Who is going to lose from this crisis?

Most of us have to accept we are going to lose from this financial crisis.

Here in the UK the financial losses are going to be large. All homeowners are going to lose a substantial part of the capital value of their home. Some homeowners will lose their home, as they give up the struggle to pay the mortgage. Anyone with shares held directly, or through an investment fund or through a pension fund has already lost a lot. People owning businesses will find it more difficult to make a good living in the year ahead, and the value of their business will fall.

To those bloggers who tell me this is a necessary and useful correction, I say there will be a lot of human misery on the back of this big reduction in wealth. It will lead directly – and quite quickly now – to more people losing their jobs, more businesses cancelling their expansion plans and to less money for charities and good works. It is a correction which has got out of control and will do too much damage.

The issue for the authorities is simply this. How big a crash do they want? The Central banks triggered all this, by first allowing an overexpansion of credit and debt, and then deciding they wanted to bring the borrowing party to an end. Now we need to know how much they want to cut total debt by? They have clearly decided on a crash slimming programme of borrowing- which may now be getting out of their control, so fierce are the deflationary forces they have unleashed. It would have been more sensible to start to correct the excess earlier and at a slower pace. Now we are doing it at break neck speed, markets need to get a feel for how much debt the authorities want to take out of the system, so that market participants can start to make some realistic calculations about how big and how profitable banks will be in the future.

I have seen one forecast that the US wll take around $1 trillion out of total private sector borrowing in this adjustment. Some of this will go through write off of debt that cannot be repaid, and some from repayments from solvent institutions and individuals. Maybe the UK authorities are trying to take around £200 billion out of UK private sector debt. If so it would be helpful to know, and banks could work out how best to do it on what time scale. If the authorites, seeing the damage too sharp a deflation causes, now want to see debt stabilised rather than reduced, then they need to slash interest rates and redouble their efforts to pump cash into the system. There is no point in slashing private sector debt, if to do so you simply transfer it to public sector debt and put the taxpayer on risk.

Meanwhile the UK is having one of its idiotic arguments about whether we need more or less regulation, as if this were the issue. I know of no serious commentator on money, credit and the economy who thinks the authorities should wash their hands of responsibility for controlling total money and credit in the system. The issue is not whether to do it, but how to do it. Clearly the method chosen in the last ten years, the so called independent Bank of England, did not work. Credit was not properly controlled on the way up, and is now imploding dangerously.Large amounts of new mortgage regulation did not regulate the main things that matter – how much credit is lent in total, and how much to each individual in relation to the home value and income.

We now need some guidance. I would suggest that now the problem is far too little credit is being extended. The nationalisation of one and a half mortgage banks has hit new lending badly, removing two important institutions from new lending altoegther and burdening taxpayers with big commitments. The uncertainty over banking capital has also frozen the private sector. Can’t the regulator make a reassuring statement, telling us in its view all the main banks have more than enough capital to get on with their jobs – or that they are about to raise more than enough? Can’t then the bankers use the government guarantees to start lending again?
The authorities tried to reduce debt too far too fast. They need to signal that is not now their intention. Concerted interest rate cuts on a big scale would help do that. It would also take some of the pressure off borrowers. To those that say this in unfair on savers, I say it is necessary for savers protection. As the Icelandic banks have shown, it does not help to offer savers a good rate of interest if the borrowers that pay the interest to the banks can’t afford it and the bank runs out of money to pay the savers.

Savers and borrowers are hitched together. Both are going to be worse off in this crunch. The issue is how can we find a level of interest rates, banking cash and capital which allows the system to functon sensibly again.

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28 Comments

  1. APL
    Posted October 12, 2008 at 10:21 am | Permalink

    JR: "To those who bloggers who tell me this is a necessary and useful correction, .."

    None of us wanted this Mr Redwood, but *I* think the situation has been made worse (much worse) by the incompetent handling of the crisis, both abroad and in the UK.

    JR: " I say there will be a lot of human misery on the back of this big reduction in wealth. It will lead directly – and quite quickly now – to more people losing their jobs, more businesses cancelling their expansion plans and to less money for charities and good works. It is a correction which has got out of control and will do too much damage."

