Moving in the right direction

Of course the chart (exhibit 2.7) fails to show the prevalence of multiple factors within a loan.

It is however notable that only 12.3% have a verified income less than 3.5 times the loan value.

The reduction in LTV can probably be explained by replacement mortgages or indeed people moving up the housing ladder and having profits from earlier properties to provide a higher proportion of the value as a deposit.


Regulation always tends to be something of a blunt instrument and to just encourage interested parties to find a way of working around it.
Ensuring the majority of subsequent risk is transferred on to institutions and individuals who may gain in the short term from reckless behaviour might serve to further disincentivise such behaviour. Forcing them to take out insurance on all "risky" activities might also have advantages.

After nearly 2 years of recession the powers that be are still trying to perpetuate the myth that "irresponsible borrowers" were to blame. They would have you believe that the whole economy was wrecked because Dave and Tracy defaulted on the 125% mortgage they had on a 2-bed flat in Newcastle. When in fact it was the powers that be themselves that caused the damage. There weren't enough "sub-primers" to trigger this lot - and what they conveniently forget to tell you is that after repossessions their losses were minimal anyway. So these "regulations" are just part of the smokescreen. Caledonian Comment

Yeah - well done Government - this is like being back in 1990 when the blame was squarely on the wage multiplier.

This surely does 2 things.

1) Confirms that the over-extension of lending is inevitable (for closing the wage multiplier was circumvented by the self-declaration and other methods) - YOU CANNOT STOP IT WITH REGULATION! (and I haven't even talked about lobbying Government to get rid of 'restrictive rules'

2) Confirms Gordon Brown et all WERE LYING when they blamed this crisis on a US led sub-prime collapse (for if we had done nothing wrong - why are we now imposing rules like the ones proposed).

It's time Journalists did their job and remembered what was said by lying politicians in the past to protect themselves.

I would also add that after listening to Hector (square head) Sants this morning on Radio 4 - he clearly said:
"This is the right time to be implementing these rules - rather than during the next boom"

...a clear indication that boom and bust is inherent to the system of Capitalism from the man who makes up the rules!

Excellent article, shame about the graph !! This is what is know in the trade as a "ego massage", where the title is in large type occupying a third of the "page" whilst the rest of the graph are barely legible !!

"It is quite true that this step could end up making it harder for some self-employed people and others with irregular incomes to get a mortgage."

In the days of yore, one method is to use the *declared income to HM Vampires, oops sorry, I mean most honoured Inspectors of Taxes !! This reasoning was based on the fact that no sane person will declare *more* income than is absolutely necessary to the taxmen !! Therefore, calculations based on such an income will err on the side of caution !!

"Precisely for that reason, I suspect the FSA is right to shy away from simple limits on loan-to-value ratios or loan-to-income ratios."

LTV and LTI worked quite well when I got my mortgage. The fact that I ignored them and paid "over the odds", in order to reduce the capital sum and, hence, the repayment period and the interest chargeable, is neither here nor there !!

"No other country that we assessed for comparative purposes featured a similarly significant NIV (non-income verified) market segment, with the exception of the USA and Ireland, both of which have experienced a boom in mortgage credit and house prices followed by a severe reduction in both."

In other words, except for the Canuckistanis who are generally more resistant to such silliness, the disease spread to both sides of the Pond !! Still, it got stopped by the Ditch and didn't cross over to Europe !!

The politically correct concept that people are *ALWAYS* inherently honest has taken quite a beating from this !! If they can't get something they want by telling the truth, people *WILL* lie to get it !!

"The bigger point is that there will still be bad mortgage loans under any plausible regulatory regime - and borrowers will still get into arrears."

To paraphrase the Bible, the defaulters will be with us always. However, drastically reducing their numbers will go a long way to sorting out the problems the mortgage market !!

However, everything in this paper seemed focused on the borrowers and there is absolutely *NO* mention of what will happen to the bad lenders if they are in trouble due to excessive risk-taking !! Without some sort of punitive measures against excessive risk-taking by the lenders, the taxpayers (i.e. us poor muggins) will be called upon to bail them out yet again when they get into trouble !!

There are lots (not just a few) self-employed people and those starting a new small company who won't be able to get a mortgage. Without self cert we wouldn't ... but our credit rating is OK, and we've never missed a mortgage payment. The FSA needs to be very sure they are not discriminating against the very people who will pull the UK out of recession - small businesses.

It is extraordinary! .. what with the revelations being made public via the internet on the jaw droppingly shocking unbelievable con that is the FRACTIONAL RESERVE SYSTEM .. we are talking about litmus testing the viability of borrowers!.

BANKS LOAD 9 times their deposits so that they can 'create' money from the interest that earned on non existent cash. This is apparently legal!?. BANKS DO NOT HAVE THE MONEY TO LOAN OUT IN THE FIRST PLACE - IS ANYONE READING THIS? IS ANYONE LISTENING? ...and yet when a borrower 'defaults' they repossess the borrowers assets EVEN THOUGH THE BANK NEVER PUT UP THE MONEY TO PURCHASE IN THE FIRST PLACE!. THIS IS FRAUD.

Despite repeated requests, Robert Peston has never made a mention of this unbelievable scam that is nothing more than government sponsored THEFT from the man in the street.

I doubt very much this comment will even get printed, which only contributes to the growing suspicion amongst the public who have discovered this .. and despite the apparent "side stepping" of this most important issue, the awareness is growing with or without your attention.

Another great article! 2 in a row.

This is exactly the direction that should be being closely looked at.

The government stimuli around the world are going to come to an end. When everything falls through the floor, the governments will be wondering "what now?". They will be reigning in banks, reigning in lending, preventing debt-funded asset speculation and investing in new tech and industry. All of this will involve new regulation at all levels, from the G20 down to domestic.

No 1 "Forcing them to take out insurance on all "risky" activities might also have advantages."

That's what those CDSs were about !! Unfortunately, since the underlying loans were "rated" as "good", the "premium" for those CDSs were too low. When the default happened, the seller of the CDSs (i.e. the "insurer" of the loan) didn't have enough money to pay off the loans in default !! Therefore, this may involve multi-party liability - the seller of the CDS and the agency that "rated" the loans !!

When sub-prime loans were "rated" as AAA+ packages, the US CDS market went *Kablooie* !!

This is merely a simplistic view and anyone may take exception to this if they like !!

For a more detailed explaination, see - https://en.wikipedia.org/wiki/Credit_default_swap

5. At 12:35pm on 19 Oct 2009, davidmcc3

Following on....

I too am self employed (well a self cert mortgage would be required) and I have given up hope of moving out of home for a good number of years with this move.

However - rest assured the banks will get around this problem by simply demanding indemnities (that's handing them money to you and me) in order to mitigate the risks (although I still don't see how taking money from someone who is self-cert reduces the risk of default). I guess on the 'masters of the universe' can work that one out.

Anyway - what is the effect of people like me not being able to move going to do for the housing market?

....to be fair the regulators are dammned if they do and dammned if they don't - but that is simply a reflection on the mess Capitalism has got us into (again).

Whilst the UK mortgage market is very interesting - I don't think events in this country will have a baring on the eventual outcome of the Economy. It's events across the pond that will be decisive - for us in particular and possibly the world outlook.

I refer to this:
"Up until the day Lehman Brothers collapsed in September of last year, it took the Fed a total 5,012 days — 13 years and 8 months — to double the cash currency and reserves in the coffers of U.S. banks.

In contrast, after the Lehman Brothers collapse, it took Bernanke's Fed only 112 days to double the size of U.S. bank reserves. He accelerated the pace of bank reserve expansion by a factor of 45 to 1."

The endless printing of the worlds reserve currency is going to collapse all efforts to have a world where we can have realistic valuations (and not FIAT currency valuations which are becoming more and more meaningless by the day)

Back to Gold? Ah unfortunately not as I think you'll find that all countries (except those who produce it) will be immediately broke.

This Government is sleepwalking into an Economic disaster of epic proportions.

#6

I think this is old news for most people on this blog, but yes I agree that a surprising number of people go about their day totally oblivious to how modern capitalism works at all.

However, this does not stop them rushing off to foreign lands like lemmings in the name of freedom. Ironic isn't it?

When the government are trying to get the consumer to borrow, to re inflate the economy, the FSA is doing their best to stifle mortgage borrowing. I read today approx approx 45% of first time borrowers are being declined mortgages by banks, so the chances of any serious growth next year is small.

The big winner in the FSA's meddling will be BUY TO LET mortgages which are not regulated by the FSA. With big margins between interest only payments and rents, coupled with less competition from the first time buyer, this will be a massive growth area for bank lending. I can see a time when anyone under 30 with a mortgage will be a rare beast.

No 2 "There weren't enough "sub-primers" to trigger this lot - and what they conveniently forget to tell you is that after repossessions their losses were minimal anyway."

THe sub-prime loans were made to the housing market but were *NOT* limited to that market alone. Much heftier loans were made to the commercial property market too !! Imagine a self-certified loan for a giant shopping mall that actually carried out only 10% of the certified business !! We are talking of billions here. Makes "Dave's and Tracy's" mortgage seem trivial !!

