'Another 18 months of crunch'

It's worth staying in on a Friday night and reading about the economy just to get a post in first.

I know people will try to answer the following points but I do not think they can be satisfactorily answered, but give it a shot! I'll enjoy reading the responses.

Money is debt. The fractional reserve banking system obliges banks to actually have some real money in their accounts, but they can lend a ratio of what they have: sometimes 10x or more.

When the debt reaches a point where the banks, the guardians of the financial system, believe that they will not get their money back a Credit Crunch starts (lending is reined in; only good borrowers get credit).

Now here's the rub. Because for every £100 lent, a £110 has to be repaid, then it is inevitable that somebody is not going to get their money back i.e. banks will go bust in the scramble to get debts repaid and secure the bank's own balance sheet. So recession is inevitable as credit is withdrawn and money from the present is sucked back into the banking system from where, once upon a time, it had come. (The future has arrived and wants its money back!) Needless to say, less money in the present due to paying off debt, the less spending now, loss of jobs, less borrowing, less money, less spending etc.

Now here's the other rub. The banks decided to pull back on lending when indebtedness was at huge levels AND lending had become so loose and widespread it had become, for a better word, fraudulent. Why would banks start to lend again with the initial level of debt which made them stop has not decreased but increased? The increase occurs as people who were paying debts quite happily now no longer can do so or do so at a slower rate and their debts actually increase and not go down! (Debt cycle)

There is no reason why lending cannot go on for ever but it seems that even the financial system loses its nerve and has to get in touch with reality, and you'd probably have to oblige people to take loans!

This is the system. Nearly everything about this Credit Crunch I have read so far shows a woeful ignorance of how capitalism in its present form works. This is what makes Recession inevitable and Depression likely.

As for the article, the United States house prices are not going to come-up in a year and a half because not only is there a glut of housing on the market and the US is overhoused, but no one is going to lend at that rate or level again for...decades.

@ GrouchoMarxist1

Wise words, it amazes me how difficult it seems to be for people to open their eyes and try and see this mess for what it really is.

Peston, you talk about going back to normal levels of lending. Do you understand that the last 5 or so years have been the abnormal years and we are now going back to normal levels. But as with every blow up, the banks will go too far. To hear the chap from HBOS talk about the bubble being back in full swing in 18 months is a sad joke at best, fraud at worst.

The real question now is will the fall back be relatively orderly with a major recession and things hanging together reasonably well or will we see multiple major bank failures and tax payers ending up with trillions of debts? As can be seen this weekend in the US where Fannie and Freddie look like they are about to get the full weight of the US taxpayer to bail them out, there is huge potential for this whole mess to bankrupt western taxpayers for years to come.

Are we sure we even want to 'raise significant sums on wholesale financial markets.' ever again?

I think the banking Industry has shown itself to be incompetent at best and fraudulent at worst when it comes to managing the uk's mortgage market.

Perhaps the nationalisation of this Industry either side of the pond won't be such a bad thing ;-)

Good comments from 1 and 2 btw.

Robert, open your eyes. The prime cause of the credit crunch was banks lending too much money to customers who would be unable to repay their mortgages in the event of a downturn in the economy.

The credit crunch is the result of banks imprudent lending over the last decade.

Applying Riccardo style thinking to thie current situation (https://en.wikipedia.org/wiki/David_Ricardo%29

As far as the UK is concerned:
1. There is no shortage of potential house buyers
2. There is currently no shortage of properties to buy
3. There is a shortage of credit

Riccardo would point out that the providers of credit (the banks) will find that they can take an economic rent in the form of high interest rates. Mortgage rates will therefore remain high, and the link with BOE base rate will be weaker.

Banks will start to look like very good investments and sovereign wealth funds will pile in. The seeds of the next bubble are already sprouting...

Could something have been done by our Government to prevent the housing bubble?
Could they, for instance, have introduced rules to prevent 110% mortgages?Could they have required better backing than those complex international packages based on the U.S. housing market?

Leave aside, the fact that the Blair/Brown administration were ideologically opposed to curbing the wilder excesses of the market.

Abraham Lincoln wanted the state to be in charge of money supply and the banks to be licensed agencies. If that had been the chosen road, there would be control in the system and even better no poverty.

I wonder if this idea had anything to do with him getting assassinated.

#7 is correct,

The bankers have enslaved the 'democratic' word for their own amusement.

I wonder what their answer will be when we cannot trade for food as our currency is worthless.

What would you rather have, a billion barrels of oil with which you can heat your home, make plastics etc or a bucket full of pounds or dollars? I mean what can you actually do with these worthless notes?

We are ALL only 3 square meals away from a revolution!

One point: did I not hear the man from HBOS say at least 18 months or until the US housing market bottoms.

This seems to be being reported as 'back to normal in 18 months' with the implication that house prices will be back at bubble top level at that time. This is how the stories are reading anyway.

The 1930's (sorry 2007) problem may last a decade or more I see no reason to change my view of that horizon. Putting forward an 18 month time limit will seriously mislead buyers and sellers.

At the present rate of decline UK house prices may be down over 30 per cent from the bubble top by then and even if stability returns money supply will not instantly return to the insane levels of the past for three to five years minimum (if ever) so one guess would be that the crunch will see bottom at 50 per cent lower house prices in the UK.

yourfriendforlife says it plainly.

Poor lending decisions are the core root of these troubles. We can't run our lives without money. The banking system has a monopoly on using and handling our money and they have been irresponsible with it. Mr Hornby and other chief executives have presised over this lending frenzy and should be replaced with wiser people.

Banks are now extending their weekend hours; not to manage your or my money but to try to sell to us or lend us money while we shop.

As someone who knows nothing about economics but has always subscribed to the view that "economics is a delusion brought on by a surfeit of economists", can I ask some simple questions?

Has globalisation meant that more money (or the promise of money) has moved further and faster than before?

Has this amplified the peaks and troughs that would occur normally?

Why do I instinctively (and I don't trust instinct) feel that keeping money moving, is more important than the quantity of money that moves?