    All true, but if politicians and their political appointees had not tried to abolish 'boom and bust' or 'Tory boom and bust' as our earstwhile Chancellor is now telling us he said.

    Brown may have abolished 'Tory boom and bust' but the silly man has given us something much much worse, a Labour boom and bust.

    Oh, one other thing. We need to see politicians taking some of the hardship we are all going to suffer. Now Parliament should be debating a pay cut and reduction in expenses to match the privations the rest of the population are experiencing.

    Not just Parliament though, every branch of government.

  2. Kit
    Posted October 12, 2008 at 11:18 am | Permalink

    Politicians and regulators are player King Cnut except he knew is actions were futile. However, our modern day Cnut's will make the situation worse by deepening and prolonging the recession.
    Thankfully politicians and regulators are just incompetent rather than malicious. But then again, after Paulson's talking down the market, Berlusconi leaking about closing the stock markets, and Brown's war with Iceland, you do wonder what their motives are.

  3. figurewizard
    Posted October 12, 2008 at 11:18 am | Permalink

    Many people, especially those who had been in business or finance spotted the clear and ominous signs of a revival of the conditions leading up to the1970s crash during the latter years of Gordon Brown's boom. However while he was trumpeting his brilliance at managing our economic affairs such concerns were dismissed as doom mongering. While it is true that an older and wiser Chancellor from these ranks would have not been able to isolate us from what is a planetary meltdown they would at least have prepared our finances in a better way to deal with it. The price we are going to pay for this much further down the line will start to become clear when the crisis ultimately abates. Our journey will be longer and harder than most others.

    • Vaughan
      Posted October 12, 2008 at 10:56 pm | Permalink

      As far as I can tell this whole thing has come about through Clintonomics essentially continued by Bush and adopted with vigour by Bliar/Brown with a particularly British socialist twist. The deal between the politicians and finance has been cynical in the extreme and the bubble has enabled Brown to tax and redistribute in a most destructive manner. They came in as a con – trick primed to break up our society and institutions and deliver us to a federal Europe and worse.The only hope I have is that the current disaster will move us away from this outcome to a more independent position although this is perhaps a forlorn hope. 'Europe' will use this crisis to it's advantage and so far our (word left out) PM has visibly enjoyed it. (Sentence left out) He has known exactly what he has been doing,adoption of CPI , gold, dividend tax credits, stamp duty etc never mind the social engineering. It's just that he never thought it would bust like this.Murdoch Press, BBC, the awful thing is you have known what you have been doing.
      God help us.

      p.s. If Cameron had been honest about the economic/tax position even 12 months ago instead of playing a political game he wouldn't be looking (weak -ed) and Brown wouldn't have his event.

  4. Brian Tomkinson
    Posted October 12, 2008 at 11:38 am | Permalink

    JR: "The issue for the authorities is simply this. How big a crash do they want? The Central banks triggered all this, by first allowing an overexpansion of credit and debt, and then deciding they wanted to bring the borrowing party to an end. Now we need to know how much they want to cut total debt by? "

    Please explain the actual mechanisms by which you believe this happened and when and why the central banks decided to bring the borrowing party to an end.

    WHEN THEY DECIDED TO LIFT INTEREST RATES AFTER A LONG PERIOD OF LOW RATES AND EXCESS BORROWING

    • Brian Tomkinson
      Posted October 12, 2008 at 8:22 pm | Permalink

      John,
      Thank you for replying and forgive me if I sound churlish, but are you actually saying that this severe crisis has all been caused purely by a failure of central banks' interest rate policy? Is it really as simple as that? Who controls the central banks? I am also unclear as to the thinking behind your assertion that the authorities want this crash. Why do they want a crash and who are the likely beneficiaries of this turmoil who presumably encouraged the authorities to create this mayhem?

      Reply: No I am not saying the authorities want this crash – they did want to cut the rate of private sector lending/indebtedness. NO it's not all caused by Central banks, but it was easy money central banking which allowed the bankers to behave as they did in the good days, and it is tight money central banking which started the unwinding.

  5. ken from glos
    Posted October 12, 2008 at 11:50 am | Permalink

    Well written article and i agree with everything you say but as a saver who always lived within my means it still annoys me.