The Philippines went through a manic period where giant shopping malls shot up like mushrooms. Many are now struggling to survive. Uneasy lies the head of the banker that carried such loans !!

6. At 12:41pm on 19 Oct 2009, TheCynicalSasquatch

I agree completely.

Sadly I worked out at the weekend that half the country is aware of exactly how the system works (and is rightly angry about it) - the other half do not - which is how the Government remains in power.

Regardless of the origins it's clear that FIAT currency manipulation is a futile effort to restrict the rise and fall of Capitalism. Every time we hit bust they simply devalue our currency in order to save the living standards we desire.
I suspect when the Gold standard was dropped it was not envisaged that this would be a regular occurence - and yet we are doing it every time we hit recession.

Fake, fake, fake, fake - the whole of your lives is based on false Economy.

Did nobody wonder why they are bombarded with adverts to buy things they don't need?

This is simply to ensure the consumption machine keeps on rolling - again in a vain attempt to restrict the overproduction as clearly identified by Karl Marx.

I can only assume that journalists don't bother reading anymore - or they would be asking and proving these very clear methods of 'crash management'.

WAKE UP PEOPLE - THE TIME HAS COME FOR YOU TO LEARN FOR YOURSELVES AND TO STOP TAKING PEOPLE'S WORD FOR IT!

It is not just mortgages but indivdual liabilites in other loans and credit cards that can entertain people stretching themselves beyond the monetary elastic limit. Controls are needed in these areas as well so that an objective assessment of a person's medium ability to pay can be made. However there is a questionable obssession with house ownership (acquiring an asset that may exceed liabilities eventually) There is a substantial section of the population where it will be always problematic to own their house but are under continual social pressure to do so. There should be a much wider availability of socially allocated housing whether LA or regulated housing association provided.

I just noticed the title of the article "Moving in the right direction" and I could not possibly agree more.

How do you judge ability to continue to pay a loan? People's employment status changes particulalry in the more open labour market that government has striven to create. All that will happen is another bureacracy that stamps paper and achieves little.

I would like a clear quantified statement about the scale of improvement that will be achieved (e.g. reduction in defaults). If this is not achieved then government should reduce the responsible agency's budget by twice the cost

No 9 "The endless printing of the worlds reserve currency is going to collapse all efforts to have a world where we can have realistic valuations (and not FIAT currency valuations which are becoming more and more meaningless by the day)"

And people wonder why the Chinese, Russians and Brazilians are rather upset about holding USD as a reserve currency !!

#16

"How do you judge ability to continue to pay a loan? "

How do banks judge what interest rate or deposit you should have when you apply for a mortgage? What's the difference?

No 11 "The big winner in the FSA's meddling will be BUY TO LET mortgages which are not regulated by the FSA."

The BTL market is dependent on a steady demand for rentings. The main drivers of the rental market are the economic migrants from other EU countries. since the economy is going down, many have left these shores and the once rented properties are falling vacant. Even with an interest-only mortgage, the owner still needs an income to keep afloat. With no income and a mortgage to pay, he'll soon be in serious trouble. Once a glut of houses and flats are forced into the market, the prices will *FALL* !!

Watch this space early next year !!

# 8.
ishkandar

Indeed proper risk evaluation is essential, its actually quite surprising that the ratings agencies have survived recent events.
A question that seems not to be being asked is "who benefited from CDOs / CDSs being given AAA ratings?" and were the rating agencies influenced in any way by them?.

Some might question whether it was all a terrible mistake borne of lack of understanding, whether there was any negligence or indeed whether potential gains influenced the flawed nature of the ratings.

The fact is, in many ways, governments have shown a willingness to under write risks taken by the banking system, without extracting a premium for the service.
The ability if a commercial insurer to cover the potential losses of banks is obviously debatable; but then we get to the question of whether an institution that is "too big to fail" should be in many ways considered too big to be allowed to exist.

It may also be advisable to take a more restrictive view as to what financial instruments should be considered as appropriate forms of capital as a basis for lending (even if ratios aren't formally enforced).

15. At 1:10pm on 19 Oct 2009, FrankSz wrote:

I just noticed the title of the article "Moving in the right direction" and I could not possibly agree more.


....surely it should be "moving in circles again" as we question the realms of responsibility for lending as we did in 1990!

Capitalism = FALSE.

Understand it and know it - don't take my word for it - discover for yourselves.

Consider this - the surplus value theory means we're all working about 1 day a week for "necessity" (i.e. things society needs) - the rest of the week is spent creating excess production - i.e. profit.

We only need what we need - the continual revolution of profit making is why others are forced to do the same - the alternative (sitting still) will result in rapid devaluation.

We could all be working 1 day a week if it wasn't for Capitalism. Think about the wastage produced by a system which ensures we're producing 5 times more than we need.

It would be funny if it wasn't so tragic.

...and finally bankruptcy hits God!

https://news.bbc.co.uk/1/hi/world/americas/8313791.stm

Maybe he was a 'self-cert' borrower, because we all know that 'Diety' isn't a 'real job' - and it's certainly not permanent (or is it?)

writingsonthewall

Yes, you and me know that boom and bust is inherent to capitalism, but want is so ironic is the capitalists don't understand just why.

This is why on the previous blog entry I tried to draw everyones attention to Minsky's instability hypothesis.
Essentially blaming finance for the instability, just at the Austrian Economists blame the fiat monetary regime.

They don't see that the instability is inherent in production; in the very act of capital accumulation.

19***

I am not talking about first timer's with 1 no BTL.I am talking about large institutions .You can take it or leave it but the large margins are there and reduced capital cost will only make the argument more valid..

These proposals are unfair and discriminatory to self-employed and small business entrepreneurs - the latter being the very people that we should be encouraging to flourish in this economic malaise.

Never mind the FSA's days are numbered. Hopefully Lord Turner and his board are busy locating the nearest job centre to Canada Square.

Following on from my comment at #2, On the BBC1 News at 1pm Kate Silverton actually introduced these measures as being designed by the FSA to "counter the borrowing practices that caused the credit crunch". That is sophistry and nonsense, a totally misleading presentation of the news. I repeat - the recession was NOT caused by a small minority defaulting on their mortgages. It was caused by complacent governments and greedy banks. And for the BBC to now depict the average man in the street as the scapegoat, doubtless using these FSA rules to justify even bigger rip-off charges and interest fees to penalise him for something that's not his fault, is a shabby disgrace. Caledonian Comment

As always the inate re-action of govt and FSA (and before them OFT) is to assume that borrowers are too stupid to understand what they are doing and lenders are at fault.

No lender has ever forced any one to borrow. All borrowers (at least those not borrowing from loan sharks with baseball bats) entered into the lending contract of their own free will. Some people failed to keep up with repayments because of change in circumstances are were unlucky others lied to obtain a mortgage and others never had any hope of repaying it in the first place. I have sympathy with the unlucky but why should I have any sympathy for the liars and the terminally incompetent?

Sure a lot of lenders were also incompetent and lacked any ability to understand risk, but at the end of the day if a lender and a borrower both fully aware of the risks involved and the borrower's ability to afford repayments enter into a loan arrangement why should that be restricted or regulated? If the lender takes more risks than normal that should result in needing to hold back more capital that is the simplest solution.

I used to work in the consumer credit industry and the red tape that surrounds that (made worse under labour) prevented lenders launching useful and reasonably safe lending products. In the consumer credit industry the level of consumer protection is such that real people (not lawyers specialising in consumer credit or the OFT) have no chance of understanding what their real rights are, and small companies have little chance of entering the lending market to provide small loans to people in their own locality to buy goods. The Consumer Credit Act starts from the assumption that all borrowers are stupid (and must be protected from their own stupidity) and all lenders are crooks, and all I see is the FSA going down the same route.

So my kids are going to have to have a salary of 95k to buy an average house, or 65k to buy a started home in London, not to memtion thay will need to pay back their 35k student loan and save 33% of their income into a pension fund to get the kind of pension their grand parents are currently retired on!

Good old Gordan No more boom and bust!

And spend spend spend, close down pensions and tax tax tax after all its not us but our kids and their kids that will pay!

As a retired Bank Manager I am reminded of the fact that there are only 4 basic questions in the making of a lending decision. How much? What for? How repay (with evidence thereof)? How recover funds advanced if proposed repayment method fails? Ancillary questions arise, of course, but should be no getting away from the basics.
Clearly,in the years since my retirement in 1996, the banks have ignored the basic principles, which give a sound basis for decision making.

In terms of lending to small businesses important factors were "knowing your Customer " and "understanding his/her business" and, from reports from former customers of mine, I am afraid that these also no longer appear to be criteria by which the Banks do their business- to the detriment of the economy of the Country as a whole.

Are you sure you have your figures right, Exhibit 2.7 in your article indicates that self certification mortgages accounted for 49% of high risk mortgages not 49% of all mortgages in 2007?

I beleive these measures are too prescriptive, too much unecessary interference that doesn't address any real problems.
The right approach to take is to allow the banks to decide for themselves on the risk associated with any type of loan, what the regulator needs to do is ensure that if any institution gets it's risk calculation wrong then it firstly has the capital buffer to absorb the losses and secondly if it were to effectively become insolvent it could be allowed to fail without leading to significant impact to the overall financal system.
In short it needs to do what it should have been doing since it's inception. This extra regulation is crude and clumsy, the work of an institution not really fit for purpose.