Just looking for enlightenment :o)

Mr Preston should really know better as these arguments put forward for the causes of the credit crunch are flawed and as a business editor he should know it.
The credit crunch was created by a a lending bubble where lenders recklessly borrowed money to people who were neither credit worthy or had the ability to repay unless house prices continued their unsustainable rises and they had never ending capital appreciation. All traditional due diligence was jettisoned as the herd mentality gripped financial institutions and more and more fuel was poured on the fire in the form of huge amounts of credit. There is only one way out of this crisis and it will be painful(sorry politicians) and that is for the people to pay off their debts and for house prices to fall to their trend level-no amount of meddling can change that. After that has happened lending will return to normal historic levels and not the speculative lending of recent years-anyone who understands economics knows that this was a bubble and it has well and truly burst.

Al last a chance to take a pop at Mr Peston who like the rest of all the so called experts knows nothing , they are like a bunch of sheep.

Trying to predict the economic up down turn is like trying to predict what a babies bottom is going to do next in other words its a guess.

So Mr HBOS boss is predicting now what the American housing market is going to do over the next 18 months yes 18 months nodody can predict the next 18 minutes but he can predict the American market for the next 18 months..

Let me tell him and Mr Peston I have a good laugh every day listening and watching these clowns make predictions.

BBC yesterday was banging on about the FTSE being down 121 with the Dow aso being down but the Dow finished the session up.

Oil, the sheep / experts were predicting only a few weeks ago oil in the short term at $200 a barrel some nutters were even saying $250 even $500 it was fashionable to say how high oil would go.
Oil is now at $107 and the sheep who predicted $200 and more are now predicting oil as low as $80 but certainly under $100.

Mr Peston you should think before you come out with these off the wall predictions as most of the UK population actually believe the rubbish the so called experts predict.

As my dear Mum or should I say Mom just to keep the Americans happy, THEY CANNOT PREDICT WHAT A BABIES BOTTOM IS GOING TO DO NEXT yet they can predict the future.

I welcome a response from Mr HBOS and Mr Peston.

ghotso wrote in reference to Western Governments.

Could they, for instance, have introduced rules to prevent 110% mortgages?Could they have required better backing than those complex international packages based on the U.S. housing market?

Only 110% ?? Surely you mean 100% or above since the 100% mortgage is based on the predicate of rising house prices.

Pehaps the current 90% lending ratio would have been better.

And then you have to ask why the Banks, the Investment Houses, the Pension funds, and even the municipal governments all allowed their sense of caution to go collectively AWOL. A great report on the current line of governmental enquiry into the various ratings agencies was in a local newspaper today. It made for fantastic reading. These financial gamblers all relied on the rating agencies to ascertain the risk of default on the investments. They then made no efforts to assess the risk themselves. A+ rating was good enough, despite the fact that the agencies were paid a flat rate for their assessments, and had an interest in seeing a favourable rating, because those paying the fees would return with more investment vehicles requiring rating.

Even when an A+ rated investment vehicle had reduced in value to only 15% of its original listed value, did the rating agencies notice, and then downgrade the rating below A+.

The obvious defence of these ratings agencies is that they are expressing thier opinions in the form of ratings and as this is a freedom of expression right, they are not culpable for their failure. It is how people interpreted this advise and their failure to seek other corroberating (SP?) advise which was the cause of the massive losses.

So the upshot conclusion from your interview Robert is that Andy Hornby and others in his elite position see only problems with the system, and not with themselves or thier conduct.
This is despite his clear failure to convince the very people who justify his position and remuneration (the shareholders) of the prospects for "their" company and the value in continuing to invest in it, he still believes he should continue in his post.

Clearly his judgement has not improved since these CDO's and CDS's were all the rage and he can learn no lessons.

Suppose its' always easier to just raise margins, rates, and fees to screw all of us over to fool those same shareholders he and his team are doing a good job.

This has been the plan of action here in Australia as all the banks have managed to maintain their profit lines, whilst keeping extremely stum about off balance sheet investments.

One thing i don't understand why is that what HBOS says makes the headlines and why is that BBC and other Media non stop promoting Doom and Gloom ?

as i mentioned before ; There is far too much SCAREMONGERING in the media which only serve to compound the further problems.

Where was Mr Peston and his so called financial experts and yes this planet has millions of experts from the far east throughout europe and the americas but not one not one single one predicted the pound to be at $1 77 today.

There were none who could even get near $1 77 yet these people are so called experts you would think of the millions of very highly paid experts one just one would have predicted $1 77.

They come on BBC, SKY, Bloomberg, CNBC like sheep and predict what the herd is predicting

Now we have the sheep effect creeping in with the so called experts predicting the pound to go lower.

I watch CNBC they say the market is going lower at the opening based on the futures very often it goes higher and vice versa the next day the so called experts are back tracking.

Could someone explain where this whole "Fraud" bit fits in? I'd say it's quite an accusation to be making, but people are dropping it in as though it's almost accepted as fact. Not being too clued in legally or financially all that I can assume you mean is one of the following:

1. Banks were committing fraud by lending money they didn't have - but then we all do that, we just believe we can acquire the money if we need to by tapping other sources of credit (though Northern rock couldn't).

2. Bankers were commiting fraud by deceiving people into investing in a situation that they knew was bad. However I can't really see the benefit to the Bankers here

3. Bankers were commiting fraud by knowingly investing other peoples money in bad deals in order to provide their own short term gain, then closing out their positions and allowing other peoples money to take the hit. However most of the Bankers are still there in the positions, and it's them that have taken the biggest hit.

4. You tell me?

I'm afraid I just don't see where people are pointing this accusation. My understanding of the general nature of fraud is that there must be some element of willful deceit, and it's this part I can't see.

Please do open my eyes here.

@ kubikubi

Sadly there hasn't been enough truth and it's only finally now coming out. Sadly too late.

If you understood how deep these problems run then I think you'd find that there's possibly a lot worse to be reported than has been so far.

Is it not the media's job to report what is happening and not try and sugar coat everything for fear of upsetting the masses?

Some three years ago a friend who worked in a bank told me that a cleaner was encouraged to enter on a self assesment form an income of thirty thousand pound, almost twice the amount of her true wage, to obtain a higher mortgage. Another friend had a call from Northern Rock one year after taking out a mortgage telling him that, because his house had increased in value thay would like to increase his borrowing. Have any of those who encouraged people to borrow more than they could afford suffered in any way now that the chickens have come home? I very much doubt it. None of them, from the salesmen on the front desk to the highly paid executives in the boardrooms, will have to repay a penny to relieve the plight of those now about to made homeless

The problem with Mr Peston and the media is people actually believe what he says much like American beleive what ever Oprah tells them.