    One other point.Credit was never cheap.I still get mail shots from my bank offering to loan me money with a headline rate of say 7.5%. A quick calculation with my calculator, in fact reveals that the APR is double what they say because they rely on idiots looking at one thing, monthly repayment.

    I suggest that any person looking for a loan get back to basic maths and work it out. I recently rang the bank and asked for details of the shortest three year loan (never quoted in the literature) and it is still nearly double the quoted APR.They tried to tell me it was based on a rolling day by day calculation! My returns on investment dont use this type of calculation !!

    All of you people out there please remember Banks tell lies. Just get that little calculator out.

  6. david
    Posted October 12, 2008 at 11:51 am | Permalink

    Another call for a 'Plan' from Red Dave, is it a five year one?

    David Cameron, Conservative leader
    Adam Boulton Live, Sky News

    Mr Cameron said he would support the government taking a majority shareholding in RBS, and called for a “real plan for the real economy”.

    “I think the Prime Minister has done the right thing in announcing the plan to recapitalise the banking system, because doing nothing was simply not an option.

    “What we need now actually is a real plan for the real economy. What‘s required now is the put in place those things to help families and businesses in what is a difficult time."

    Asked if would support a government move to take a majority shareholding in RBS he said, “Yes, we think you need to do what is necessary to recapitalise the banks.

    “Putting capital into banks to strengthen them needs to happen.”

    Asked whether he supported John Maples’ call for top bankers to lose their jobs in the wake of the financial crisis he said, “I would be very surprised if they all kept their jobs. It is a matter for the boards of individual banks. Right now the important thing is to sort the system out.

    “I have nothing against people earning good money and earning a good bonus – I believe in a market enterprise system. If the taxpayer is going to put money into these banks it would be completely wrong for senior executives in those banks to get a bonus this year. We do need to look at bonus systems that cause banks to take irresponsible risks.”

    He accepted that borrowing would have to increase to fund recapitalisation, “Borrowing is gong to increase because money is being lent to recapitalize these banks.”

  7. Tony Makara
    Posted October 12, 2008 at 12:14 pm | Permalink

    There has to be international agreement on a new global financial system, Horst Kohler has called for a new Bretton Woods, and in these times of global transaction only a global solution will suffice. In the UK I believe our economy would fare far better with just a few big banks and perhaps even a state bank. As for regulation, well it can be a force for good or bad depending on how it is implemented, the current system of regulation has proven to be a complete failure and needs to be replaced with something more sound but not necessarily less restrictive. The will to lend must be encouraged, but the practice of lending itself must be more secure.

    • DWL
      Posted October 12, 2008 at 2:00 pm | Permalink

      Great! A few big banks. Build a nice single point of failure into the system.

      • Tony Makara
        Posted October 12, 2008 at 11:52 pm | Permalink

        DWL, with due respects, extending lending has hardly been a success, as recent events have demonstrated. The flow of credit will be far easier to monitor if the number of lenders are reduced, liquidity too would be more balanced. The fact that so many have been able to borrow so easily from so many lenders has created a breakdown in the system with even the professionals unsure how much toxic debt there is.

  8. David Eyles
    Posted October 12, 2008 at 12:43 pm | Permalink

    What we are starting to see now is a repetition of what happened in the last recession. Banks are altering the goalposts to protect themselves in the short term by making conditions harder for the borrower. This leads to certain sectors of the economy being deemed higher risk than they were before. So the banks pull the plug on businesses and individuals who are currently able to service their loans, even loans at higher rates. The business or individual goes to the wall and their assets are now devalued. In the short term, the bank may recover its cash, but after that has happened a few times, the total value of assets in the economy are depressed. The banks are therefore deepening the recession by their own actions.

    At this time, what is needed more than anything else is patience and common sense on the part of the banks. If loans are being serviced, albeit at a pinch, then do not pull the plug. The moral case is that this applies with even greater emphasis now that we the taxpayer are bailing out the banks for their own stupidity.

  9. gordon-bennett
    Posted October 12, 2008 at 1:11 pm | Permalink

    The rock bottom cause of this problem is the exploitation of the Community Reinvestment Act in the USA, which was used by community pressure groups such as ACORN to force lenders to issue loans to people too poor to be a good credit risk.

