (eg. height – sudden rise or fall). By timing the spikes the investor can gain a lot of money and lose a lot of money (the psychology is – greed is when investors buy into the market or sell as late as possible to (maximize) time the spike rise; fear is when the sell out of panic or sell too early). Amount invested is also another risk factor. Where timing spikes can gain a lot (over many spikes) or another can lose a lot – losing being a down side that if fully invested may not be recoverable and thus I prefer long term investing. Long term investment ensures companies have a stable access to funds to operate, but more importantly can create the budget strategy to finance their venture to success, since my personal experience in the industry is that there are very many good companies with good ideas that only need financing to make good profits. Good companies I define as ones with sustainable competitive advantages (eg. patents…) two of the dangers for any/all companies is when a new technology or business model (eg. convenience), fashionable trends outdate the companies’ products.

    Re: Government Action

    The government could create new financial instruments where foreign investors can invest in undervalued real estate (without Americans feeling threatened). The government would insure/guarantee the investments fund 10 to 70%, to offer to long term home owners that qualify for the program and stay afloat and not lose their home, and even defer interest whereby when the real estate prices rise past the price the investments fund paid the owner can sell the home and pay back the interest deferred. The investments fund can also garnish wages including a proportion of welfare (rental), all above other income above, paid out to/payoff the deferred interest.

    It is up to the government and the involved institutions to prove honestly and transparently, beyond all doubt for all investors and constantly drive the point home that the certified companies are as safe as it gets. The government could even guarantee/insure (perhaps 30% equity of the company allaying the financial institution’s creditors (eg. bond holders), whereby if there is a run the payout is first come first serve, and once the government runs out of committed funds, they can freeze payouts offer to defer the debtors (eg. mortgagees) interest payments until a minimum price has been reached (via natural supply and demand). The government should use advertising on electronic trading web site…and possibly to any people with a net worth of 5 million or more. Explain clearly why investors have nothing to fear on Certified companies. The government communication (with official website) that shows how risk is almost totally eliminated and to get the point across that investors can’t lose money in this investment clearly and absolutely, strong point, beyond all doubt, no other instruments or place to put your money compares in terms of safety. Keep reinforcing every single day; it could be safer than gold (down side is limited, but can enjoy large upside). The profit motif/win win to all parties.

    Re: This Certification Program (continued) can be used for any and all bubbles…

    The USA’s Debt: There are 3 ways (one at a time of in combination) for the USA to payoff its debt.

    1. Increase exports which creates real values versus retail where companies are just recycling money, the point is that companies are making profits of the same GDP nation’s economy versus selling to make profits from outside the GDP nation’s economy.
    2. The best way to jump start an economy is to bring in investors (eg. Singapore, Dubai, Hong Kong), a financial hub so-to-speak, investing in a domino/cascading momentum of the engines that drive economies, the financial institutions, and the cascading down stream of job creation (wealth building as a whole), bailing out Bear Stearns was like a floor whereby investors can lay their worry to rest – while the SEC and Finance Companies look for ways to make sure such crisis/fiascos don’t happen again.
    3. To payoff the debt the government can raise taxes; the question who to tax and how much…corporations, individuals, rich, poor, occupations…
    4. The fourth is if the government cuts spending (except in the economy) and creates a surplus which can be used to pay off debt.

    Re: What to do if a Currency Crisis

    To deal with the USA currency weakness we could form a currency of the Americas. It would be synergistic (and not under the major competitive of Euro). USA has the premium brand name that until recently was the stablest currency for half a century (the DOW/NYSE has the stablest bricks and mortar brand name and NASDAQ has the the ability to finance the latest advances in the sciences bio/life sciences, engineering, new technologies…Canada is a balance against USA, Canada has some high tech, but the majority of Canada’s TSX is in commodities, which is a home run for growing/developing world; Canada also has much unused land…Mexico has the nicest beaches for tourism/food and beverage, and many desperate workers who are willing to do jobs nobody else wants to do…Chile has much pristine land/clean water (eco-tourism) reverse cycle vegetable/fruits produce to North America…Brazil is the hottest of the economies in the Americas which should perk up the United American Currency… Argentina can combine their livestock farming to become the bread basket and bio crops of the Americas…

