2222 replies to this topic

[BrickFielder]

Time for a new thread I think as the last one was getting pretty long in the tooth. To start it off I have written down some of my to thoughts on lending and what it might mean for the rest of us and I am afraid I not in the all lending is bad camp.

I have changed my mind somewhat about the banks lending at 2007 levels namely because I forgot that there are less banks now and each bank ought to have a larger market share. This is especially true in the mortgage arena where northern rock and Bradford and Bingley were significant players. What I think the banks should aim at is lending levels which allow the economy to grow at a stable rate. Let us not forget that the trigger for the credit crunch was poorly risk assessed mortgages to Americans with no jobs. This may seem in retrospect to be a silly thing to do, but if you just package these things up wrap some insurance around them and flog them off , probably nobody would have noticed without the downturn in the housing market. There is another story here though and it is that some of those people with no jobs did manage somehow to pay the mortgage and keep going and are still managing to. This suggests that there was a real problem with the risk analysis of loans at banks , more often than not the correct risk was not priced in (hence all the bank write offs now), but also to a much lesser extent a few didn't get loans when they probably should have done (especially small businesses). What we need is sensible lending which allows the economy to grow, not boom and bust,nor housing price bubbles, nor severely constrained lending and for the banks to price lending according to the risks involved (stop passing the buck on risk).

There are some consequences of correctly pricing loan risks and curtailing silly risky loans for us all. Buy now pay next year will not be available in the shops unless you put down an appreciable deposit. Probably the biggest changes will be for those who last time they bought a car, did it for a loan for the difference between the price and end the residual value of the car at the end of the loan period. Here people with have no equity in their cars so they will most probably be asked for a significant deposit or be given very high interest rates before they can have the next car loan. This is part of the reason why the car industry as a whole is performing extremely badly.Credit Card lending will also change with higher minimum payments likely(20 percent of balance to be payed off by the end of the month). Generally we will have to save a little before we go out and buy that nice new shiny whatever and will have to be seen to pay off current debts instead of just racking up more and more debt.

[BrickFielder]

Economic news from around the world is pretty gloomy.

Switzerland has annouced rescue measures for its two large banks Credit Suisse and UBS with some 60 billion of troubled loans being taken on by the Swiss government. Hungary and some eastern european members of europe are rumoured to getting bailouts from the ECB or IMF as stock markets and currencies there have taken steep tumbles recently. In Ireland there are rumours that the government blanket guarantee of banks will be called on at some point with a hefty bill likely for the government.

Russian stock markets seem to be semi permanently closed recently with repeated large falls decimating their share prices. Globex on Wednesday banned depositors from withdrawing their money as confidence in the Russian banking system began to show signs of evaporating.

Perhaps an important piece of news has been somewhat overlooked recently is that India is suffering the same kind of troubled withdrawals from mutual funds which trigger the US to swiftly annouce the 700 billion Tarp. Investor pulled 43 billion ruppees from mutual funds over the last month causing inter bank rates in India to rise to 23 percent (Imagine your mortgage going up from around 10 percent to that level). Without intervention this will hit the Indian economy hard and could lead to currency problems. This highlights that actaully asian economies might just be in an even worse position than western economies. Nobody knows what is happening to savings in China, but we could all be in for a bit of a surprise I feel in terms of China’s growth.

Live Mint report on Indian Mutual Funds

US bank lending from the US government reached record proportions in the week up to 15 with 437 billion dollars a day being lent by the Treasury. The worry is that normal function of inter banks lending has still not unfrozen despite all the bailouts. With time it may unfreeze but in the mean time the real economy is being damaged. This is after Citibank and Merril reported more big losses yesterday. From America there is news that the merger between GM and Chrysler is going ahead. I cannot help wondering whether this can be linked back to the leaked story from the European trade unions that GM was considering stopping production at a number of European plants. Chrysler is known to have invested quite heavily in manufacturing plants in Asia which are currently under utilised. In Europe shares in VW and BMW have taken a beating and this is on news of quite robust sales. Perhaps this is because the big players in the finance industry which provide car loans are struggling as well (GE Capital and GMAC) or this could be that a significant downturn in the economy is being priced in.

Edited by BrickFielder, 17 October 2008 - 09:20 .

[Iceberg]

I understand what you getting at BF re the 2007 lending, but I think it's at best poorly said by the govenment, it's probably misleading and almost certainly won't happen.