    Those toxic loans were then bundled up ("securitised") and traded all over the world and resulted in the banks' mutual lack of trust and confidence since nobody really knew the worth of the bundles.

    Is anyone asking for the repeal of the CRA and, if not, will this whole sorry mess happen again?

  10. Neil Craig
    Posted October 12, 2008 at 1:36 pm | Permalink

    We have worked to ensure that the losing done by bankers is minimised. Unfortunately this means spreading the misery. It is not clear to me that saving the banks will not mean a net of loss of jobs since bankers get more money per job than most of us & the net inefficiencies & distortions of interfering with the price system don't help. It will have to be paid for by either higher taxes or cutting government expenditure.

    Higher taxes will cut into the productive part of the economy meaning a vicious circle therefore government should do most or all of the "sharing in the fruits" of recession.

    I would also suggest that letting the £ fall would reinvigorate the manufacturing sector. The thing I am worried about is that we will see protectionism rising, as happened in the 1930s, which would have a seriously destructive influence on the real world economy. The thing to remember is that, so far, this is merely a crisis of the money system. Panic can & probably is now, turning it into an assault on material productivity.

  11. Stuart Fairney
    Posted October 12, 2008 at 2:04 pm | Permalink

    Am I alone in noticing this completely naked usurpation of power by the government? They could never have driven half this stuff through the commons. So it seems the tiresome need to debate, account for your self, subject your plans to scrutiny, and importantly get MP's on the record to see who is actually supporting this nonsense is done away with.

    Instead we have Darling and Brown 'announcing' zillion pound nationalisations by decree. Have we learned nothing from FDR's new-deal failures? Government intervention will make things worse for longer (look at the now almost expunged from history USA 1937 recession if you doubt this). If banks are fundamentally unsound they should go bust and other banks can pick up their assets from the receiver. Depositors are protected, shareholders have to take their chance as always. This can be painful, but it is the nature of capitalism and what makes it such a success. With the current nonsensical bailout plans EVERYONE is on the hook for however much Alistair Darling can be talked into promising by failed bankers! This is not responsible government, nor is it responsible opposition to meekly go along with this. I had hoped Mr Cameron was secretly Mrs Thatcher, simply unwilling to reveal his true colours for electoral purposes. In another echo of the 1970's he is now obviously Mr Heath instead. Oh dear….

    • StevenL
      Posted October 13, 2008 at 1:57 am | Permalink

      "Am I alone in noticing this completely naked usurpation of power by the government?"

      No, your not alone. "Price conditioning" is a tactic normally used by timeshare, double glazing and kitchen salesmen. The first figures they mention, or quote you, are well in excess of what they want to charge you. Makes the price seem lower. It's haggling basically, in a lot of parts of the world it's the usual way people buy and sell things, but it scares the hell out of Western consumers.

      We've been sucessfully 'price conditioned' if you ask me. They started off talking about a few billion here in writedowns, and a few billion there.

      We're now so used to these mind boggling figures being banded about that no-one bats an eyelid at a £500 billion 'bailout', 'investment' or bet as I would suggest it would be more accurately defined as.

      It's the same with the severity angle. Hardly anyone noticed the first bite of the credit crunch last August, most people shrugged it off in fact. Now the talks all about meltdown and depression everyone is scared enough to go for it.

      It might work, maybe it is a good idea, who knows, but you're right to say it has all the classic hallmarks of an elaborate scam.

  12. Matthew Reynolds
    Posted October 12, 2008 at 2:41 pm | Permalink

    I think that stamp duty should be 100% suspended for three years on shares & property . All basic rate payers should get a £500 rebate from April 2009 and a further £500 as of April 2010 . Employers & self employed National Insurance should be 3% less from April 2009 until April 2012 . Income tax on savings & shares needs to be 100% suspended for three years while fuel duties must be frozen for that period along with VED .

    This would boost share prices by making trading in them beneficial from a tax point of view while lower employment costs would help stem the dole queues by making it cheaper to employ people . The savings ratio would rise as the tax system would make it pay to put cash into bank accounts and by freezing taxes on transportation government would do its bit to make sure that consumers gained from lower oil & food prices thus helping household budgets . A big income tax refund would help the high street by giving many people more money to spend and assist people with servicing their debts . By removing stamp duty as a factor in house sales you would at least avoid depressing them still further .