    Stock Market prices are determined by demand between buyer and seller (what and how much they are motivated), perception of fundamentals and strategy… Supply can be defined as the ingredients (inputs) – back end of value added components (parts) factory (down supply chain) and factors (down the value added company chain) that influence they upstream costs; demand is need for final goods/end products (output); and the factors that influence – costs to research and development, operations, marketing and also the growth chain – incubation, mass production, market ready, head to head competition…Factors that influence supply and demand should be rationally based (specifically fundamentals), but too many investors lose a grip (whether fear or confusion over uncertainty, or betting – for the big returns based on really impossible to predict exactly over large number of rounds) and end up making investment decisions based on sentiment, rating quality…

    Re: Capitalism and how it Functions:

    Some of the key differences (traditionally) between Communism and Capitalism are that Capitalism is not only sustainable, but naturally (invisible hand) allocate (investors flexibly, and quickly switches where mistakes becomes apparent (made by investee companies), and balances between sunk (locked in) to variable investments and their different profit margins to ensure the investment is/are worthwhile. Naturally allocating to the highest yielding (investments) use of funds (short term) goal is to get the most gain in the shortest time (which is often the riskiest) most volatile versus long term for the allocation of capital depends on stages of company (eg. mutual fund that only goes after value (currently out of favour stocks), or switch from basket of growth to venture capital, starts with (incubate, nurture) early stage company with a good idea and then exit at IPO or after market. These are the basics in which a company has can be said to have good fundamentals given sustainable competitive advantage when endowed with good product ideas that are patented and not easily outdated, and then every company needs the financing to buy-in expert management (the more tricky the different management have different management style (eg. low cost – affordable, high volume – many contracts in the developing world) of Nortel vs. (eg. Upper end equipment for the Techie companies of the First World Nations that want the latest and the best performing technologies) of CISCO…

    In communism (which is probably why communism is so vulnerable to; falls prey to totalitarian/dictatorship) is a top decision making process where the top or near top leaders decide what is best for the people, while democracy when inspired can vote for the candidate and party they expect will grant them (at least their most pressing concerns) of the policies they want. It boils down to what people want…eg. many developing countries need safe fresh water – clean up from pollution to produce clean and non-toxic/no heavy metals food from farms (eg. irrigation…), education for social mobility, which gives higher quality of life so to dream of better life (expecting better than parents), increased buying-power (with an eye for certain types of products) from the first world, electronic (toys) and luxuries (name brand fashions) and well as real increase in quality of life by ability to stay in touch with large friendship network any where in the world and at any time (constantly and discretely). As well as dream based on religious beliefs desires/pursuit motivations that are socially acceptable.

    Communism traditionally can win (via rallies) of the hearts and minds of people towards loftier goals (also using propaganda…) but does not allow dissent against party. Capitalism drives individual needs, profit margin (ultimately quality of life, from democracy of exercising right to participate in representative government via electing a government that will – kind of like a proxy Board of Directors vote(s) whereby the government once in power will legislate in the interests of the voters that put them there…concerns such as human rights, freedom of speech…economy.

    Re: Additionally

    Additionally finance companies that are bailed out (eg. red flag – 10% to 150% cap at 80% per year of appraisal value) should be required to have their financial statements reviewed (perhaps bi-annually) to ensure that they are not taking on heavily weighted towards new unknown instruments, and high leverage investments (which can be tempting) to payoff debt, but rather maintaining in lower risk/conservative investments that will allow them to slowly payoff debt without going under and via perception (eg. the adage where there is one cockroach there are more cockroaches) of how many mines in the same sector or geo are waiting to be reported and even business analyst (the fear mongers) lead investors to sentiment/perception, of uncertainty (and as bubble sector/geography falls in prices investors begin spreading their fears to other exchange/stock market bourses the contagion effect)…The point is to avoid encouraging bailed companies from relying on the government company from saving them every time their highly risky behaviour causes them insolvency to the detriment of threatening the entire world economy.