Its like globalk warming in 100 years the sea lebvel will be higher maybe Mr Peston and Mr HBOS and the experts can predict that also that is if you first believe that man is the cause of global warming

I digress, as a point Palin and Mcain disagree on global warming and its causes.

If you tell me pertol, gas, eletricity water etc etc etc are going up then people use less.

Tell people house prices are falling " at a greater rate than ever " and buyers will wait until they think they can buy cheaper so the housing market grinds to a halt care of Mr Peston and his magic ball and experts.

Tell them food is getting dearer and they stop going to Sainsbury the go to Aldi and Lidl.

People are not stupid so if you them something as a so called expert most will belive you and act accordingly.

Look at that idiot Alistair Darling last weekend having to back track on his statement even before the ink had dried and he is running the asylum.

Darling said oil was at records highs yet it was over $40 cheaper than on July 16th, experts do me a favour.

DampFireFly,

The real fraud IMHO, is the creation of the bubble on puropose in the first place.

The banks (from the top down), then create panic and cause the price of the assets to fall drastically.

The effect of this is that Once the banks repossess (remember from the bottom layer bank to the top - As the loans are called in that order), all the money ends up back where it started but for one difference.

YOU have been paying for something for years that you no longer own, I believe this is called slavery?

Do a search on youtube for federal reserve, and watch parts 1 to 5 - Very enlightening ;-)

Hello.
Where is Mr Peston to defed jimself or is he to busy with his next expose or interview.

Look at he did with Northen Rock he started the run on the bank with his " exclusive " sources have told me rubbish.

Dampfirefly et al,

The Fraud, as Robert knows, is at HBOS and has been been known to them since March 2007 at least.

How big is what we have been trying to ascertain but the HBOS Board, as Robert knows, has seen fit to cover it up since before Northern Rock.

The losers are in their thousands and they are not bankers, those were pensioned off at the ripe old age of 51 in one instance.

The 'rogue banker' - well we are told he went to work for a "German Bank".

Let's all blame the customers and the world economy for this state of affairs.

However, which banker has lost his home?

In 1970, I bought a house for £3,150 and sold it 2 years later for £7,400. The value increased at 54% per annum.
I borrowed the £3,150 from a building society at 8.5%. The building society investor was probably getting about 6% before tax and perhaps 3.5% after tax. That means that I had probably used the savings of some retired person who had worked hard and saved all of his/her life for me to gain at 54% p.a.
If I was the only Clever Dick doing that then the economy would stand it but not if everyone is doing the same thing!
You don't have to be an economist to see that the source of the funding ( the retired saver) will run out of funds and be reduced to penury as inflation runs riot. The winners were buying villas in Spain and driving around in expensive cars.
The bubble created during the 1970's burst but the bankers did not learn the lesson.

Like you Gendad I have a friend who knows something of what goes on in banks.

I believe that bank staff at high street banks have huge pressure put on them to sell and something of what you learned from your friend can occur with staff who may act irresponsibly. That is a minor contribution to our current plight. Bank staff have to operate the policy of their bank. It is the policy makers at board level within these organisations that drive a lending strategy that is foolhardy. Many people who can't pay their loans back are people who have been allowed to self certify their incomes. In other words they write down what their income is and sign it and the bank will simply believe you (on your head be it it would seem). With lending strategies that have seen lending at 6 times income on an interest only basis and, until recently, fat returns on property investment, the temptations to go for what banks offer has been too strong for some.

Why are you putting so much credence on the words of this person?

He's chanting the latest piece of received wisdom some over-educated staffer wrote for him in last month's board report. Last year things were going great....now it's a disaster...Big revelation!

He and his ilk didn't see this coming, so why believe their progostications now? You should not report his words as serving anything but the shattered reputation of the pointless outfit he works for.

The nub of his message seems to be that we will forget this debacle in time and things will go back to the way they were with the banks rebuilding again a crazy edifice based on securitizing the wages of the poorly paid to keep rooves over their heads.

We need to address the fundamental problems we have with the structure and organisation of major entities in our economy. That's what's gone wrong, that's the real story.

So Mr HBOS being interviewed only as the head of HBOS in his interview with the head of the BBC financil department to one and only Mr Peston expresses " his personal opinion " how can he express his personal opinion if being interwied as the head of HBOS.

I hope HBOS shares reactive negativly on Monday to Mr HBOS comments and the share holders ask for his resignation.

You have no right to express your personal opinion then have th media single out these comments.

# 17 You're right. Fraud is a serious accusation but I don't think we can continue to dress it up as 'loose lending practice' or 'bad risk management'.

The fraud begins with the Estate Agent who gets a couple with NO INCOME to sign a deal for a mortgage that they cannot afford, with initial payments that are tiny for the first three months. The agent knows that these payments will be increased 10x in a few months but does not alert them to the fact.

The agent then sells this mortgage onto someone knowing that this mortgage is a dud. (But he now has his fees.)

This mortgage is packaged together perhaps with other morgages and despite having a very poor credit rating the overall package is given an unbelieveable AAA rating and a promise of a double digit investment return! Investors are going nuts for this! (Now the rating agency has its fees too so why should it bother that it's given a highly, highly optimistic rating?)

Then there was outright criminality where people took loans for houses that did not exist! (Under false identities and possibly aided and abetted by others.)

Now, you could say people believed house prices would always rise so there was no danger of large losses, or you could say that people didn't understand their new products so it was hard to discern what would happen.

But I just don't believe people are that stupid and it was more obvious than that. I think a lot of benign terms are being used to cover-up some very unbenign deeds, that have destroyed some people's lives.

Andy Hornby is reputed to be a "retailer by background", but he's only 41. Even Sir Fred Goodwin has more background than young Andy! So we know that bank owners value youthful optimism above age and experience, and we know for sure what happens when you have no age or experience – we all go through it.

We know why banks trust adolescents with billions of pounds – greed. The question now is how to confine (to the greatest extent possible) the pain to the greediest people, and how to spare the pain for perfect people like you and me! For the future, the antidote for greed is fear. We won't go far wrong if we keep "moral hazard" uppermost in our minds.

Couple of point regarding HBOS.