If you take mortgage lending, anybody with a decent credit record, that wants to borrow 3 Times there salary and can put up a 20% will get a mortgage at the moment. However take up levels are far below what they should/need to be.
There isn't anything the banks can do to attract more people except
- Offer lower credit rates (which won't price the credit risk to the right level).
- Relax terms (but this would get us in the same problems further down the line again).

The banks have for the first 6 months of this year been lending responsibly(as can be seen by there 6 month results) what they need to do is continue this method of lending.
A more sensibly statement by the government might have been to say that the banks should be responsible lenders etc, they should not withdraw credit unless all means have been exausted, make more use of payment holidays etc.

Far more harm is done by NR and it's clamp down on house repossessions(as shown by the bbc this morning).

Overall I am almost at the point of saying that banks will by and large be saved. The cost will be terrible with a prolonged recession(depression).

Your point re China is very much the market view atm, The Chinese economy is not just stuttering it's stopped and is in very real danger of imploding. The money it's received in the last decade has not been invested wisely, but is instead been spent producing roads, generating plants etc to allow it to fuel the greed of the west.
Now that the greed is being curtailed they don't have a true demand for their products anymore. This is a major reason for the declining commodity prices and the declining share prices of the mining/oil/extraction/raw material company share prices.

Australia will start to suffer badly from this as will Russia, many of the developing markets like India/Philipines/malaysia even South Korean will be OKish( although still suffer a recession), as they have quite an invested infrastructure through outsourcing from developed countries and I don't see this tailing off.

I think shares in the UK are at the bottom pretty much now and will likely stay there until a way out is found or the first few glimmers of hope break though.

The derivative loss by the French bank this week is interesting, particularly as this is where most of the major banks have turned to keep there income up after the CDO problems. I'd expect more banks to fall foul of this as they dabble in things they arn't really qualified or experienced in as the markets are incredibly volatile.

[BrickFielder]

Iceberg I agree with you about lending, but suspect banks will have to relent somewhat to keep the economy from stopping totally as it will take time for the consumer to adjust. As for China then changes in the way real estate works might help spur some domestic demand (the next bubble) as small time farmers are alllowed to sell up and make way for industrial agriculture. I missed the french derivatives loss so I will have to search that one out, but it is looking likely that the CDS fall out from the Icelandic banks could trigger more write downs especially in some european banks.

Markets News.

Late yesterday Shares on the Dow had a surge and I believe it may be due to a technical matter with options expiry occurring on the 19 and 20th of October. Here option traders will have to close out existing deals and start new ones (buying options in shares). The consequence of this is that next Monday might be a very bad day for the Dow.

Focus in the UK now turns to other financial companies with the FSA closely monitoring the situation with life assurers. Legal & General life assurers, insisted its financial position remained strong. Prudential was on Thursday night forced to deny it was planning an imminent rights issue, as investor concerns spread to the plight of insurers. Shares in Prudential shares fell almost 20 percent in recent days.

Also coming into focus now is the plight of some hedge funds. One of London’s best known hedge funds, Gradient Capital Partners, is in severe difficulty after dropping nearly 42 percent in value in September, according to the Daily Telegraph.On Thursday as Highland Capital Management annouced it was shutting down two of its funds and details emerged of big losses at TPG-Axon. Properly leveraged hedge funds help to spread risk and if they fail to act effectively then we may expect some prices rises as a result. Politicians seem to be carefully sidestepping the issue, but hopefully the FSA has its finger on the pulse.

Commodity prices have dropped a lot over the week due to suggestions that the global economy is slowing rapidly and demand for raw materials will shrink much as Iceberg mentioned. This is having a big affect on shares prices of mining concerns listed on the London stock exchange. Linked to this are reports that the baltic dry index has dropped 80 percent since its highs earlier in the year. Alphaville takes the view that it is letters of credit which are the problem (as I mentioned before but am still nto convinced about) with trade delayed while bank credit is sorted out.