    To give a direct boost to struggling homeowners why not allow them a £30 a month income tax rebate ? That would get cash to people who are really hurting with big mortgage bills & negative equity . The aim must be to keep people from losing their homes and giving them extra help on top of the big tax rebate and other changes is surely common sense ?

    As deflation threatens to cause another Great Depression this PSBR swelling demand boosting tax cut plan will help parts of the economy most at risk from this disaster while benefiting people who are suffering the most . Poorer people tend to spend cash from tax cuts thus helping hard pressed retailers .

    Tax cuts funded by a bigger PSBR will I think tackle many of the problems that you blogs on this economic mayhem have mentioned .

    In three years time public spending needs to be slashed so it hardly grows at all until the PSBR is wiped out – once the economic upswing is underway smaller government & lower public borrowing can help the process . All the areas of waste that John Redwood & others have alluded to can only be cut once the deflation has passed and the economy is recovering .

    I know that interest rates and financial regulation is important but a nice big targeted tax cut plan might help the situation as well .

  13. Per Kurowski
    Posted October 12, 2008 at 3:51 pm | Permalink

    Those losses already there and all those in waiting are serious and do hurt individuals, awfully, miserably, and I much agree with John Redwood’s post. That said we must also, unfortunately, not forget that, one way or another, the costs of saving the system must also be paid, by us all, either through taxes or, in its absence, through inflation.

    In this respect the society has a vested interest in finding new equitable ways of how to pay for it, and that these are aligned with the new global realities and interfere as little as possible with the recovery of the economy. In other word we must now, more than ever, strive to find functional progressiveness in our tax systems.

    I invite you to look at one proposal http://perkurowski.blogspot.com/2007/05/human-her

  14. T Dorlas
    Posted October 12, 2008 at 6:45 pm | Permalink

    Dear Mr. Redwood,

    You are talking about deflation. Not being an economist, I do not understand the term. Perhaps you could give some more basic explanation to economic ignoramuses like me. Is deflation not the opposite of inflation? It does not feel like my money is buying me more. Also, this is called a credit crisis, but is it not actually a debt crisis? Too many people and businesses in too high a debt?
    Surely, the Government cannot argue that they have nothing to do with this? They should ultimately be in control of the money supply, and if banks are lending too much without it being underwritten by
    actual funds they should have put a stop to this? Or is this done in such a way that it does not appear on the books? In that case I would call it fraud. It seems to me more likely that it was a deliberate policy. Surely, having an independent currency means that this is essentially not caused by external circumstances. But in that case the opposition should come down on them much harder.

    In any case, thanks for maintaining this interesting blogsite.

    T. Dorlas

    Replky: Yes, deflation is the opposite of inflation. Excess credit led to soaring house, , property, commodity and other prices. Now today deflation, a shortage of credit, is leading to collapsing house, car, property, oil and ghrain prices.

    • StevenL
      Posted October 13, 2008 at 1:49 am | Permalink

      "Excess credit led to soaring house, , property, commodity and other prices." (JR)

      In other words, printing money causes inflation. Now that the banks have stopped the easy credit binge and are more intent on saving their money, what do they politicians do?

      Pander to the homeowners and risk £billions trying to make them print more money.

      House prices, our currency and commodities prices are falling to more sensible levels. Yes, it's going to hurt, but just printing more money will only change things if the entire Western world prints enough (and the politics allow) a hyperinflationary price/wage spiral.

      In my mind it's one or the other, debt deflation and a time of unemployment and hardship or inflation and uncertain consequences that could get completely out of control.

      There's no easy way out of this, the fundamentals all point in the direction of the 'good' times being over. It still surprises me the amount of people who think that 'things will get back to normal soon'. When you question them on what 'normal' is, it turns out they believe house prices rising at 20% per annum is 'normal' in their minds.

  15. david
    Posted October 12, 2008 at 6:53 pm | Permalink

    Looks like Gordon has a new fan John.