1 When trying to convince himself that Northern Rock's problems were down to their management as opposed to the fact that he caused a bank run - Robert Peston referred to banks such as HBOS as "well run banks".

2 Shorters were vilified for causing a drop in HBOS share price when in fact all they did was highlighted the information regarding the exposure of HBOS wholesale funding (£207 billion) that was already published in the accounts.

In my opinion Northern Rock's fall was down to one main reason and that was the run started by Robert Peston.

# 24 - Angrytaffy rather points out the obvious doesn't it?

The house he bought in 1970 for £3150 sold in '72 for £7400.

What price today for this property?

As a consequence, what price in 5 years time, assuming we are all still here?

This is the basis of the high economics we all do not understand and, without us fueling this economy, I doubt its future.

You can fool all the people some of the time...

How much longer before all the people realise?

18 months more doesn't sound at all unrealistic. As I wrote here back in February, the lesson of the Enron collapse is that the dominos often fall in slow motion. That crisis - in the Energy and Project Finance sectors - took two years to work through the system.

HAVE YOUR MORTGAGE WRITTEN OFF, AND INSIST THAT YOUR BANK OR BUILDING SOCIETY, PASS ON TO YOU, THE CUT IN INTEREST RATE BENEFIT, INCLUDING BACK DATED BENEFIT, FROM THE BANK OF ENGLAND, TO YOU.

AND WHY NOT?

After all, Bankers’ were gambling with mortgage-backed-securities using them as collateral in unregulated volatile markets and they lost them causing a crisis – the effects for you as a homeowner and taxpayer are devastating.

At no time did homeowners’ and taxpayers’ give authority to any bank, building society, institution or any government to create, or gamble with instruments used as collateral putting their homes at risk. At no time did your lender in principle and in law have the authority of the regulators’, or authority of law.

Why should you pay for the greed and ruthless behaviour, most foul, of the super-rich bankers’, who caused the credit crunch and contributed to it? – Not only is it the biggest modern-day bank robbery but the biggest robbery of the economy leaving it vandalised. It was all avoidable. It didn’t have to happen.

At no time has the taxpayer been responsible for the conduct and dealings of private investors or for loses incurred by private transactions of banks, mortgage lenders or any financial institution.

Many homeowners struggle for years to get on – and stay on – the property ladder. Why should they pay for bank loses by way of: Increased interest rates; negative equity; repossessions - made homeless with predatory bailiffs plundering their property?

Why should they pay with: financial hardship; not able to put food on the table; mental stress; and devastating effects of it all for the rest of their lives and their children’s lives - whilst the bankers’ are having a party?

The unscrupulous bankers’ who caused the credit crunch left the banks’ which employed them with debts to the tune of nine hundred billion pounds, the effects of which the banks’ have stopped lending to customers’ and to each other. This has caused a liquidity problem resulting in the drop in house prices and increased interest rates, the effect of which is a dramatic increase in negative equity and repossessions. The effects upon the economy are so enormous - many companies are cutting back production. It is affecting all kind of industries. Many people are losing their jobs. Everyone in some way or another is affected. Why! All because of bankers’ greed and gambling.

Why should the super-rich bankers get away with their staggering profits, big bonuses, and asset stripping, scot-free, at the expense of homeowners’ losing their home, the enormous costs to the taxpayer, and the damage they have caused to our economy leaving it vandalized?

The Bank of England, (BOE) used Taxpayers’ money to replenish the losses’ of financial institutions such as banks and mortgage lenders, loaned at a penalty interest rate. The BOE also cut interest rates to stimulate the economy – but the Banks’ have refused to pass on this benefit to their mortgagor-customers. Instead, they use the benefit to offset and reduce the penalty interest rate – all at the expense of the taxpayer and benefit relief meant for homeowners.

The banks’ enormous exposure has demonstrated how important homeowners’ collateral was for the stability and stimulation of the economy, that is - until they gambled it away. Oh! By the way - not at their own risk - but at the risk of your homes repossessed.

Homeowners and the taxpayer, through no fault of their own, are now liable for hundreds of billions of pounds.

Why involve the taxpayer? This involvement of the taxpayer has set a dangerous precedence, that if allowed to continue, it would be another form of stealth tax, wilfully calculated – most foul.

Gordon Brown and Alistair Darling in their panic responded to the crisis by introducing, what they called – emergency covert legislation to prevent a failing bank from going bust. But there always has been legislation to prevent such occurrence in the first place. So what is the real purpose behind Brown and Darling’s covert legislation?

Northern Rock has been such an embarrassment for the Government, that it can’t afford any further revelations of failing banks’ and the full extent of their liability be known.

The fact that Gordon Brown and Alistair Darling, by their own admission, that their emergency legislation is covert, shows the purpose of their intent, to keep secret the truth, of the extent and severity of liability to be placed upon homeowners and the taxpayer.

When Northern Rock failed, the media, to some extent, exposed, in simple terms, how and why the bank had failed and what had been going on. It soon became apparent that other banks had similar problems that were ubiquitous through out the whole banking system. However, the cause to justify their conduct, in principle and of law is “Unintelligible”.

No matter how desirable Brown and Darling’s legislation to nationalize Northern Rock may be, they have set a dangerous precedent, which is in fact, unlawful. If they think by making it a temporary measure will somehow give validity to it, they are wrong.

There is no authority by which Gordon Brown and Alistair Darling or any Government, can initiate such legislation - the effect of which, transfers the risk-liability from the private investor unto the taxpayer and homeowner-mortgagor that ultimately ousts the authority of the Court in the UK, and the same checks and balances apply in the USA. Any attempt to oust the authority of the Court, and in such a manner, is contempt and a criminal offence.

LEGAL AUTHORITY TO HAVE THE PERPETRATORS OF THE CREDIT CRUNCH BROUGHT TO JUSTICE AND TO CLAW BACK THEIR ILL-GOTTEN GAINS.

In relation to the credit crunch - all the rhetoric we have heard from the Chief Executives’ of: the Financial Services Authority (FSA), the Treasury (HMT), the Chief Executive of the British Bankers’ Association before the House of Commons and from the speeches’ of Alistair Darling and Mervyn King, the Governor of the Bank of England (BOE) at the Manson House, is all geared to: Who is to pay for this mess after the event, how to prevent a reoccurrence of the behaviour that caused the credit crunch.