What about those self employed people who legitimately obtained a self cert mortgage and have been able to make the repayments but will now be in a position unable to obtain mortgage finance on reasonable terms due both to the reduction in their loan to value(house price fall) and this new regulation on self certification. Can they claim compensation for this failure of government policy?

This over regulation is very dangerous, this could well lead to further house price falls, some may argue a good thing, but we could get to a situation where the majority of homeowners no longer have enough equity in their property to obtain mortgage finance. The UK economy cannot afford further monetary de-leveraging and shrinking of the overall money supply. The people at the FSA need to assess the macro economic impact of their proposals more carefully. This exemplifies why the tri-partite system is fundamentally flawed, you cannot neatly compartmentalise macro economic policy, monetary and fiscal policy and financial regulation in this way, they are too interdependent. (Brown's buggers muddle).

So it wasn't all the fault of the US after all.

For the last few years money has been thrown at everyone which has pushed house prices up well beyond the reach of most new buyers or those needing to move up a gear.

How strsnge that ir has taken over a year now since the credit crunch for the government to realise that they have to make borrowing more difficult and realistic as a proportion to income.

That is fine but only if house prices once more become compatible with incomes as they once were.

Difficult for the government who are now left with billions of pounds of toxic loans and the cost of keeping people in their homes at the current prices. Have they at last seen the light of what they alone were responsible for? Encouraging a huge bubble and now a big bang.

This is a crisis that has not yet reached a tipping point wich is costing the taxpayers rather than the banks who seem to be making a mockery of Brown and Myners as well as the FSA.

They were considered too big to fail and they still are. The government have entirely lost the plot and are now making announcements on the hoof withour any idea of the consequences

They think it's all over!

....it's not yet....

https://news.bbc.co.uk/1/hi/business/8314087.stm

Oh how the foolish live in hope that the fireworks of bailout had marked an end to bank failures.
That's how a depression works, you have the big bang, the press get excited and print some rubbish, the government respond and try to reassure everyone that they're in control - and then slowly the facade wears thin and we all start panicking as we realise that really 'nobody was ever driving the bus - it drove itself!'

It seems that the people on this blog are generally well informed about the situation - although there are a few points on which we disagree - most here seem to agree that the problem is systemic and not a 'bad wind' or 'financial storm' - like it's some natural phenomenon or something.

Unfortunately if you go to the Nick Robinson blog you can see there are many 'empty kettles' whose sole intention is to argue about who cause the problems and who will be best to solve them - sadly not one of them realise that the solution is not in a change of political party from Red to Blue.

If you look carefully at the history of this country since the end of the war we have been heading down a road of inescapable debt for sometime. You can blame Gormless Gordon all you want - but to attribute the failure of our Economy to him is giving him credit for something he had nothing to do with (in the same way he tried to claim credit for the good times) - I suppose that's ironic justice in a way....

As every day passes it looks like we're getting deeper and deeper in the mire. We all know logically that there has to be some real pain when unwinding the last 10 years boom - surely nobody is naeive enough to think it's all over in a few months?

Talk of recovery is just that - talk. The stock market boom and recent bank profits are solely down to the propping up of the market by the Government. I have had a year of 'recovery beginning' talk from politicans and the media and yet not one piece of tangeble and consecutive data to prove it.

You might think I'm being pessimistic - but the worst is yet to come. I really fear the consequences of burying your head in the sand and hoping that it will all turn out OK.

Payback time is almost upon us.

This is half a proposal, as Stephanie says. One three occasions over the last 15 years I have proposed a rather more complete scheme to the Treasury and the Bank of England. To prevent bubbles it is essential that the ludicrous notion of affordability is buried and we return to maximum income multiples (3 - 3.5 times).

The downside is that anything that actually works MUST plunge the economy back into recession because the recovery, such as it is, is based upon re-inflating the asset bubble - (which is insane)! Various unreformed nincompoops are continuing to appear on the TV and Radio declaring that house inflation is a sign, not of inflation, but of a recovery! They have leaned nothing from the disaster of the Credit Crunch and if they are registered practitioners they should be struck off!

Shame we "invented" new "super business wizards" like the Northern Rock mob, just to satisfy the Directors ego and Browns "economic growth" Had these self serving ego maniacs been made to work within a solid framework that has worked well for years we wouldnt have got into this mess.

Although I suspect Brown knew the bubble would burst but hadnt worked on Slimy Tony jumping ship and leaving Gord holding the can of worms.

# 14

"There is a substantial section of the population where it will be always problematic to own their house but are under continual social pressure to do so. There should be a much wider availability of socially allocated housing whether LA or regulated housing association provided."

I'm curious to know where you think the funds are going to come from to pay for all this affordable housing?

When are people going to realise there is no such thing as "affordable" housing - never has been, never will be...much as we may fervently wish it to be so. Social housing is either subsidised by private builders (as a bribe for being granted planning permission for market housing) or the Govt., via the future taxpayer. Since both of these sources are effectively skint, I wouldn't hold your breath waiting for a sudden rush of affordable housing to appear.

If the banks lost £100,000 per default in the UK over the last 2 years that is about £8bn. Probably closer to £2bn given that even a horrendous default still leaves the house to be sold. Just my estimate, no science. Clearly this is only a fraction of the money that has been given to the banks.

Why does anyone care about mortgages? For most of 1990-1996 there was about twice the level of repossessions that there are now and that didn't threaten the banks then?

Whatever they are, there are other bigger problems to be looked at.

This is the joke of finding a man looking for his contact lense under a street light. You help look and after a while ask him where exactly did he lose it. He replies that it was the other side of the street but there was no light over there so he came to look where the light was better and it was easier to see.

So what we are saying here is that there is NO real regulation of mortgage lending as a result of the FSA's new rules. All the lender has to do is make sure that the borrower can afford the payments on the mortgage on the day that mortgage is approved, great! Whats new there then? Think back to Northern Rock for a moment, all those people who were given those 125 per cent mortgages at 7 times their salaries could easily pay them back at the time they got them, thats not where the problem was. It all went wrong for those borrowers when interest rates rose from 3.5 per cent to 5 per cent, then they couldn't afford the payments and the whole house of cards collapsed.
Where in any of these new rules does it prevent that from happening again? Nowhere as far as I can see!
On the face of it the FSA looks like they are doing something to protect our interests as taxpayers and borrowers, but its all smoke and mirrors. This is nothing more than a Bankers charter, a licence to go back to the bad old days, what in these new rules is there to prevent any bank lending any borrower a mortgage that leaves them paying a massive mortgage for 25 years, but removes them from the rest of the economy as a consumer?
Just like with bank charges we should take the banks through the courts to ensure that they lend only 3 times a persons salary and no more that 90 per cent loan to value, after all if it all goes bad again it is our taxes that rise and our public services that get cut when we inevitably ride to the banks rescue.

Just a couple of comments on this issue.
I can't understand the graph (it adds up to 127%) so presumably items are counted again in different categories.
The graph is for 2007 so presumably that was during the boom times when finance was freely available, how about 2008?
The lending that did for HBOS was commercial so how does the FSA propose to regulate greed lending that took place there?

#35 houseflogger. Funds for affordable housing can come from a redistribution of the supernormal profits enjoyed by so many participants in the housing chain, not least those that make large amounts of money through simply obtaining planning permission.

No doubt there are a thousand arguments why the rich should not forego their wealth. Not a problem, the market will provide an answer. People will need to find affordable housing by whatever means they can - old shipping containers, cardboard boxes, disused factories and so forth. You are heading for the third world. Get on your bike and see how people live in the third world, it may give you a heads up.

#37 Sorry but why should the law stop banks lending someone 125% of the property and 6-7x salary. If the bank has done due diligence and both bank and borrower are sure that the repayments are affordable and they are both aware of the risks what is the problem? The borrower may be expecting a large pay rise (for example on passing qualifications) or is promised an inheritance in a year or 2.

You have to allow people to make their own judgment about what is sensible. The alternative is to assume that all people are incapable of making their own decisions and once you go down that route why should you stop at mortgages - why not all borrowings and financial commitments, why should people be allowed to chose to invest in shares - after all they might choose the wrong company and lose money.

Of course the banks do have to be dealt with slightly differently. Lending is about risk, the riskier the loan the more capital the bank needs to cover it.

I do appreciate that this is unpalatable when taxes are rising to cover a bank bail out caused by over-lending. But the truth is, banks did not and were not required to set aside enough capital to cover the risks that they ran from 2000-2007/8. Partly this was because they did not understand the risks, partly govt did not understand risks and partly because there was a regulatory system which started from the assumption that banks knew what they were doing. Fix the capital regulatory system and whilst you will not stop further booms and bubbles they will be less painful.

Incidently I bought my first flat at the tail end of credit controls when I was only allowed to borrow 3.5x income and a 15% deposit. At that time mortgage interest rates were 12% and going higher. If mortgage interest rates are now 6% surely the amount being borrowed can be higher whilst remaining just as affordable

Stephanie:

There are lots of mortgage lenders who say "no, you can't afford to pay (say) £500 a month" ... but no one says I can't afford the same sum (or much more) to rent. And if I want a roof over my head, I have to pay the rent.