    Is there that much money in circulation…if all the world were invested to the hilt, then the problem is that investments that switch back and forth between sectors and stock exchange and geo (developed/developing) markets are largely paper shuffling, and money being made by one entity is lost by another entity so there is no real value being made for the investment community as a whole.

    Which brings us to two conclusions, 1.) most profitable value added ideas, where the ideas are good, demand will allow the company to charge more and make more money, while the buyers get more consumption value, and supply costs are cheap (such as automation/robots; and/or cheap labour of whom have come from even worse occupations (even lower income of lower safety – both of which are bad for developed world workers – competing), but safe. 2.) increase in GDP by growing exports as other nations get richer they can afford (although proportions of imports may remain the same overall increase means a bigger pie) more imports from their trading partners exports.

    A bubble can possibly be recognized and its risk (uncertainty) eased – sensitivity of investors, by noting/tracing which new instruments/sectors – direct or supply up stream or down stream are giving huge returns for each dollar invested and are over valued in relative of its own fundamentals benchmarked against the fundamentals of other instruments (of similar expiry…sectors/companies. Fundamentals are sustainable competitive advantages (which investors should be prepared to act on as soon even on rumours that signs suggest the sustainable advantage is losing (analogue erosion), versus suddenly lost (digital, announcement of competitor with a better product), the strengths/weaknesses of the economy/stock (sector/industry) that comprise the economy, imputing critical broad economic health issues such as national debt to exports (GDP) real growth in the economy (GP 1.5%), including government spending and taxes.

    Monetary Representations:

    Appraisals: measuring strengths, weaknesses; positioned to best make the most of an opportunity, vulnerability to certain weaknesses – ability/capability to to mitigate or worse case scenario/exit strategy.

    Feasibility is the totality (while high lighting major drivers - categories and value to whom) cost to benefits to/from company/society…

    Multi criteria only the most influential large impacting (most valuable impacts) most effective, most (perceived) versus within category general benchmarked estimated monetary value for that factor/criteria.

  • Comment number 32.

    People seem to forget:

    Banks lend other peoples money, ie Savers

    Savers expect nice interest.

    That interest has to come from somewhere.


    Borrowers AGREE to pay the amounts they have borrowed for Houses, they could have just said ,no too expensive.

    The money they borrowed belongs to another UK Citizen (Savers) not some Mythical ogre.

    And also:

    The majority of Bank Shares are owned by ordinary peoples Pension Funds !

    The Bankers have clearly made mistakes, but damaging our Pension Funds, is that necessary too ?

    Any Rights issue Shares will very likely all be bought by Pension Funds.

    Something to think about.

    Sweet Dreams.

  • Comment number 33.

    It's worth remembering the Government has set it self a Housebuilding target.

    To fulfill this target people will either have to be able to buy houses, or be able to Rent houses.

    It looks likely that the Rented sector will grow possibly quite dramatically over the next three years.

    Afterall, if people do not wish to commit to buy right now, that leaves scope for Landlords to buy cheap houses to Rent out.

    So, the Big Commercial Landlords will get bigger, and the chance for homeownership for the ordinary citizen will become slimmer.

    Of course, the Big Commercial Landlords will not sell their Houses at a loss, they won't need to.

    So, those not willing to take the chance on homebuying will find a better opportunity doesn't come along.

    The Housing market has changed radically from the 1990's. The Rented sector has changed that.

    So if you want a House and can afford it, know that you will remain living in that area at least a decade, then buy now, otherwise your best option is to rent.

    Mind you , I know a couple of people who sold their homes a couple of years back, hoping to buy a cheap repossession house during the next House Price Slump.

    So far they've made a big mistake, and it looks like they won't get what they want !


BBC © 2014 The BBC is not responsible for the content of external sites. Read more.

This page is best viewed in an up-to-date web browser with style sheets (CSS) enabled. While you will be able to view the content of this page in your current browser, you will not be able to get the full visual experience. Please consider upgrading your browser software or enabling style sheets (CSS) if you are able to do so.