But this crisis was foreseen, the FSA, HMT and BOE (the Tripartite Authorities) did have “Notice.” Had the Tripartite Authorities exercised the existing safeguards or all the measures they are now proposing before the event, the banks’ wouldn’t now be calculating their lose exposure to the markets in the USA.

Is it amazing, that the biggest modern-day bank robbery to the tune of nine hundred billion pounds and its effects on the stability of the economy has taken place on Gordon Brown’s watch? But why have Gordon Brown, Alistair Darling and the so-called authorities taken no action against the perpetrators of this enormous crime - the result and consequence of which – is the staggering costs, and incidental costs in hundreds of billions of pounds, the damage - a form of vandalism upon homeowners, the taxpayer and our economy? It would seem from the deafening silence of: the Treasury, the Bank of England, the Financial Services Authority, the British Bankers’ Association and the Government, that they have no plans to recover what was stolen, or to bring the perpetrators to justice. They are acting as if nothing had happened - hoping it will all blow-over.

What is needed is a public inquiry to look into the way the perpetrators of this enormous crime have breached the law. How they plotted a course to by-pass the protective security alarm system of the law. How, they spun a complex web to protect themselves from prosecution and the processes that assisted them in the execution of this crime. The FBI in the USA is in the process of bringing criminal proceedings against bankers in the USA but nothing has been done to prosecute the bankers in Britain who knew what was going on.

Den 6 September 2008
BELFAST.

People may be not be seeing the forest for the trees...houses and their values.

Yes the banks have been absurd in their lending practices and have made a mockery of free enterprise and capitalism. However, property speculation has been the root cause of the problem. Banks have just been a means to an end. Sadly, property speculation may be needed to solve the problem as well.

Houses have been used as investment vehicles or for wealth creation rather than as a place to live. If governments had put restrictions on the amount of properties that could be bought without tax penalties and had restricted negative gearing, a large part of the market would have been removed thereby reducing demand. Many years ago when I lived in NZ there were restrictions on buying and selling a house within a certain time frame without incurring tax penalties. This included your primary residence. I do not know if a similar law had been in force in UK or elsewhere but in hindsight it seems it was a good restriction, which should have been retained.

As to the current crisis, when the property investors who own 30, 50, 100 or 700 houses (yes, there are some with that many!) decide that the time is right to snap up the bargains and add to their portfolios, then the market will stabilise. Many of these can afford a slight loss initially while properties bottom out as they are looking longer term for a gain.

Sadly when this happens the first time buyers, and others that struggled to get on the property ladder before, will once again find themselves stretched to the limit. The difference should be that the banks will not be as stupid with their lending practices.

I just cannot understand what it is that leads Americans and British to believe that they can continue to live a life on debt. If you believe that in 18 months time there will be another round of infinite supply of unearned money to fund fantasy house prices and spending sprees you're in for a reality check.

@GrouchoMarxist1

Yes Bravo !! .. finally somebody who also understands!

We need to end the Keynesian economic model, and look to the Austrian school.

We *can* do something about the mess, but it will take a brave politician to state that the current monetary system simply does not work.

https://www.silverbearcafe.com/private/moneyasdebt.html

Money is debt.. and unregulated fractional reserve banking simply amounts to legalised counterfeiting!

We need to go back to real money.
https://mises.org/about.aspx

More people should have listened to Ron Paul in the US - but the media shut him out. He has all the answers.

https://www.campaignforliberty.com/

We should be ending the Federal Reserve system, and ending the ECB and their fiat money systems, they do not work and are not sustainable.

Amusing reading and more, from my favourite columnist

Enjoy!

Isnt it wierd and warped that all Western economies depend on the price of houses?
Not manufacturing, not exports, not science expertise, not industrial output...just houses.
Something is very wrong.

the people responsible for these crimes must be put on trial and theire ill gotten seized by the courts.it is what natural justice demands if not, we will never erase this endemic curruption which has become a dangerous cancer at the heart of our society..

sd0001 is on the right lines. Fiscal policy, in this case taxation, is where the solution lies. Buy to let has been the main engine behind this stupid bubble. Houses have become an attractive means of transferring other people's wages into your pocket with minimal work. Getting a BTL set up is effectively buying a licence that entitles you to 20% of another worker's income. And you can buy the licence using leverage, and make it pay for itself, so it literally is money for nothing. This is essentially a loophole that undermines the way that capitalist economies are supposed to work. The idea is that you do useful work for reward. BTL is easy parasitism. It's not that being a landlord is something we want to stamp out; it's that its rewards in the UK are much too high, especially when balanced against its risks and the work involved. So houses are effectively bid up as "money for nothing licences". One of my friends has 60 BTL property and tells me quite openly, laughing, that he can't believe the government allows him to make money for doing almost nothing other than arranging a loan.
The answer is to tax rental income much more heavily (it's "unearned income) and/or levy higher property taxes, and reduce income taxes. It should be possible to make SOME money from being a landlord, but not LOADS of money for doing so little. It should be possible to become a landlord only by making subsidizing payments on top of the rental income to cover the mortgage, or by starting off with a much lower loan to value on the property, i.e. putting down a substantial deposit, which would stop rapid land-grabs whereby landlords can acquire dozens of properties every year.
We also need to restore tenants' tenure rights to how they were before the mid 90s. Landlords hold the whip hand and their risk levels are minimal, making parasitic landlordism even more attractive.
If you get the tax regime right, then no matter how crazy lending is, there just won't be the incentive to go out and buy 700 properties (which is NOT a good outcome for a country where land is at a premium).
The country cannot become or stay wealthy when a huge chunk of its population subsist off the incomes of people doing genuine work. That would be like having 30% of the country on the dole. This isn't about envying the rich or wanting socialism; it's about making the capitalist system work. Currently it's broken.

"Money is debt.. and unregulated fractional reserve banking simply amounts to legalised counterfeiting!"

Yes, there is some validity to this claim. Anyone who doubts it should do a google search for "cantillon effects".

GrouchoMarxist1 that is a fantastic summary.

Aren't these the same guys who were assuring us that house prices will initially stay flat in 2008, six months later- a drop in low single digits, then somehow came up with 9% just to avoid the double digits and now it has dawned on them they cannot stop the juggernaut. The classic 'this time it is different'.