    Tory business chief backs Brown bail-out plan

    Those are not words I would normally expect to write, but Simon Wolfson (chief executive of Next) did just that on the Andrew Marr prog today.

    Sitting alongside the wonderfully dour Jon Moulton on the Marr sofa, I fully expected retail whizzkid Wolfson to stick the boot into the Government for its handling of the economy.

    Why? Well, for one thing he co-chaired (with John Redwood) the Conservatives' Economic Competitiveness policy group last year. The report won lavish praise from George Osborne for its insight and tax-cutting zeal (though the leadership stopped short of endorsing all of its proposals).

    For another, Wolfson donated £10,000 of his own readies to Dave Cameron's leadership campaign and has remained close to the Tory leader ever since.

    But instead of going on the offensive, Wolfson proceeded to defend the Government's £500 billion bail-out plan.

    "What we have to recognise and what's really important is that the money that is going into the banking system from the Government isn't money that is being spent. It's money that is being invested. There's a lot of nonsense being talked about it and my biggest concern is that actually we worry everyone to death and we worry the market to death.

    "And actually when you look at what the Government's been doing, it's the quickest plan put together by any government across the world. We've had Opposition and Government working together. We've had the FSA, the Bank of England and the Treasury all working together to deliver what is in fact a very good plan – and will probably make money for taxpayers."

    Now I know Wolfson is a smart guy who is probably more interested in shoring up consumer confidence to protect his own retail business than praising G Brown and A Darling. But still, they were words that may well come to be quoted by Labour.

  16. mikestallard
    Posted October 12, 2008 at 6:58 pm | Permalink

    When Norman Lamont, Nigel Lawson and Ken Clarke come on TV, they sound as if they know exactly what they are talking about. Mr Darling, however, sounds just like an expert Edinburgh Lawyer.
    Secondly, Labour solved the problem of schools'n'ospitals by slinging money at them when they were unreformed. This, of course, meant huge pay rises all round and a lot more idiotic state control. I fear that, now, they are being panicked into doing the same thing. I do not think, myself, that anyone in the present government has much of an idea about money. But they will still put their fingers into the machine…….
    Thirdly, when the last panic about terrorism was on, all sorts of new powers were demanded for the government to avert catastrophe. These powers are now being misused. I fear the present crisis will result in the same sort of total injustice.
    It would be really nice actually to hear something along these lines from the Conservatives, say, on newsnight. Or in an important speech. Or – brainwave! – how about parliament???

  17. StevenL
    Posted October 12, 2008 at 7:03 pm | Permalink

    "To those who bloggers who tell me this is a necessary and useful correction, I say there will be a lot of human misery on the back of this big reduction in wealth." (JR)

    There undoubtedly will, but a lot of the 'wealth' was based on 'mark to market' valuations of houses that had been hyped up by speculation, the media-fuelled national obession with the housing market and the hocus-pocus of the securitisation and swaps markets.

    A lot of the banks so called 'wealth' was (and to some extent still is) based on the expectation that consumers will be able to afford to pay back the £1trillion plus personal debts they have accumilated.

    Once house prices move so far away from earnings that a couple on average incomes cannot afford to buy even a one-bedroomed flat without going 'sub-prime' then of course the whole thing will collapse.

    Personally I think that the state mortgaging the next generations income in an attempt to prop up the value of this generations own dodgy 'investments' is highly immoral.

    Just what is the legacy the current generations have handed down to the next?

    They removed academic selection and made it harder for teacher to discipline children. Now left-wing backbenchers even want to make it illegal for parents to discipline their own offspring!

    They encouraged massive immigration into the poorest areas of the nation, telling us it was good for the economy, and branding as racist any opinions to the contrary.

    They have mismanaged their own pensions, and intend the next generation to pick up the tab whilst they plan their own cushy retirements overseas.

    They have presided over an unsustainable credit boom whilst pretending the riches were the spoils of sound economic management. Now the fallout begins they want to fight against the market, passing the risk of the multi-billion pound bet they are making onto people that haven't even left school and have no democratic say in the matter.

    One day this generations healthcare and pension provision will depend on the generosity of those who are not yet old enough to vote. We should remember that, because when they learn about how we all squandered their inheritence trying to bail out collapsing governments and finance houses they might just decide to change the rules of the game.