Can't quite see why there are double standards here.

On the news item comments, there are lots of people saying "if you can't afford the mortgage, you have to rent". Bet they all have mortgages. Bet they've never been faced with rents higher than the landlord's mortgage (he wants to make a profit, of course).

I have rented (once) some years ago - a single room was costing me nearly £300 a month.

This feels very much like work in progress that has been rushed out partly for fear the market is about to take off again (fat chance) and partly for fear of needing to show the FSA is doing something (gissajob).

I am left feeling quite underwhelmed: it seems as if a a mountain is straining at a gnat.

As some posters above have remarked; the real deal is going to be a whole lot worse.

When are retail banks going to be separated from the investment banks?

27. At 2:17pm on 19 Oct 2009, Justin150 wrote:

"Sure a lot of lenders were also incompetent and lacked any ability to understand risk, but at the end of the day if a lender and a borrower both fully aware of the risks involved and the borrower's ability to afford repayments enter into a loan arrangement why should that be restricted or regulated?"

Clearly you are not aware of the risks involved either (which doesn't bode well for others)
When you take out a mortgage do you assess that the interest rate set in the US by the Fed (and copied here) is too low historically? I certainly didn't and I wouldn't count myself as financially unaware.

...and yet after 2001 it was too low - far too low.

The problem is the world you describe is a perfect one where information is not witheld or used to profit from, nor in your world do Governments manipulate the interest rate in order to win elections.

....which unfortunately isn't the case in this world.

Even if you took away the financially incompetent you will find a lot of people are falling foul of (with hidsight) poor lending decisions.

33. At 3:34pm on 19 Oct 2009, John_from_Hendon wrote:

"The downside is that anything that actually works MUST plunge the economy back into recession because the recovery, such as it is, is based upon re-inflating the asset bubble - (which is insane)!"

I hope you're listening folks - because this is the depressing situation. To solve the problem you must create a worse (or similar) problem.

39. At 4:36pm on 19 Oct 2009, armagediontimes

...and if you go to the states you can see 'homeless camps' being set up in their parks - it looks like a refugee camp in a war torn country - not the greatest nation in the world.

# 36

"If the banks lost £100,000 per default in the UK over the last 2 years that is about £8bn. Probably closer to £2bn given that even a horrendous default still leaves the house to be sold. Just my estimate, no science. Clearly this is only a fraction of the money that has been given to the banks"

Your estimate is not wide of the mark, proving that today's announcement is the usual Govt. spin / smokescreen, trying to blame Jo Pubic instead of the real culpricks.

# 39

"No doubt there are a thousand arguments why the rich should not forego their wealth. Not a problem, the market will provide an answer. People will need to find affordable housing by whatever means they can - old shipping containers, cardboard boxes, disused factories and so forth. You are heading for the third world. Get on your bike and see how people live in the third world, it may give you a heads up"

The alternatives you propose would still require planning permission, which I doubt would be forthcoming. Even if it were, such is the glacial pace of the planning system, the new housing units would not be available for at least five years.

So approximately half the markets been doing self cert. A staggering number. Closing this option down is going to stall any recovery in the property market for some time to come. People were driven to self cert because traditional multibles of income just wouldnt provide enough finance to purchase the desired property. It would appear that those who took out a self cert, will find it extremely difficult to trade up, unless their income has increased dramatically. Newly self employed will have to wait years, or at least until the inland revenue can certify their income. what a log jam. Im not saying it isnt long overdue but this is a sea change that has enormous ramifications for affordability, and therefore valuations.

A few thoughts

1 - When other financial procucts (insurance, pensions etc) have been mis-sold, customers have been able to claim compensation. Does the same not apply when people have been mis-sold mortgages with ridiculous LTI ratios?

2 - Perhaps we should change to the system they have in parts of the States where if you get into negative equity you can just hand the keys back to the bank and walk away (OK it obviously didn't cause the US banks to be more careful in the past, but now perhaps it would)

3- The real solution to all of this is to get rid of the stupid "nimby" planning rules, green belts and all. If a piece of farmland has no particular ecological, scenic or amenity value (and there is plenty of such land around), then planning permission for house building should be given. That would bring prices down to the level where they are determined by the alternate value of the land plus building costs, not just the maximum people can afford to pay. High land prices only benefit big landowners and speculators. Low land prices will allow our children to afford somewhere to live.

This looks mildly sensible but hardly goes anywhere in preventing future financial disasters.

The FSA are, I think, acting politically (to silence the 'something must be done' brigade) rather than looking systemically at the problem of designing a financial system fit for purpose.

OK. some people were allowed to borrow too much. Some lenders, particularly new entrants, were reckless in other ways. All because asset prices, this time round the copper bottomed residential housing market, were allowed to inflate, buoyed by a new class of purchasers (BTL), steady economic growth and lack of regulation. We may as well bolt the stable door, I suppose.

The only trouble is, this is only the latest of a series of financially induced busts and tinkering around the edges isn't going to make the world any more secure.

Look at it this way: the real problem wasn't the increase in house prices or credit availability to working people. The market can and has sorted that out (eg a a house price decline of 15% max and a repossession rate less than a third of that between 1991 and 1997). No, the problem was the reaction to the problem, if you take my meaning. Financial stock valuations fell precipitously, not proportionally. There was mass panic and a requirement for Governments to intervene to an unprecedented extent. This 'hunting' is as clear a marker of an unstable system as you can get. Meantime the FSA worries about facets of the last bust and ignores others (such as the ramping of commodity prices). Its a bit like, in the aftermath of a cattle stampede, regulating the tumbleweed that set it off. Worthy, but partial at best.

Personally I am much more concerned about continuing perverse incentives to maximise price volatilty in the finance industry. These, I think, led the actual bust to develop and become so ridiculously disproportionate.

Only today there was a report in a National broadsheet that short-selling in Lloyds has doubled because ..... (insert your own story here). It's still OK to short financial stocks heavily. It's still OK to publish stories reinforcing the short position (providing the reporter doesn't profit of course). I'm not sure the FSA have got their priorities right yet.

# 47

.....As an earlier poster pointed out, neatly targeting the very people who would potentially helped pull the economy out of recession.

The ineptitude beggars belief.

Like almost all of the FSA's work this does not address the correct problem. If consumers want to borrow and lenders are prepared to lend they should not get in the way. Bluntly it is none of their business and it is absurd to think that some regulation knows better than those involved in the particular transaction.
On the other hand since we have extended the Government guarantee to absurd lengths we do have an interest in the systemic risks being run by the Institutions. The regulations should focus on what percentage of loans by that institution are in the higher risk category and the penalty should be additional capital retention by those institutions. Other that this the FSA should go forth and multiply!

#40 The whole lesson about Northern Rock is that none of them were expecting a large pay rise, nor were they coming into an inheritance in the next year or two as they all ended up busting the bank because they couldn't afford the payments once interest rates went up.
There is no need to regulate shares as its that persons own money, and if they make a loss, that is not going to ruin my life is it? Its not the same thing obviously.
All the banks want is to know that they can go back to the way things were without to much interferance from the likes of us, unless they need massive amounts of our money in the future to pull them out of another mess.
The fear I have is that people who are buying homes today are effectivly able to mortgage themselves up to the eyeballs which is fine if you are the mortgage lender who knows that the more money you lend someone to buy a home, the higher the value of all those other assets you already own become, but the rest of the economy is starved as less and less people have money to spend in the high street because they are all paying massive mortgages. I know many people who got onto the housing ladder between 02 and 07 and they all have mortgages of between 6 and 9 times their salaries, they can afford to pay them, I don't know anyone who has been repossesed, but all they do is sit at home and pay a massive mortgage, nothing else. How is that good for the long term health of our economy?
As I said, the spin around this regulation gives the impression that the FSA is not going to let what happened before happen again......all I want to know is HOW?

No 20 "...but then we get to the question of whether an institution that is "too big to fail" should be in many ways considered too big to be allowed to exist."

Firstly, I am opposed to the concept that anything is "too big to fail" !! As you have said, "If it's too big to fail, then it's too big to exist !!"

Secondly, "if it's too big to fail, then it's too big to bail out, too !!" !! Therefore, they should be allowed to die an unnatural death !!

"It may also be advisable to take a more restrictive view as to what financial instruments should be considered as appropriate forms of capital as a basis for lending (even if ratios aren't formally enforced)."

IMHO, the only financial instruments that are the least risky and can be considered as a basis for capital are ownership instruments like shares, certificate of ownership of commodities or other assets, cash, etc. Loan instruments, even when backed by assets are not sufficient safe to be used as a basis of capital since, (a) the value of the underlying asset may not be properly valued, and (b) the issuer of the loan instrument may not be totally sound !!

No 21 "Capitalism = FALSE.

Understand it and know it - don't take my word for it - discover for yourselves.

Consider this - the surplus value theory means we're all working about 1 day a week for "necessity" (i.e. things society needs) - the rest of the week is spent creating excess production - i.e. profit."

Indeed, I'm not taking your word for it since what you have stated is far too broad-brushed and simplistic to be realistic.