What amazes me is, all the economic journos seem to be comparing 1993 to the current situation. The reality is 2010 spring - 2011 winter is probably going to worst point of this cycle and then you'll be able to make a call which one was worse. Everybody seems to be saying employment is high but nobody seems to mention 'for now'. It is the key to every statement that seems to be missing, as if the past is behind us. Delusion is the only way to describe it.

Yes this time 'it is different' because:
1. At least in our lifetime you wont have another emergence of China, India and other key developing countries. On the plus side we saw our cost of manufactured goods and services fall but on the down side the related demand for commodities, food and oil we see today
2. Levels of personal debt that will take a decade to pay back. The highest in the developed world.
3. A trade deficit that makes us import more than we export, add to that a falling currency and you are looking at persistant high inflation.
4. An inflation index that does not reflect reality and the main cause of the cheap money.
5. And finally, you cannot survive on Services alone. That has made this country a one trick pony. Once the spending stopped, it was the spanner in the works and bang everything comes to a grinding halt.

I think we need to think of another model that doesn't look at perpetual growth but sustainable growth. The other problem is this government's 'tax and spend' policy has also breached it's expiry date. Frankly speaking the next decade is going to be tough and there are no two ways about it. There aren't any easy options left.

Presumably even a banker does not really believe that recessions clear up like the 'flu and then everything is instantly back as it once was. Can't wait for 6th March 2010 when it will all be OK again!

UK consumer debt levels were unsustainable (and obviously dangerous) as far back as the late 90s. The demutualisations just made the situation worse, because they ensured that the prudence of the traditional building societies would be supplemented by the recklessness of demutualised banks chasing growth at any price. This is not hindsight, it was blindingly obvious as it was happening.

The banks have demonstrated that they are incapable of prudent lending (the only reason that they have stopped lending now is because the source of funds has run out). Borrowers have demonstrated that when tempted by a house or car or whatever, they are incapable of moderating their borrowing to an affordable level.

This time round, there have to be some special actions, because never again can we allow unrestricted credit to fuel artificial economic growth.

The French have a law which supposedly makes it unlawful for banks to make loans where they result in the borrower's total loan commitments exceeding 33% of gross monthly income.

I think that it is about time we had something similar in the UK. (I already hear the cries of "you can't stop people borrowing freely", you can't prevent free operation of the market" etc).

In fact, that French 33% formula roughly equates to the old 3x income rule which the self-regulating (and prudent) building societies used to apply.

Clearly, although France has not been immune to the credit crunch, it is not now enduring the extreme changes that are happening in the UK, and it's quite possible that this is because French property prices have not been artificially stoked-up like they have been here. The lower prices have contributed to rents in France remaining at more affordable levels too, so people save (remember that word?) until they are in a position to put down a deposit to purchase a reasonably-priced property with a loan which is affordable. The banks have to be more careful when they vet mortgage applications, and for borrowers getting a loan is a big, serious deal (not as in the UK where it's been a minute of form-filling by a commission-driven 'advisor' at the front desk of the bank).

Obviously no government would introduce such a scheme until property prices fall by a further 20% or so, or they would be accused of precipitating a fall as a result of its introduction. But once done, it would ensure that levels of borrowing bear some relation to incomes and affordability, and that can only be a positive step.

Sadly, I don't think that any government will ever introduce such a scheme, because the politicians, the banks, (and too many commentators, too) all seem to think that unsustainable high levels of growth are a "good thing". The problem is that it is always the ordinary person who naively accepts that assertion, and then pays the price.

(A prime cause of the credit crunch, as manifested in the UK, was that - arguably - they became too dependent on selling their mortgages to global investors in the form of mortgage-backed securities: by 2006, such funding provided two-thirds of net new mortgage lending in the UK)


Dear Mr Robert Peston,

The very many intelligent comments on this thread point out a developing reality. That economics is no longer the preserve of warlocks and crystal-ball gazers. You should note from the comments that your interview of Andy Horby was very obviously lame, nearly sycophantic and added nothing to the sum of human knowledge. Please try to do better than this, or let somebody else have a go.

Having taken over from Evan Davies as the primary interrogator of our Economic Management, at the very least we expect you to be challenging the economists and business managers whose job it is to regulate the economy for national security reasons, at the very least, and ideally, for altruistic planet-wide reasons.

The inadequacy of economic management of an economic system that allowed huge global credit inflows to be only regulated by "market forces" is obvious. It has taken 5 years for markets to notice that the housing asset bubbles did not justify high foreign currency exchange rates. This despite the fact that enhanced futures and derivative instruments were supposed to inject better controls and damping of market fluctuations.

What sort of economic system modelling is this supposed to constitute, and what sort of academic economists can possibly ever suggest that economics has the right to be a science, or even have the respect of a Nobel Prize?

In Britain, the fact that the monetarists did not even consider the inflationary effect of credit imported from overseas makes them worthy of derision even from theologists.

Economics needs to stand up and prove its worth, if there is any, or stop masquerading behind showmen and dunces.

Oh my goodness, what a load of nonsense is being spoken here by the amateur economists who think they know best! Here I go, offending just about every contributor:

1) The wonderful idea in post 1 that interest means that it is in fact impossible for all debts to be paid to the bank! It's hard to know where to begin with this one, it's pure tosh, though lauded by the ignoramus Peston knockers. In this universe, there can never be inflation as there is a strictly limited money supply. In fact, paying interest would lead to deflation, and after a very short while the banks would own everything in the world!

2) The perpetuation of the myth that Robert is somehow responsible for the collapse of NR. The idea that the plebs cannot be trusted with truthful information is utterly insulting - the run was caused by a genuine concern for the safety of deposits. Can anyone seriously think that those deposits would have been safe if no run had occurred? If Robert had sat on this story, he could have been responsible for the ruin of millions of people. This suggestion is not surprising from the self-anointed expert contributors to this blog, however, as accurate information forms no part of their own views, so the idea that the participators in the run acted rationally based upon information is alien to them.

3) The idea that the British economy is a charade, as it is too service-oriented. This one really makes me laugh, as if performing services is not real work! Every worker in the world performs services. These services produce real economic wealth, whether the result is a service rendered or a good produced is irrelevant. I love the idea that we are all poor and have no means to enrich ourselves, but just haven't noticed yet, and one day our stuff will all disappear in a puff of logic!