  18. FatBigot
    Posted October 12, 2008 at 8:02 pm | Permalink

    It seems to me that there are two elements to the problem of excessive credit.

    One is the unexploded bomb of bad debt. It will explode at some stage; maybe in a series of small pops, maybe as a single huge bang. If the former it is manageable, if the latter it could bring down a bank. Because no one knows when or how the explosion(s) will occur it is hardly surprising that lending to banks has frozen. The guarantees offered by the government seem a sensible way to ameliorate this problem, particularly because all the bad mortgage loans can only suffer a partial loss – many will be repaid anyway and those that default still have a house or flat as security which will give a substantial return of capital.

    The other problem is the credit bubble of unsecured lending, including such things as car loans, borrowing on credit cards and unsecured overdrafts. Although the individual transactions are smaller than mortgage loans there are vast numbers of them, many in amounts too small for it to be economic for the banks to sue. Even a short and shallow recession can give rise to very substantial losses.

    Restoring lines of credit for sound borrowers will not make the bad debts go away although it can produce new profits to cushion the blow. I doubt that any steps taken by government can do more than help to re-start modest levels of lending. If the main players in the business are not prepared to wait for bad debts to work their way through the system there is nothing government can do to change that.

  19. Jonathan Bryce
    Posted October 12, 2008 at 10:12 pm | Permalink

    As far as the crash goes, I don't think we really have a choice in the matter. The wealth that is being "destroyed" is wealth that was created on way or another on the back of the idea that house prices only ever go up, and that some greater fool will be prepared buy the house off you for more than you paid for it.

    That wealth consists of the houses themselves, the mortgages secured on them, the mortgage backed securities created on the back of the mortgages and all the various other derivatives created out of them.

    It also includes all the property developers who were building flats that nobody actually wants to live in, but were sold to investors, and all the supporting industries around them.

    None of this "wealth" actually was worth anything. All that happened is that people have now realised it isn't worth anything, and they aren't prepared to pay anything for it.

    As for what the government is doing at the moment, I can't think of any other policies that would work better, but I don't think what they are doing this weekend will solve the problem and enable us to continue as if nothing had happened. It looks like this is just the beginning of the crisis.

  20. rugfish
    Posted October 14, 2008 at 10:30 am | Permalink

    JR – "Who is going to lose from this crisis"?

    In a word, us.

    Who is going to win from this crisis ?

    Them and us and Labour by the looks of it.

  21. John
    Posted December 1, 2008 at 4:00 pm | Permalink

    Just watched a movie called "Zeitgeist". Not sure if what was in the movie is all true but it got me thinking. Maybe this crisis was created so banks start borrowing money from central banks (at interest). Since we (the normal people) are struggling we would need to borrow more money (at interest) to just survive. At the end of the day banks make money and we end up paying debts till the rest of our days (in some cases our children will have to pay those debts). Sounds like a food chain and we are at the bottom of it. One thing I am sure about. When companies go bust, there will always be someone out there that will buy them paying almost nothing and will make a fortune later.

  22. Per Kurowski
    Posted December 1, 2008 at 6:31 pm | Permalink

    Talking about movies… at least listen to the Joker before giving more powers to the schemers

    I can hear the free market answering a confounded citizen by describing the bank regulators with the same words the Joker used in the movie The Dark Knight, 2008. "You know, they're schemers. Schemers trying to control their worlds. I'm not a schemer. I try to show the schemers how pathetic their attempts to control things really are. So, when I say that … was nothing personal, you know that I'm telling the truth. It's the schemers that put you where you are. I just did what I do best. I took your little plan and I turned it on itself. Look what I did to this city with a few…" collateralized debt obligations.

    When I think of a small group of bureaucratic finance nerds in Basel thinking themselves capable of exorcizing risks out of banking, for ever, by cooking up a formula of minimum capital requirements for banks based on some vaguely defined risks of default; and thereafter creating a risk information oligopoly by empowering the credit rating agencies, which was all doomed, sooner or later, to guide the world over a precipice of systemic risks, like what happened with the lousily awarded mortgages to the subprime sector, I cannot but feel deep concern when I hear about giving even more powers to the schemers.

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    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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