The Alphaville view of the Baltic dry index

Alphaville also has a good post today questioning the reporting that the bailouts are working to reduce stress in the markets. Bloomberg and others have reported how Libor and TED spreads and OIS are coming down. Alphaville points out that it really is not coming down quite as you would expect (3 month libor down 0.02 percent down overnight). Some are arguing that it will take time, but for me the credit markets are dictating the tune. Although credit default swaps on banks are coming down they are rising on the wider economy which means there are potential big losses coming down the line for banks as the real economy starts to falter. One bank analyst yesterday on bloomberg suggested credit markets were now pricing in a depression although he did clarify that by saying he did not expect it to happen.
AlphavilLe on Libor and OIS

Naked Capitalism has an blog entry today on why the US bailout has sent US mortgage rates upwards. The reasoning goes that now old mortgage debt is going to be bought up by the US government at reasonably attractive prices investors are buying up this old debt rather than invest in new mortgage debt through Fannie and Freddie. In essence investor make more money dealing with the government than with the proper normal trade processes. US Housing could well have taken another big hit with the unexpected side consequences of the bailout. Rumours are that the monlines what to get in on this action as well.

Naked Capitalism and rising US Mortgage rates

Quote of the day comes from a comment by Michael on Brad Setsers flight to treasuries and safeties post today. I perhaps should mention that Brad does not really beleive this will come to pass as he expresses in comments at the end of the blog. Brad is right though that this is the one of the worst financial nightmare outcomes and could result in currency market crashes as a result.

Quote

However, this surge of bailout debt is another “weapon of mass destruction” that is going to fall on us somewhere down the road.Once the credit panic is over and the flight to safety ebbs, the interest rate on Treasuries will snap upward as the debt is rolled over with fewer buyers bidding on it.

Foreign central banks seek safety by brad setser

Edited by BrickFielder, 17 October 2008 - 11:00 .

[Iceberg]

A good story has just appeared concerning China and my view.
http://newsvote.bbc....ess/7675552.stm

"A Chinese toymaker which supplied firms including US giant Mattel has gone out of business with the loss of up to 7,000 jobs.

Rising raw material and labour costs and slowing US demand forced Smart Union to close its doors this week.

Workers have since been protesting outside the firm's factories and a government building in Guangdong province to demand their unpaid wages."

[Boar Wrinklestorm]

Yes, I quite agree with what Brick+Ice say, the credit markets need to contract in order to prevent this sort of problem happening again. One could say, I guess, that the crunch is really a natural contraction to acceptable lending levels.

(I got lucky, a friend of mine who works high up in the IT chain of global bank - who seem to have sidestepped all this mess - said to me at a xmas party in 2006. 'VP, if you have any unsecured debt, pay it off, spend all your money in paying it off. Do not borow, and, for goodness sake do not touch any equity you might have. Build yourself up a cash contigent, too' I took his advice)

[Kiwi]

VillagePlank, on 17 Oct 2008, 11:41 AM, said:

I got lucky, a friend of mine who works high up in the IT chain of global bank - who seem to have sidestepped all this mess - said to me at a xmas party in 2006. 'VP, if you have any unsecured debt, pay it off, spend all your money in paying it off. Do not borow, and, for goodness sake do not touch any equity you might have. Build yourself up a cash contigent, too' I took his advice

Very sensible -- unfortunately you're not our average Brit.

UK personal debt exceeds national GDP.
It's scary but the entire value of everything this country produces is not enough to pay off our loans and credit cards!

[The PIT]

Kiwi, on 17 Oct 2008, 01:18 PM, said:

UK personal debt exceeds national GDP.
It's scary but the entire value of everything this country produces is not enough to pay off our loans and credit cards!

That is scary.

Time to start changing the attitude of Joe Public and get them back to save up until i can afford it mindset rather than flash the card I'll pay another day if possible.

[Stu_London]

Superb piece from one of the best economic observers, there is - Fred Harrison

http://www.dailyreckoning.co.uk/economic-f...-recession.html

Recommend everyone reads this and remembers it next time Gordon or Alistair blame 'global factors'.


Rather eerily this was written some 3 and a half years ago.

[BrickFielder]

This would be the author of Boom Bust: House Prices, Banking and the Depression of 2010. He would appear to be quite keen on taxing land rather than income. He also has some very anti new labour views and seems to be propose that we completely restructure the way taxation and government work along the lines suggested by the economist ricardo.

Ricardo's Law by Fred Harrison

Quote

There have been some improvements, but the price has been a big increase in the tax burden,much of it introduced by ‘stealth taxes’ - and it is debatable whether the increase has givenvalue for money. Despite this, the gap between rich and poor has widened. Why is this? In Ricardo’s Law Harrison sets out to explain. The reason is the method used by governments of all political parties over the last two hundred years to raise government revenue – taxation.