It was i that caused the credit crunch and i dont wish anyone else to take the credit for it .

10 years ago i went to see the halifax to get a mortgage using an inheritance as a deposit , i was also no income no job ,but optimistic about proprty development ,when refused a loan ,i pointed out that the simple action of giving mortgages to anyone would push prices automaticaly upwards through the creation of extra demand thus ensuring that the market became more solvent .

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

I have to say I was underwhelmed by Paul and his mate in the TV interview. This was more like Jonathon Ross than a business interview.

it appears that by stating what we already knew - that our borrowed money was coming from abroad and isn't anymore, we should somehow feel more content with the notion of the crunch?

It is strange that there is never any mention of the traditional method of raising credit - that used by our former "building societies" - the concept of savings.

If we look at the savings rates offered today and compare to BoE base, RPI etc, the rates on offer are appaulling and mostly below RPI. In other words our finanaical guardians are not bothered about the availability of cash or the long term ability of UK plc to fund its own housing needs. This makes blaming problems on the "crunch" a complete nonsense.

No serious interview with a CEO of a former building society should try to discuss its financial stabiliy and direction without reference to the strength of the other side of the mortgage balance sheet - savings.

I think the man from HBOS hasn't got a clue. There is more prospect of the Second Coming than a restoration of the international mortgage global securities market in the next eighteen months.

The one thing that is starting to scare me now is the consistent ignorance of supposed insiders to what is going on in the real economy. We are in recession and it is going to be a bad one. The last thing anyone wants now is more debt. Even Gordon Brown seems to want to be made virtuous, perhaps not yet, but eventually.

Mr. Hornby reminds me of the `financial adviser' in one of his branches who, in 2003, thought me a strange and silly man for repaying the balance of my mortgage debt. He seemed unable to absorb the view that to pay higher rate income tax on savings which I could use to clear my debts was plain silly. He told me that most people were borrowing more against their mortgages and made it clear to me that I was the odd man out. Who is the odd man out now, methinks?

The world has changed in the last year. The eventual losers are going to be those that refuse to change with it.

# Porter Rockwell

1) I don't think you get my point. There is of course inflation as the money supply expands, as credit enters the market. This can be expanded as banks continue to lend AND INCREASE THEIR RATIOS AS THEY HAVE BEEN DOING. (Remember the ratio of capital deposits to lending has only recently been tightened in Europe and I don't know if there is a legal ratio in the US.) Ergo more money chasing the goods. Ergo inflation. There's so much money flying around that it's easy to grab another 10 and lend a hundred. A limited money supply is the last thing there is. Plus look at some of the 'financial vehicles' used and counted as assets to enable more lending!

YES! You're right paying interest will lead to deflation. (Ask Japan they are 18 years into deflation.) Now, I know you're going to say what about the record food prices etc, but that is a very big spike, and we are having the extraordinary circumstances of an extra billion temporarily wealthy people wanting to sit at the table. However, as less money goes around we will be headed for deflation, and job losses and companies going bust. The banks might not own everything in a short period of time - it is a long process - but the banks that survive will have the whiphand over those in debt. Remember the farmers of the Great Depression era?

2) You're the only one talking about Northern Rock! But I agree. Robert Peston is a hero for that and an excellent journalist. As the main economic voice in the media for the people he has to follow the mainstream line, anything else is just too frightening.

3) The charade is that the economy is kept going on borrowing. We've avoided the shrinkage that Adam Smith himself would have believed was necessary to get competitive again by borrowing. You're right. If you sell a service or a pair of shoes, that's not the important thing. But you can't live with a smaller income than spendings forever in a competitive environment. Ask Mr. Micawber where that leads! I don't think anyone's arguing differently.

Good grief.

Based on the above posts I think I can work out how many actually understand mathematics, risk, and the economics of banking.

I am happy to admit that I don't fully understand it. But I am prepared to think it through logically.

Perhaps most of these bloggers would also understand particle physics having read the reports on the latest cern machine too?

Yes, on the margin, I am sure there has been imprudent lending. And it would be expected that imprudent loans have a higher probablity of defaulting. But reading some of the above I am sure the posters would always be able (with 20:20 hindsight) to pick the one share on the stock market that was a sure winner.

I am sure too that it is always the other persons fault when things go wrong. Er, who signed the loan documents? Do you believe everything you read, and don't bother to think it through?

When I did my maths at school - long ago - I was taught about loans, and risk.

Many posters here really ought to read some old text books.

Think about it people and wake up. I do not have the highest regard for bankers, having been one myself. The present crisis is "bank made" on purpose. It is beyond credibility that we have a collection of hundreds of "top" people who couldn't figure out that property is not a continually rising asset.

Everything stemmed from the above-value of the paper, foreclosures, contraction of credit etc. etc. Now tell me if it was orchestrated?

Because that truly is the bottom line. We can talk about banking reform, abolishment of the FED, BOE etc., which I concur with and the above is the prime example of what you get with the current system.

Blogpolice
I see your point but what you need to understand is this, and it really is simple.

1 Money is "created" as debt. That is indisputable fact.

2 Only the principal (not the interest) is created.

Given 2 it is impossible for the whole principal and interest to be repaid. How could it?. Somebody must be "short" of the money required to pay the interest as it is not in the system to begin with. Therefore you have a default or, at best, the interest is paid out of "new" money. BUT at the end of the day there MUST be a shortage at some point. Just plain maths.

kinglofthouse.

Can't agree with this one I'm afraid.

As you suggest, I'll show why in "plain maths" and in a simple economy of A and B who are the only actors involved.

In the first "period" of their new "economy":
A earns £100
B earns nothing

So there are £100 worth of goods and services available in their little economy (all produced by A).

A lends B £50 in return for an interest payment of £5

B spends £45 on goods and gives £5 to A for his loan interest

A spends his remaining £50 plus his £5 of interest on £55 worth of goods

Total production in the economy £100 total spending £100

In the second "period":
A earns nothing
B earns £100 (there are thus £100 of goods and services available)

B repays his £50 debt to A and spends his remaining £50 on goods and services

A takes this repayment of his £50 loan from B and spends it all on goods and services

Total production in the economy £100 total spending £100.