We work in order to gain the means for survival. Any gain that is surplus to the needs for survival may either be put aside for future use in less fruitful periods (lean years) or used for luxuaries.

Unfortunately, the current British definition of "needs for survival" include far too many items that are, in truth, luxuaries !! Furthermore, the pursuit of luxuaries and enjoyment today over-rides the need to save for the needs of future "lean years" !!

"We only need what we need - the continual revolution of profit making is why others are forced to do the same - the alternative (sitting still) will result in rapid devaluation."

This is not totally true since there is still the need to save for tomorrow. Merely existing for today is not enough to take care of the times of hardship.

Or are you saying that you will work one day a week, enjoy the other 6 days and when hardship strikes, you will simply steal someone else's labour to feed yourself !! Truly that is not capitalism; that's Kleptocracy !!

"We could all be working 1 day a week if it wasn't for Capitalism. Think about the wastage produced by a system which ensures we're producing 5 times more than we need."

Ah !! A polymath !! You can grow food, smith tools, build a car and power it, brew all sorts of medicines and use them for healing all ills and produce long distance communications, all without leaving home !! I salute you, Sir, Truly a genius amongst Men !!!

#43 Actually I did understand the risks. That is why when I bought my first flat and indeed in the mid 1990s when I stretched myself to the limit to buy my current house I made sure I had a fixed rate for a couple of years. Whilst I might have paid less if the rates went down, by fixing it I knew that as long as I kept my job I could afford the mortgage and in 2 years time my salary would have gone up enough that any interest rate rise ought to be manageable.

In order to make that decision I did not need perfect information (which incidently is not possible, this is basic information theory for complex systems) what I needed was enough information to make an informed decision.

Where you and I can agree is about the fact there is no such thing as perfect information and economic models built around that are wrong. In complex systems at best information can be complete but out of date, or incomplete and current but cannot be both complete and current. In most complex systems information is neither complete nor current (govt statistics being the best example). This has important consequences for decision making. Basically this means that it is better in complex systems for decision making to be devolved down as far as possible (to individuals if possible) and the reason is that because information must be imperfect, it is inevitable that decisions will from time to time be wrong. Where one person makes the decision for the entire economy and it is wrong then the entire economy suffers, where each individual makes his or own decisions more of those decisions will be wrong but the consequences of each wrong decision less problematic for the economy (although obviously not for the individual). This information theory driven analysis also explains why bubbles are so much of a problem. Although decisions are being made at the individual level, everyone is making the same decision so it is the equivalent to one person making decisions for the entire economy. A bubble will inevitably burst because information theory predicts that information on which decisions are based will inevitably be incomplete or out of date so that there is an inevitability that eventually the decision maker will get it wrong - even if it takes several years to get there.

This is also why communism cannot work economically

No 22 "Maybe he was a 'self-cert' borrower, because we all know that 'Diety' isn't a 'real job' - and it's certainly not permanent (or is it?)"

Do we all know so ?? It's a dirty job but someone has to look after all those selfish sods running on Earth and ruining it and getting no thanks for helping them !! Try looking after billions of selfish, spoilt children and see it it doesn't feel like you are working 24/7 for an eternity !!

#40 Justin150. You´ve got no idea at all, have you? If interest rates are 12% but wage inflation is 12% you have no problem. If interest rates are 6% and wage inflation is zero you have a big problem.

If you tip into deflation (as you have with house prices, and a lot of people have with incomes) then you have a bigger problem.

#52 muggwhumnp. Good to see that it is never too early to start revising history. Northern Rock failed because of a failure of its funding model which is in turn a failure of its management. Even if it had experienced a 0% default rate by its borrowers it would still have failed. The only people who bear any responsibility for the failure of Northern Rock are (i) Its management, (ii) regulators, (iii) City pump and dump merchants who were busy persuading the easily led provincial management that the way forward was to borrow short and lend long, and to book the arbitrage differential as profit - probably booked 100% of the expected 25 year profit at the time of origination and then went straight to the bonus trough.

No 27 "The Consumer Credit Act starts from the assumption that all borrowers are stupid (and must be protected from their own stupidity) and all lenders are crooks, and all I see is the FSA going down the same route."

Welcome to the nanny state !! You want *Absolute safety and security*, you have to put up with the rules.

No 28 "And spend spend spend, close down pensions and tax tax tax after all its not us but our kids and their kids that will pay!"

Yeah but who enjoyed all that spend, spend, spend ???

No 29 Dear Captain Mainwaring,

We are civilised now, or so they tell us. Now, it's all the American-style one-size-fits-all banking. No need for that Limey, fuddy-duddy local banking nonsense !! Also no need to take responsibility for your actions, someone else will clean up after you !!

O Tempora !!
O Mores !!

- Ye Boring Olde Fartte

No 35 "Since both of these sources are effectively skint, I wouldn't hold your breath waiting for a sudden rush of affordable housing to appear."

Wait !! Wait !! You forgot about Harry Potter and his magic wand !! I'm sure he can wave his wand and magic a few hundred "affordable housing" into existence !!

No 38 "The lending that did for HBOS was commercial so how does the FSA propose to regulate greed lending that took place there?"

Aha !! Another one who noticed that it wasn't all housing that caused the crunch !!

No 42 "When are retail banks going to be separated from the investment banks?"

Oi !! Stop stealing my mantra !! :-)

No 48 "2 - Perhaps we should change to the system they have in parts of the States where if you get into negative equity you can just hand the keys back to the bank and walk away (OK it obviously didn't cause the US banks to be more careful in the past, but now perhaps it would)"

And where will the buck stop ?? Will the risk-taking, bailed out banks simply hand over the keys to the government ans walk off into the sunset with their mega bonuses ??

No 55 "Where one person makes the decision for the entire economy and it is wrong then the entire economy suffers.."

Impossible !! When good old Uncle Joe makes any decision, it is *ALWAYS* right, even when it is wrong. The same for the Great Helmsman of China !!

Cheap Finance. Cheap Finace. Cheap Finace. It's that simple.

The chart shows that about 80% of the loans should have never originated. The banking fee and bonus system encouraged these loans be generated. Also, the lack of any oversight by the industry or the governments. I find it distasteful that the bankers and governments now want to blame the borrower. Things may have been different had the public demanded that the bank CEO's and Board Chairs been sent to jail, for this grand theft, but their political partners would not have allowed that to happen. My perference would have been public hangings as a temporary deterent. If we continue to rely on the lies of the liars we will only go through this all again. When the governments require that the banks repopulate the lost retirement accounts rather than pay out bonuses we may be on the right track.

#64 "And where will the buck stop ?? Will the risk-taking, bailed out banks simply hand over the keys to the government ans walk off into the sunset with their mega bonuses ??"

Agreed, this does assume that we let bust banks go bust. And that in turn assumes that we split the investment banks from the retail banks. And beyond that I think it also assumes that we split the basic financial infrastructure of current accounts, etc (the modern equivalent of notes and coins) away from the retail banks.

The whole dependency on vast amounts of saving and borrowing is a sympton of a system that is distorted and broken. We have huge imbalances in wealth and we're relying on lending from net-savers to net-borrowers in order to get cash into the hands of potential consumers and keep the economy going. It is completely unsustainable, especially as the net-savers are expecting interest on their savings. The only answer is for the Government to forcibly redistribute wealth by taking directly from the net-savers and giving to the net-borrowers in order to re-balance the economy. A more equal society will by definition have far few savings and far less need for borrowing.

Or alternatively we could rampant inflation have the same effect.

I am self employed. I take only what cash I need out my business, and I take it as a repayment of (the very substantial) capital that I invested. The post corporation tax profits roll up and are reinvested to replace and grow working capital, there is no point in taking it out and paying another 20% tax (or 30% as it will soon be). Self-cert works well for me and I have never missed a payment in 18 years. I have a very large amount of equity and I will be the only loser unless the market falls by 60% or more from here. No amount of affordability checks will save us if the market falls that much.

Under these new proposals I can't get a mortgage. I don't have 'the right sort of income' If I do want to remortgage to a better lender I will have to switch my income to dividends and pay a shed load of tax rather than redrawing my directors loans. That weakens my business. I am being penalised for being self employed.

Also there has been a vicious recession. Most businesses will post much lower profits, if not losses this year. Lenders will take the lowest of the last three years as your income base in the new FSA imposed world. Which means it will be another three full trading years before any of us self employed folk can borrow.

But of course the FSA, with their nice comfy salaries won't be worried about that. I'm all right jack.

This is tantamount to reverting to pre-Thatcher rules and capital ratios. The banks were perfectly able to regulate themselves until regulation was removed whereon competition set the boom in motion.

I've read a lot about how self-employed and contract workers cannot prove their income but this was dealt with back in those days by bank managers who exercised judgement, looked at tax returns, made exceptions where necessary and adjusted LTV values according to several criteria. Why it's now thought impossible is beyond me. It's quite defeatist. Give authority back to traditional bank managers.

This move, however, is long overdue. It might at last restore house prices (which are still bubbling away) to sensible levels whereon people can have a place to live without suffering financial hardship for many years into their mortgages. Don't forget that it won't be long before interest rates go up again. Don't believe what the economists say about this one.

