Unprecedented?

Hmm, not sure about that description of this:

Alistair Darling will unveil an unprecedented scheme to offer £50 billion in taxpayer-backed loans to high street mortgage lenders today in an attempt to solve the credit crisis.

Under the plans, to be unveiled this morning, the Bank of England will swap Treasury bills for mortgage debts and other collateral from the banks. The total size of the loans will be dictated by demand.

Isn\’t that exactly what the Fed has been doing over in the States? Allowing mortgage bonds to be used as collateral?

Still, aside from that, should help I suppose but then I\’m no finance maven.

9 thoughts on “Unprecedented?”

  1. This is lunacy. What Darling is offering is to nationalize the risk, while having the banks sell like crazy to people who cannot afford the repayments. The taxpayers take it in the shorts, the banks offload their responsibilities to lend.

    Its as if no-one in the UK government has learned what happened with subprimes in the US.

  2. This deal is pure politics. The Bank of England has tarnished its name to be associated with it – so much for the banks so-called independence.

  3. I.E. increase the money supply by £50billion, which the banks loan out and increase to £500billion by virtue of the money multiplier, which forces up inflation, which causes interest rates to rise, which causes the government to underwrite more bank securities, which, etc. etc.

    You can’t stop recessions, you can only postpone them. The longer you postpone them the worse they are. We’ve already stored up a stonker, which the system is presently trying to feed us, and we are just making it much, much worse.

  4. Jim,
    This does not increase the money supply. The Treasury is handing over Gilts for mortgage debt. The government is betting that people will not default on the these mortgages. Let’s hope they are right.

  5. “Its as if no-one in the UK government has learned what happened with subprimes in the US.”

    It’s more as if people with no understanding of the financial system were, erroneously, to believe that the US subprime crisis has anything in common with the UK housing market.

    In most of the US (Manhattan aside), land is and always will be cheap, because there’s lots of it and planning regimes are relatively relaxed. House price inflation will be a complete bubble, and lending poor people money to buy houses carries a genuine risk of utter wipeout.

    In the UK, there is a land shortage. Barring famine and mass emigration, land prices will continue to rise. While there may be short-term bubbles, the long term trend will remain upwards.

    The problem for UK banks is that nobody knows exactly where the liability hundreds of billions of dollars wiped out by the collapse of the US bubble lies, because the risk was spread so widely through the financial system. So international lenders are reluctant to lend to Bank X in case it announces next week that it’s lost all its money on US subprime bonds – and so banks find it hard to maintain liquidity in the short term.

    This makes Darling’s plan a Good Idea: in exchange for assets which only insane people think won’t maintain their value in the medium term, UK banks can be provided with the liquidity required to make them not fall over and continue to allow the economy to function, businesses to invest in capital, etc.

  6. What John A says. Total market cap of UK banks £250 billion. Any sensible gummint would tell them that they have two months to do a five-for-one rights issue or else lose their banking licence.

    John B, the ‘shortage’ of land is a lie perpetrated by NIMBYs. Only 10% of the UK by area is developed. And people want to live near towns because that’s where the shops and jobs and schools’n’hospitals are. This is no different in the USA*. I have read horror stories about low paid workers commuting for hundreds of miles to their jobs in large towns.

    * Just imagine, the whole North Sea dried out and the surface area of the UK trebled. Would this affect property prices in London or Manchester? If yes, explain why you think this.

  7. Hmm. Do you see UK planning controls being abolished at any point soon? If not, then my point stands: nearly all of the UK housing stock resembles Manhattan in terms of density and demand, and very little resembles the exurban sprawl that has caused the subprime losses in the US.

    Tim adds: Erm, ex-urban sprawl? I think you might have missed the fact that sub-prime is really very concentrated.- CA, FL and NV….only that last doesn’t already have restrictive planning codes.

  8. “Any sensible gummint would tell them that they have two months to do a five-for-one rights issue or else lose their banking licence.”

    I can see a few minor problems associated with this one. Perhaps you can too?

    [clue: note the number of stock issues over £1bn that have successfully taken place over the last year or so, since people became reluctant to commit large amounts of cash for such ventures…]

  9. John B.

    Bank shareholders should IMHO be faced with a stark choice – stump up some more money (and hopefully live to see another day) or see your shares become worthless. Only this corrupt, inefficient gummint blinked first. UK households have got over £1,ooo billion on deposit with banks (the equal and opposite entry to the £1,400 billion of household debts), it’s not like they can’t stump up the £50 billion or whatever is needed.

    Yes, UK planning laws are incredibly restrictive – but it is an artificial shortage (or maybe that was your original point, in which case I apologise for misinterpreting). All hail the hallowed greenbelt!

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