In both years the "economy" has produced £100 of goods and the earnings and expenditure of both A and B taken together has been £100. Neither party has gone bust nor has there been an inevitable monetary shortage or surplus in relation to goods available for consumption in the economy.

A comes out £5 ahead in overall consumption as a reward for deferring his consumption and taking the risk of lending to B in the first period. That's capitalism!

54. At 5:06pm on 07 Sep 2008, RaulMagister wrote:

"Total production in the economy £100 total spending £100."

Sorry, you fail the real world test.

In the real world, the interest is a *percentage* (making it an exponential function), not an absolute figure (which would be a linear function) ...

The interest might be 10%, per unit time (a year for example), not £5, and B didn't make his second year payment of 10%... tut tut. Bad boy has a bad credit rating now causing economic collapse etc.

Away you go and work it out again... You don't happen to work for a bank do you? It would explain *lots*.

My question is, why would we lsiten to anyone in the banking industry or our politicians or central bankers.

None of them called the credit crunch before it happened so how can it be that they are all suddenly experts? I think financial commentators should be more responsible also in their reporting.

true liberal

I'm not a banker.

And the rate of interest is irrelevant to the argument. It is perfectly possible to denominate an interest payment in monetary terms as I have done. A fixed rate of interest effectively does just that.

Also B doesn't have to pay any interest in period 2 since he has paid the whole amount in period 1 and clears his loan as agreed in period 2.

So no recalculation required.

HBOS view is that wholesale lending will not return until US housing market is sorted. This implies that lending to a bank is into a pot which the banks can use for any purpose. I this true or can wholesale loans be tied to specific purposes? Either the wholsale lending market is very unsophisticated or HBOS has not thought this through.

"And the rate of interest is irrelevant to the argument. It is perfectly possible to denominate an interest payment in monetary terms as I have done. A fixed rate of interest effectively does just that."

Sorry, no. Simply not reality.

Interest is paid as a percentage per unit time. It is *never* denominated as a fixed sum for very good reason.

e.g.

A=0
B=0
Bank=0


100 cash created by the mint. Earned by A. A puts 100 into bank.


A=100
B=0
Bank=100 debt to A


B borrows 90 from bank at 10%. 10% reserve.


A=100
B=90 + 90 debt
Bank=100 debt to A, 90 loan


over the year.


A sells B 50 goods.
The bank charges 10% interest => 99
B pays 40 on loan.


A=150
B=0 + 59 debt
Bank=100 debt to A, 59 loan


Over the next year.


B sells A 50 goods.
The bank charges 10% interest. => 66
B pays 50 on loan.


A=100
B=0 + 16 debt
Bank=100 debt to A, 16 loan still to pay

Back where we started, but 16 worth of debt has been created regardless of the economy, payable to the bank and reducing the economy to 84% of it's previous size.

This is the deflationary phase of the boom/bust cycle which credit causes. The inflationary phase, the "good" times are during the first year when the bank is expanding the money supply, A (apparently) has 150 and B has 40. I have discounted the bank interest payments to A for simplicity.

If we keep running the cycle, the debts rapidly surpass all of the initial physical cash and the only way to keep the system running is to continually create ever larger loans. That is where we stand today, we are all slaves to the banks and have been for over 300 years.

That's Fractional Reserve Banking!

Andy Hornby "doeth protest too much", it was that naughty American "credit crunch" that did for us "guv".

The HBOS credit conduit Grampian is being run down, however, the so-called Alt-A element of US mortgage debt is still a danger. A lot of the wounds inflict on HBOS are self-inflicted, yet in common with all UK bank executives Hornby is sitting tight deflecting the blame in all direction.

Andy Hornby's statement that until the beginning of the credit crunch the UK banks raised some two thirds of their funding from overseas financial markets and with the bulk of this money (possibly as much as fifty percent) coming from US must be of grave concern to our government about the future of the UK and for UK citizens it looks very worrying indeed.

To state the blindingly obvious that is a lot of dependency on financial markets that have been totally discredited because the people heading up the large financial investment bank's failed to exersize sound fimancial governance.

At best these people stand accused of gross incompetence and at worst they have either been in perpetual state of denial or living a lie for the past decade or more. It also raises questions about the competence of the auditing company's personnel and the systems and procedures they adopted.

The root cause of the problem seems to lie in the fact that many of the people heading up our large banks and other large organisations have lots of knowledge but little understanding of what it actually takes to properly grow a business that makes modest profits year after year after year.

Having spent more than thirty years as a works manager working for several blue chip (manufacturing) company's I was always at a loss to fathom out how, for more than a decade, these banks managed to dramatically increase their turnover and make the rediculously high profits they were declaring year after year after, even through aquistions. We all now know that the figures they were declaring were a figment of their imagination and were distored to boost their earnings.

Even though the credit crunch has confirmed what I and many others like me thought was going on, I don't feel any better for it because I expect the next five to seven years are going to be painful for all of us.

The credit crunch won't end on any given date. It will peter out over time.

Lending won't just switch back on. It will come back so gradually you won't even notice how good things are until it all goes pear shaped again.

The point which many seem to miss here is we are in an economic cycle - nobody was asking when we were in the upswing if it would suddenly stop and go bad, however now we seem surprised that we cannot just 'switch off' the problems and start spending beyond our means again.

As was said on newsnight last evening, the problem is high levels of personal debt and the re-assessment of risks in lending too much to easily. This is an adjustment of the market so if we pump money in people will just take on more debt compounding the issue. In other words it wil be a short term fix then we end up even worse than when we started.

As I write the FTSE 100 is down a little so that big USA boost only lasted for a day... it has to work through and thats the 18 months.

The credit crunch will last as long as CEO's are left to hold up banks on their own

And as long as ministers paper over the quacks within the system with a view to joining them later

Mortgages are given out on the same basis as a smorgasborg

According to Tony Benn, the BBC is controlled by the government, try and prove you are not by veiwing the film

ZEITGEIST

here is the link to it

https://video.google.com/videoplay?docid=-1817848131611744924

and lets see some comment about it.

I don't know on whose BBC site I read of the "Money as Debt" video.
I send them my sincere thanks. What an eye opener.
The video is 47 minutes long, Google it, watch it,
and learn mind boggling facts that beggar
belief and will change your perception of the Banking system for ever. At last I begin to understand many hitherto puzzling aspects
of Banking behaviour .

Thankyou