The next issue that needs investigation is the ridiculous system that allows people to commit to mortgages for 25 years when most are unable to guarantee a job for anything like that time. Employers are increasingly relying on 2- and 3-year contracts. People are mere numbers to employers these days, to plug and unplug as whimsies of the economy and/or shareholders dictate. They may be able to repay now but in 2 year's time?

Stephanie,

A reader of your article might be forgiven for believing that quality mortgage advice and the essential requirements of affordability is something that the regulators have just stumbled upon. In fact, the FSA were working very hard to tighten controls in all aspects of this since 2004. Between June and October 2006 the FSA conducted mystery shopping trips and questionnaires to check on the quality of advice and systems checking affordability. Guess what. Only one third of firms sampled had robust systems in place to provide customers with suitable advice. Incredibly more than three quarters of small mortgage networks and advisers did not have robust processes to give quality advice.The poorer areas of advice were on the question of affordability.There were very detailed mechanisms to look at affordability and spending of borrowers. Although larger networks and building societies were found to have robust processes in place, it was found that processes were not being followed or applied.The industry were told to pull their fingers out by FSA or else.What happened?

This is another example of the failure of the Principles-basis of financial regulation set out by Government. You know, the one where the FSA issues Fact Sheets of best practice on Self-certification, advised and non-advised mortgage advice etc. etc. and then leave it to industry to behave unless found by ad hoc checks to be transgressing.Numpty-regulation leading to ever-rising yummy taxable profits.

So, lets not keep blaming Jane and Joe Bloggs as you often do, Stephanie. There was a system of government regulation of a very sophisticated industry to either protect Jane and Joe Bloggs from their own stupidity or to ensure they had proper advice in making their individual decisions. I am pleased you think the FSA/Government are now getting it right........too late!

Hi Stephanie

Thanks for this interesting article. However I think that you give the FSA far too much credit. The time for all these restrictions was 3/4/5 years ago.... What we need now is the banks to lend more not less.

Also it might be easy from a cosy bureaucratic job at the FSA to dismiss self-employed people as they have. It should be part of the FSAs job to devise a structure whereby people who are self employed can get mortgages without the problems that self-cert came too. Whilst there were problems many individuals borrowed more sensibly. We never seem to want to deal with issues this days we just dismiss a subject such as self-cert rather than dealing with it.

In conclusion I feel that the FSA is not fit for purpose...

I cannot understand why there is a big discussion on the idea of regulation. I am a professional engineer and I have to justify to various professional bodies the safety, design, budget and schedule. Why can't the financial services be regulated properly.
How can a professional organisation lend money to a person without testing their ability to pay back the money.......surely this is incompetence in the extreme, how can you trust them to say I have the income and they will pay it back, honest. It beggars belief. Is this not just Due Diligence and Corporate Governance we normally apply as professionals in any field.
There are some rules of thumb such as LTI ratio why not fix it at say 2.8 and then if the lender wants to lend more then the directors of the bank should personally verify that a LTI ratio greater can be done due to whatever circumstances and they underwrite it and become accountable for the decision.
At a stroke house values will return to a sensible level and mortgage lenders will not be able to lend just what they like.
Due diligence and corporate governance must demand that they verify the proposed borrower's income.

Then separate investment banking from retail banking and delink the two. The big bonuses can be paid when the investment bankers really take the risk. If they do it wrong then let them die like Lehmans and not unduly affect the market and not affect the retail banks.

Get paid big bonuses for big risks that are not underpinned by the taxpayers if all else fails.

Get some corporate governance into the banking system and make individuals in the management truly accoutable with their jobs just like those in the private sector of industry who make a much better job of it.

I thought the whole idea was to lend money to people who have to struggle to pay it back, and sometimes can't.

That's how banks make money, foreclosing and eviction.

The last people they would lend money to were those who had it; they would be bankers as well.

All this is just hot air.

There are a few key factors at play here.

This bubble is still 3/4 inflated and needs to reduce to a level where stable activity can resume.

The base level is when the cost of a first time buyer home come into the average salary range of the first time buyer.

If we work on a average salary of 20,000 3.5 X multiple would give 70,000 + 10% deposit 77,000.

The sooner price reduce to this sort of level, the sooner activity will resume with all of the knock on effects on household goods.

This will call the bottom of the market and allow sustainable lending.

The government are using every scraping from the bottom of the barrel and are burdening are children with debt so that this fall does not happen in their term of office but it has to come and the longer it is postponed and more money they print the harder it will be when it happens.

They are missleading and encouraging fools to buy into a market that has some way to fall for their own political ends.

The problem is that most of the sheeple can't see it.

# 55. Justin150 wrote:

"A bubble will inevitably burst because information theory predicts that information on which decisions are based will inevitably be incomplete or out of date so that there is an inevitability that eventually the decision maker will get it wrong - even if it takes several years to get there."

Your premise works fine for short term speculative gain, with decisions based on predicting the market, but with the bubble bursting its probably more a case of on a long term perspective the entire level of the market being based on poor decisions.

i.e. Historical decisions based on imperfect information and influenced by the promotion of unrealistic expectations will eventually be exposed when a shock to the system reveals the truth and causes people to wake up to reality.
Thus bursting the bubble.

Currently, continuing disinformation and people's willingness to buy into it is allowing the bubble to remain inflated to a significant degree.

No 67 "My perference would have been public hangings as a temporary deterent. "

Naaw !! Too quick !! Impalements are better !! Takes longer and allows the street vendors to sell more, thereby helping the SMEs and the economy !! :-)

If it's good enough for Prince Vlad the Impaler, it's good enough for Britain !! :-)

No 68 "Agreed, this does assume that we let bust banks go bust. And that in turn assumes that we split the investment banks from the retail banks. And beyond that I think it also assumes that we split the basic financial infrastructure of current accounts, etc (the modern equivalent of notes and coins) away from the retail banks."

This is what happens in the Far East and they don't seem to have the same kind of problems we have here !! Splitting the retail banking from the casino banks also safeguards, to some extent, the savings of the people and, thereby, giving them a sense of confidence that is missing here !! Considering that most Far Easterners are inveterate gamblers, they seem to know instinctively that casino banks are for gambling and should *NEVER* be mixed up with the savings banks !! Keeps them from blowing their entire family fortune on one bet !!

I'm all for re-mutualising building societies, have more "localised" financial organisations like the Co-op or even, hopefully, something like the Grameen Bank, which won its founder the Nobel Prize for instituting and popularising micro-finance !!

Furthermore, if anyone wants to be investors in the casino banks, they *WILL* have to take the rough with the smooth !! They cannot go crying to the taxpayers (us poor muggins) for bailouts every time they go bust !!

Finally, it all boils down to what is most effective as opposed to "being seen to be doing something" !! LET THE BIG GAMBLERS DIE !! Save the careful banks. Lloyds TSB was a careful bank until its shotgun marriage to HBOS !! After all, they've flogged off the estate agent bit in recognition of its incompatibility !! Why not, repackage HBOS with all of the toxic assets and let it die. Then resurrect Lloyds TSB as it was !! Let it be the scapegoat for its sins !!

And while we are at it, collapse RBS, too and just save the viable bits (i.e the High Street or retail banking) and re-brand them as Nat West again !!

If nothing, that will generate a lot more confidence in foreigners in British banking than all this faffing about !!

No 69 "...I will have to switch my income to dividends and pay a shed load of tax..."

Aha !! Now you've discovered the *REAL* reason for all this messing about !! YOU WILL HAVE TO PAY MORE TAX !! That's all that this government is interested in !! Taxes, more taxes and still more taxes !! Who cares if the small man goes to the wall so long as they can squeeze the last drop of blood out of him !!

And they blather on about recovery !! Don't you find this hilarious ??

"But of course the FSA, with their nice comfy salaries won't be worried about that. I'm all right jack."

The mantra of the Civil Service !! FYJIAR !!

I see no figures on how many self certification loans defaulted in the UK.
Anybody know ?

#80

No figures, but there weren't many self-certs around. Self-certs were always higher risk and were priced accordingly:
https://www.google.com/hostednews/ukpress/article/ALeqM5hKOflr-Eef0OO-WPv3JYIJ8E_B-Q

54. At 6:41pm on 19 Oct 2009, ishkandar wrote:

"We work in order to gain the means for survival. Any gain that is surplus to the needs for survival may either be put aside for future use in less fruitful periods (lean years) or used for luxuaries."

1)Uncertainty - maybe in the past, but how many farmers don't yield what they expect today with the technology and techniques available to them? It may have applied in the middle ages but this argument is out of date.

2) Luxuries - why do you think man is unsustainably using resources of this planet? Don't you realise that Capitalism skews the true cost of items (such as luxuries) so we think they are affordable (whereas the truth is we will pay - a heavy price - someday)

If mankind wasn't dedicating most of his life to producing unneccessary goods and services then we would all be geniuses - not just me.

Most inventors work out of sheds at home. Just because we're not wage slaves does not mean we can't collectively progress - I mean did the first man invent the wheel because he was paid - or because it was needed - and more importantly that man worked with others to achieve it.

Your mind is clouded by the system you have been born into I'm afraid.

I would point out (for anyone who wasn't aware already) that Hector Sants was working at the FSA during the boom years - so for him and his colleagues to come up with this self-cert idea now does bring into question what the hell are we paying him for!