I am not sure I can really go along with everything he says but his arguments about some of keynes views sound a warning bell with me.

Quote

two unavoidable effects: (1) the persistence of inflation - the effects of which politicians struggle to minimise; and (2) a gradual cut-back in the rate of savings, which consequently affects investment.

The next step for the UK government may well be to borrow more money and start on an even bigger infrastructure development programme than we have seen already. The cost of which may be Inflation and or a diversion of savings from banks towards government debt, with banks having little option but to tighten credit criteria further.

Just as governments are not blameless nor are regulatory authorities, ratings agencies, accounting standards, investment banking, mortgage sellers, car dealers and not forgetting ourselves.

The next year will show how little politicians really understand about the modern complexities of economics and there is a good chance they make things worse. For now the banks still seem to be functioning (the cash machine still works anyway) which is always a good sign.

Fred Harison on Keynes

[weather eater]

There’s a story in today’s telegraph today about lowering interest rates to 1%, how much truth there is in that I don’t know but encouraging people to borrow our way out of this crisis is surely madness as I understand it low interest rates to businesses in the USA was one of the factors in getting us where we are today.

[crimsone]

Anybody that takes out a loan of any sort because interest rates are low is a fool. Interest rates change.

[Thundery wintry showers]

Unfortunately, many people don't think things through enough to make decisions that pass beyond the "fool" category...

[Osbourne One-Nil]

crimsone, on 17 Oct 2008, 09:44 PM, said:

Anybody that takes out a loan of any sort because interest rates are low is a fool. Interest rates change.

Fixed-rate loans?

[Stu_London]

Osbourne One-Nil, on 18 Oct 2008, 09:24 AM, said:

Fixed-rate loans?

Yes more debt please

Exactly what a this country needs

[Paul]

Dropping interest rates isn't just about encouraging people to borrow, it's about reducing mortgage payments etc, which puts more money in people's pockets and gets them spending money on the high street.

Saw this on the BBC site, quite concerning that since being nationalised Northern Rock are repossessing properties at twice the rate of the national average.

http://news.bbc.co.u...ics/7676671.stm

[Stu_London]

Paul, on 18 Oct 2008, 12:16 PM, said:

Dropping interest rates isn't just about encouraging people to borrow, it's about reducing mortgage payments etc, which puts more money in people's pockets and gets them spending money on the high street.

As long as inflation remains above interest rates we are all getting poorer

Low inflation or deflation and low or zero interest rates will prevent the massive debt that the country and it's citizens have being inflated away

Anyone cash rich will be ok - anyone with lots of debt will be snookered (especially if they lose their job)

[Osbourne One-Nil]

Stu_London, on 18 Oct 2008, 12:15 PM, said:

<br />Yes more debt please<br /><br />Exactly what a this country needs<br />

<br /><br /><br /> But not the point I was making. I was pointing out that not all loans have variable interest rates. A specific reply to a specific point.

[The PIT]

Paul, on 18 Oct 2008, 12:16 PM, said:

Dropping interest rates isn't just about encouraging people to borrow, it's about reducing mortgage payments etc, which puts more money in people's pockets and gets them spending money on the high street.

Saw this on the BBC site, quite concerning that since being nationalised Northern Rock are repossessing properties at twice the rate of the national average.

http://news.bbc.co.u...ics/7676671.stm

Possibly that Northern Rock lent more to people that couldn't pay than others and it also needs to get the debts down as well. Shouldn't be unexpected really.
They had a women on Breakfast quite upset about her house being reprocessed even though Northern Rock hadn't actually said that it would. She didn't help herself by not going to the Court Case.
Should the tax payer bail these people out or should the bank be more lenient. Difficult to say as we don't know what the advise Northern Rock gave to her or whether her life has had a sudden drastic change. Loss of job etc.

[crimsone]

Osbourne One-Nil, on 18 Oct 2008, 12:45 PM, said:

<br /><br /><br /> But not the point I was making. I was pointing out that not all loans have variable interest rates. A specific reply to a specific point.

Understood, though fixed rate loans aren't the common type people take out as far as I'm aware, and aren't they only fixed usually for just part of the life of the loan?

With regards to lower interest rates and morgage repayments, I may be mistaken, but I've not noticed the interest rates for morgages come down in line with the base rate of interest?