This is more fakery from Capitalism - by abusing socialist ideals. The contradictions of Capitalism cause the systems to fail - the Government then suggests a new (or existing but bigger) body to control them. We donate tax money to the cause in the forlorn hope that they will prevent this happening again.

...but as anyone with a brain knows Capitalism is contradictory and prone to irrational behaviour - a bit like the people (because most markets are a reflection of mass behaviour).

A stable market is one where everyone acts like a wolf - creating balance. However most investors follow the money and therefore act like sheep. They go in together (boom), they come out together (bust).

Simple.

Hi Stephanie,

Look forward to your comment on what the Item Club Ernst & Young October Quarterly Economic Review has to say about the economy and their forecasts. Some very interesting things to say about QE amongst other things.

55. At 6:42pm on 19 Oct 2009, Justin150

Interesting points, however the conclusion is not the same I would draw (I'm not saying Communism does work, but that I don't conclude it doesn't)

The availability and accuracy of information is the crux of the matter, if we agree for now perfect information cannot be achieved then it comes down to what system works better with the lack of information. It's true that if you have 100,000 people guessing at a future outcome - then the distribution of guesses will disperse the effect of being wrong - but surely we can reproduce that without having to rely on people's judgement (which can be tricked by imperfect information). An even distribution is more likely to dilute the incorrect guesses by a set margin each time - unlike the current system where the majority (as now) can all guess wrong.

The real problem is some have the power to create mis-information for their own gain, and those who have that power can use it to further increase their position and ability to do that (a monopoly) and if they cannot do it alone they can with like minded people (a cartel). This means winners staty winners and losers stay losers - regardless of the odds of that happening under free conditions

The issue with Communism in the past was the same issue regarding information - it's hard enough supplying the entire market with correct and up to date information - let alone a person, or party. However in contrast to the current system (many people guessing) then surely the adage "you can fool all of the people some of the time" is pertinent as 'all of the people' thought Northern Rock's business model was a good one.

...however - isn't that what the internet was invented for?

Information super highway

The clue is in the name. It wouldn't take much for all citizens to table their needs (and I mean needs, not wants) and ensure that the resources produced by all are distributed evenly. This doesn't have to be a man on the decision making - distribution can be set by the people and only changed by the people (like a constitution).

....of course those who object to this are those who know perfectly well that they are living outside of their needs - and are essentially children who don't want to give up what they have - because they have become acustomed to it. It's the same reason people pooh-pooh resource wastage or environmentalism - it's just children conforming to their type - not having the ability to see beyond their own personal situation and the realisation that 'no man is an island' and without others they would starve.

Meanwhile the adults among us realise that we have a choice, either start the process now - or wait until we're thrown into it violently.

I would prefer we did this now to avoid the pain and suffering that will come later, especially as it wil throw man against man in wars for resources.

....and that's why Capitalism does not work socially.

(by the way 'children' and 'adults' are not age specific, there are adult children and children in adult bodies)

You can believe - or not believe, it matters not simply because it's inevitable that there will be crisis and that we will have to make these decisions someday - it's just the adults among us like to think ahead - only the children live for the moment without considering the future.

It was inevitable that there would be some tightening of the regimes for mortgage lending to consumers, as well as businesses. As you rightly point out the FSA has decided that the bankers do not always know best. The figures on self-certified mortgages in 2007 could be both a symptom and cause of the credit crunch and ensuing recession.

Firstly, on the causal point, they indicate that the mortgage lenders were desperate to sign off loans, despite the increased risks of default that these mortgages have in hindsight been shown to possess. It seems that this might be related to the targets and related bonus cultures in the financial institutions, which permeate down to the front line. At an operational level bank employees needed to sell mortgage deals to reach targets and achieve bonuses.

Secondly, as a symptom of the impending crunch and recession, it would seem that there was less mortgage business available with a lower risk premium attached to it in 2007, otherwise, presumably the financial institutions would have gone for those deals instead; i.e. the non self-certified types.

The risk for the longer term recovery of the economy is not to be sniffed at. The lending institutions may swing to the other extreme in their attitude to these risks and become hyper cautious about lending to the self-employed and this may act as a brake on economic recovery. There are likely to be more people in this smaller business part of the economy following the substantial job losses in larger organisations across the economy over the last year or so. The current outlook for the jobs market is not the best for job seekers currently.

No 82 "1)Uncertainty - maybe in the past, but how many farmers don't yield what they expect today with the technology and techniques available to them? It may have applied in the middle ages but this argument is out of date."

Exactly which farmers are we talking about ?? If it is the farmers in the West, *NONE* of them can survive without government subsidies !! Furthermore, the markets themselves are very uncertain because consumers are fickle !! The weather may play a less important part than in the Middle Ages but they will still affect the production.

Farmers elsewhere are totally dependent on the weather !!

Regardless, even if you produce widgets, you will still have to save "for the rainy day" unless you intend to go a-viking (i.e. thieving) when times are hard !!

"2) Luxuries - why do you think man is unsustainably using resources of this planet? Don't you realise that Capitalism skews the true cost of items (such as luxuries) so we think they are affordable (whereas the truth is we will pay - a heavy price - someday)"

Luxuries like having a plough instead of just hoeing the ground !! Like having a bicycle or a car instead of walking everywhere further than 10 miles from home !! Like having clean running water, electricity or gas instead of cooking over a wood-fired stove or drinking muddy bacteria-ridden river water !! I've seen all this happen in many third world countries.

"Most inventors work out of sheds at home. Just because we're not wage slaves does not mean we can't collectively progress - I mean did the first man invent the wheel because he was paid - or because it was needed - and more importantly that man worked with others to achieve it."

I'm sure if you can produce enough cars to keep Britain's exports up, you'll be knighted in no time at all !! Perhaps you'll build some plasma TVs while you are at it !! All made from mud and straw !! Any manufactured and/or imported goods or parts are someone else's labour that has to be paid for; or were you just going to rob them of it too !! Especially since Britain no longer has any iron mines or smelters to produce iron from ores. The last British smelters produce steel from pre-produced iron made by someone else !!

Rhetoric is very cheap !! Reality is that most economies are interdependent and international parasitism is forbidden by world accord !!

#83 writingsonthewall. Hector Sants and the FSA merely follow orders. A few years ago the orders were not interfere - mortgages for all. Today the orders are to construct a smokescreen, try to shift the blame onto the ordinary man in the street, make certain there is no popular understanding as to what happened.

What happened is explicable by an error in the funding models of the large institutions - borrow short and sell long. When short term funding dried up then the business model failed. It had nothing whatsoever to do with sub prime borrowers. Check out the assumptions of the sub prime lenders - substantial defaults and foreclosures were built into the model.

Their model did not include substantial house price falls - but that is just a consequence of the original error in the model. it is not working out too well in the US - so Europe does everything in its power to create a false market and artificially hold up house prices. Look at Spain. There they have 1.6 million empty houses and yet house prices are only 10% below peak. How can you explain this, other than by the creation and maintainence of a false market?

This has nothing to do with free market capitalism. Nowhere will you find a treatise on free market capitalism that envisages the forced sequestration of funds from the general population in order to shore up rotten and systemically bankrupt institutions.

What faces the general population is something far more sinister than capitalism.

#87 Ishkandar. You write: "...international parasitism is forbidden by world accord"

Surely you meant to write "...international parasitism is enshrined by world accord, and, where necessary, enforced by military power."

Otherwise you need to explain an awful lot, including; the routine hoovering up of third world medical staff to come to westrn hospitals, the invasion and occupation of Iraq, and the requirement of the IMF that Latvia steps up the exportation of its human capital.

"Exactly which farmers are we talking about ?? If it is the farmers in the West, *NONE* of them can survive without government subsidies !! Furthermore, the markets themselves are very uncertain because consumers are fickle !! The weather may play a less important part than in the Middle Ages but they will still affect the production."

There are farmers in the west - that is an exaggeration.
Consumers are fickle because they are lambasted with choice - too much choice makes a fickle nation - hence the abundance of waste. In fact it's not really even the case is it - most people are creatures of habit, they eat the same foods and do the same things - they like routine. It's far more rare to find people who don't follow a routine of some description (although everyone likes to think they don't - because of their desperation to be indiviudal).

Farmers are dependant on the weather - but again this is due to the imbalance Capitalism brings. I think you'll find farmers in the mid-west in the US have to cope with conditions similar to central Africa - but the technology at their disposal ensures they can produce consistently.

Your examples of luxuries goes from true luxuries (car driving) to needs (clean water) - are you just tyring to confuse?
I think you'll find in the long term the abundance of luxuries creates other problems - for example the reason we have so many obese people in the west is exactly because people drive when they could cycle. You are creating a problem by indulging in luxury - and as with car usage - what was a real luxury in the past (a drive) has been over-used and over-supplied so that many people now drive around the corner to the shops.

You seem to have an obsessions with 'robbing people' - is that a sign of desperation in being unable to counter arguments? I think you'll find most people steal in order to fulfil the learned materialistic urges (which are unnatural) and not because they simple feel like it. Of course you're right, plasma TV's probably wouldn't be invented - but unless you can explain what purpose a plasma TV has over a normal TV - or even radio - then I'm all ears.
The reality is whilst a plasma TV may be desirable in order to 'keep up with the Jones's' - it has no real purpose in our world and millions of people manage perfectly well without it.
Invention borne from need and necessity have a place in this world - trinkets to adorn yourself and boost your flagging ego do not.

It seems to me you are arguing the case of the child - you don't want to give up what you have been given - even though the sustainability of those items means that one day you will have to give it up.

Your final argument about everything being sold off (industry) is only as a result of Capitalism as the need to exploit has to be moved off-shore for fear of upsetting the populous here. We have moved from a Capitalist nation with an exploited workforce to a Capitalist nation exploiting others - hence Iraq, Afghanistan etc.

Your guilt is now being born by the poor in India, China and other industrious countries - out of sight, out of mind allows you to continue in your illusionary world of luxuries without showing you the price others are paying for it.
Capitalism is the method by which this is done - but rest assured the rich get smaller and smaller in number each year and the poor grow ever more powerful and numerous which will eventually lead to the return of 'mob rule' where you and I are the opressed and the truly poor are the opressors.

88. At 10:40am on 20 Oct 2009, armagediontimes wrote:

I thought the FSA were independent of Government (or is that a myth) - if they are not then even more reason for getting rid of them all.

I agree that recent events are not Capitalist - plainly because the Capitalist rule would be to have allowed the banks to fail and it's tough luck for anyone who loses savings, pensions etc. This is it's anarchic nature - which has no consequence for humanity as we are all seen a commodities. What it doesn't account for is the reaction from these commodities - unlike a slab of concrete these commodities fight back!

Models rarely contain doomsday scenarios - mainly because if they did then nobody would invest anything - ever! (or at least so very little to make it pointless)
I do actually agree that 'half way Capitalism' is possibly worse than raw Capitalism for uncertainty - but that's not to say Capitalism's nature is acceptable.

If the banks had failed then I would not be here posting this as my Electricity and Broadband would have been cut off and I would be sitting in the dark as the lack of funds would mean key industries would not be able to pay their workers.
The reason for the collapse in the first place was due to market inteference (manipulation of Fed rates in 2001 - although you can go back much further than that) - but then they must intefere in order to reatain some sort of normality - otherwise you might find it frustrating when the bus no longer comes past your house because Capitalism can no longer see profit in it - leaving you stranded.

89. At 11:09am on 20 Oct 2009, armagediontimes

...the parasitic nature of the west is now neccessary to ensure we all keep the standards of living to whihc we have been accustomed to.

I'd like to know which branch of logic dictates that in a finite world (the earth) we can live like kings in the west and there are no consequences for the rest.

I presume it's the same branch of logic which tells the rich that they are 'wealth creators' and not simply 'wealth re-locators' - because wealth is finite and defined by the resources and the interaction with man (work) - unlike money which is a concept that no longer bares any relation to the true value of the underlying commodity.

....which is why oil prices are bouncing - they are tagged to the Dollar - which is being printed by the Fed - making valuation meaningless.

One day we'll all wake up and realise it's all paper.

Leaving aside the saving of the world from it's own doom.....

Does anyone remember the Barclays shareholders who came on here lauding it up about not having to rely on Government bailout and saying how mcuh better it is to raise the money privately?

....well this story shows why that is yet another false dawn - you are at the whim of foreign investors. The Government may seem an unpalletable partner but at least you know they won't drop you in it - if nothing else than political reasons.

https://news.bbc.co.uk/1/hi/business/8315917.stm

Beware the Wolf in sheeps clothing investors....

#91 writingsonthewall. It matters nothing whether the FSA is independent of government. The point is that government, its agencies, mainstream media, and regulatory bodies have been captured by financial oligarchs. These bodies all take their instructions from the oligarchs.

The reason that models do not contain doomsday scenarios is because they are supposed to be constructed to support projects that have themselves passed a rigorous "fatal flaw" analysis. Models are expensive and so you only construct them for projects that are viable.

Banks have failed. They are being kept alive as zombie banks. They cannot recover because they are irredeemably insolvent. The only thing keeping them going is massive amounts of free money allied to surrepritious, and semi criminal, modifications to accounting rules. Had they been allowed to fail there is no reason at all to suppose that society would have collapsed, as you postulate.

The money pumped into the banking system ($15 trillion and counting) could have been used to protect depositors and provide bridge funding to the operators of vital infrastructure. In addition there are 500 individuals in this world with aggregate wealth of $5 trillion. Some of this wealth could have been sequestrated as an alternative to going after the pennies from the masses.

Depending on where you live busses no longer pass your house anyway. That is what Thatchers deregulation of the bus industry was all about.The value of peoples savings are being eroded in any event by the policy of zero interest rates, and, as is well documented, millions of people have lost their pension entitlements.

The price movements you observe in commodities is the free market telling you that the US$ is in the process of being destroyed. Most certainly as a consequence of the fabled banking bail outs. The US$ will not go gently into that dark goodnight, so it is a racing certainty that the high priests of finance will demand that the pace of human sacrifice be stepped up. A body can lose a lot more than savings and pension entitlements.

The great irony of what you write is that, largely as a consequence of the conscription of wealth to give to the already obscenely wealthy, the UK is almost certain to run out of power by around 2017 anyway. So, your apocalyptic vision will be fulfilled but maybe not for the reasons you think.

Life is very simple. If a parasite attaches itself to you, you remove the parasite irrespective of any short term inconvenience. Ask anyone who has ever been infested by lice or looked down to find their legs covered in leeches.

#93 writingsonthewall. Barclays shareholders have the freedom to say what they want, even if what they say is evidentially false.

Along with all other banks Barclays are recipients of the UK governments munificence. They are allowed to borrow money for nothing, and they are allowed to avoid disclosing the magnitude of their toxic assets and to participate in mark to myth accounting methodology.

Most importantly they can "market" to external investors that they cannot lose as the UK government will not allow the institution to fail and will not harm the interests of wealthy investors. That probably completes the due diligence.

writingonthewall

Remember that capitalism has two faces: its neo-liberal market rules ideology and the state capitalism ideology of social democracy (bank-bail outs to protect all us little people from market failures).

State capitalism is in the ascendency because the capitalists (not the people) are the state instutions (which is nothing new).
Whether it is state organisations or supra-national institutions (e.g. EU and G20) the capitalists will use them to try to prevent devaluation (even if it is protectionism, i.e. the survival of one nation's capitalists and the expense of anothers)and ultimately to ensure the means of production remain in their hands and are not collectively controlled.

Capitalism is the state and the market.

Remember the state is an armed institution that ensures the domination of one class (capitalists) over another (labour).

Another day, another distraction

Perhaps we could have a cut and paste response to this sort of thing. First to the blog posts it. Something like this.....

Hector Sants was in charge of wholesale funding at the FSA
UK banks used wholesale funding to cover their mortgage books
They lent long and borrowed short
The wholesale debt payment terms were tied to LIBOR which soared in 2007/2008
Some wholesale debt is dollar and euro denominated and the pound has devalued against these currencies
The legislation covering the FSA charges them with enabling competition for consumers. A large number of products were available via brokers. Lending standards dropped in favour of market share.
'War Games' identified Northern Rock as a potential risk from its use of wholesale funding and that this risk could spread
The FSA did not act forcibly to manage risks
The tripartite regulatory regime has not been regulatory
Arrears and repossession rates are still low
The losses on mortgages rather than funding are still low
RBS were too acquisitive and the joint ABN AMBRO purchase at 10 billion was one acquisition too far.
HBOS had a commercial lending book that was too big and too risky
Lloyds acted too swiftly
CPI was used to assess inflation rather than RPI which incorporates housing costs.
Interest rate discussions considered CPI
Wholesale funding was cheap for a while but increased in cost.
Non-banks arranged alot of more risky loans at the peak of the market.
All of this happened under the governments of the last 12 years.


OK, anything else?

Yrs

Mrs Bloggs

I have 2 business', one on a self employed basis, the other a Limited Company.
I completely agree with stopping self cert mortgages. However I see no reason I should be suffer for the fraudulent activity of those who were PAYE yet getting self cert mortgages.
Does this mean I have to buy a home without a mortgage or will the FSA get back in to the real world and use our tax returns to verify income. After all if it's good enough for the tax man, it should be good enough for the FSA.
And as for those who argue that self-employed income is under-represented for tax purposes, pay your fair share of taxes or suffer the consequencies.

No 88 "This has nothing to do with free market capitalism. Nowhere will you find a treatise on free market capitalism that envisages the forced sequestration of funds from the general population in order to shore up rotten and systemically bankrupt institutions."

Absolutely true !!

96. At 1:05pm on 20 Oct 2009, duvinrouge

"Remember that capitalism has two faces: its neo-liberal market rules ideology and the state capitalism ideology of social democracy"


....or is State Capitalism merely a result of attempts to prop up Capitalism in the first place? It's either by design, or by accident - the result is the same (handing over public wealth to the private sector year on year) - but the ramifications are different (people can accept mistakes, but not being lied to)

Either way, the result is the 'haves' become fewer in number and the 'have nots' grow - an imbalance which leads to one bloody conclusion...