Green shoots take a blow in the mortgage market

A setback for any signs of green shoots in the housing market as figures out this money show mortgage completions down 6.8 per cent in February and 25 per cent down on a year ago.

It was the first fall since the end of last year and may signal that the confidence that was returning to the housing mareket is not as solid as some were forecasting

Did the price of oil trigger the recession

Remarkable as it might sound the cheap price of oil in the 1990's may well have started a chain of events into which we are now being propelled.

That is at laest according to a paper presented at the Brookings Institution by James Hamilton.

Derek Thompson summarises it well in this piece at the Atlantic

Cheap gasoline from the 1990s into this decade encouraged families to set up their homes farther from the cities where they worked. But as the price of gas began to increase, it put a big strain of these families' commutes. With gas rising from $2 to $4, the price of these long drives doubled, straining those families' most expensive payments, namely: mortgages. When families realized they could not afford their exurban commutes, they sold their homes for a big loss. Voila: Their mortgage crisis became a bank crisis and the rest is our living history.

We want to own our own home

The fall in house prices over the last year has meant that many people, my partner and I included, can now realistically consider buying a home. However, the problem remains that whilst there are properties which we can in theory afford, it is still extremely difficult to get a mortgage. This lack of access to credit risks extending the economic downturn and undermining young people's faith in the Government's recovery plan.

This is Kate Groucutt writing over at Labour List,a problem which the government is going to have to tackle

This is what happened

1.

We have managed to save enough for a 10% deposit and there are now a range of mortgages available on this basis. But, no, we were told that for a new build flat we would require a 25% deposit.

2.

we approached the Government funded scheme Own Home which gives a contribution of 20-40% of the value of the home on an interest free basis for 5 years. It is aimed at first time buyers, yet we were told that we would need to wait 10 weeks just for an eligibility interview, hardly 'real help now'.

The money merry go round

Another ideological god has failed. The assumptions that ruled policy and politics over three decades suddenly look as outdated as revolutionary socialism.

So says Martin Wolff as he begins the first part of the FT's analysis into the future of capitalism in this morning's paper

But he gives a good analysis of how we got here

In the US, core of the global market economy and centre of the current storm, the aggregate debt of the financial sector jumped from 22 per cent of gross domestic product in 1981 to 117 per cent by the third quarter of 2008. In the UK, with its heavy reliance on financial activity, gross debt of the financial sector reached almost 250 per cent of GDP

This was one symptom,then

By intervening to keep their exchange rates down and accumulating foreign currency reserves, governments of emerging economies generated huge current account surpluses, which they recycled, together with inflows of private capital, into official capital outflows: between the end of the 1990s and the peak in July 2008, their currency reserves alone rose by $5,300bn.

These capital flows ended up in a few countries notably the United States in which

the ratio of household debt to GDP rose from 66 per cent in 1997 to 100 per cent a decade later. Even bigger jumps in household indebtedness occurred in the UK. These surges in household debt were supported, in turn, by highly elastic and innovative financial systems and, in the US, by government programmes.

All being driven by a financial sector which came up with more innovative ways of recycling the money until it all came to grief in the trailer parks of the Mid West

Going to the dogs

There has been a lot of talk about whether the country is indeed going bust.

I suppose that the definition of going bust is that your assets are swamped by your borrowing and in the case of a country,those borrowings come from overseas.

Take a look at this graph courtesy of the blog site Burning your money and decide whether we are indeed going to the dogs.

I have just finished reading Nick Cohen's article in the Observer.It is a fascinating insight into a world that Nick believes that we have left behind full of excess and greed and is well worth a read.

It comes from an extract from his forthcomoing book and its opening is a very poignant

Two years after the Great Crash of 1929, the American journalist Frederick
Lewis Allen looked back on the Jazz Age of the 20s as if remembering a dream.
The daring flappers, abandoning their corsets and lifting their skirts "far
beyond any modest limitation" and the swaggering investors, who "expected the
Big Bull Market to go on and on", ought to have been fresh in his readers'
minds. But Lewis knew that the bank failures and mass redundancies of the Great
Depression had made the recent past utterly foreign. The optimism brought by
prosperity was now as far away as a distant star. Wondering what to call his
book, Allen hit on a title which was also a reminder, Only Yesterday

What are we saving then?

This is an argument that we need to see more of.

Over at Labourhome Red Rooster asks exactly what is the government trying to save from the pre credit crunch economy arguing

The Credit Crunch gave us an immediate purpose, but before that we were floundering for a solid narrative of how we wanted to change Britain for the next 10 years. The Crunch doesn’t postpone that conversation- in fact it makes it all the more urgent. Because at the moment, with the power to reshape the world at our fingertips, I think we fundamentally come across as someone stumbling around a ship in a storm, trying to keep one expensive vase after another from falling and smashing onto the floor. That may be fine while there’s a storm and you’ve invested heavily in vases.

The argument should be taken further.Was an economy based on growth and borrowing the right direction or do the events of the last few months mean that it is time for change?

Nice of Peston to point this out

The primary motive of the £400bn of additional taxpayer support provided last month by the Treasury was to prevent the collapse of the banking system (and really it wasn't such a bad thing to prevent a meltdown of most of our banks).

Or to put it more bluntly, the transfer to our banks of so much of our cash wasn't designed to kickstart lending by our banks - although it's unsurprising that many of you think that's what it was all about, because ministers created that impression

.

The words of Robert Peston and it seems that are polititians atre unaware of this fact as well given yesterday's exchanges in the Commons.

It is though nice of Peston to point this out but surely this should be coming from the government and there is more

the only fact that you need to know about mortgages is that well over 50% of lending capacity in the mortgage market has been taken out by the problems at HBOS, the collapse of Bradford & Bingley and Northern Rock, and a freeze on new lending by small building societies.
The Treasury can shout all it wants to the recipients of capital from taxpayers that they must provide more loans to homeowners, but these recipients simply don't have the resources to fill the gap.

Sign of the Times

The question is how long will the financial crisis take to transfer to the general economic climate.

This is just being reported on Telegraph.co.uk

Ford, one of Europe's biggest vehicle manufacturers, has cut back on production as the financial crisis engulfing the continent intensifies.This will mean 17 days less production at its factory in Southampton, while work is also being cut at the company's car plants across Europe.
Ford is following the lead of a number of car makers, who have dropped shifts in response to the growing financial crisis of recent weeks.

Bradford and Bingley-the last or the next in a long line?

So the best kept secret of the weekend has been confirmed.The Bradford and Bingley is to be nationalised,split up and sold off.

This from the BBC

Under the arrangement, the government will take control of the bank's £50bn in mortgages and loans. Shares in the company have been suspended.
B&B's £20bn savings business and branch network will be bought by rival Abbey, which is in turn owned by Spanish banking group Santander

The question now is where all this will end.Will the B&B be the last or the next in what will be a long line?

The government is once again taking a chunk of debt to its balance sheet.This time it is the mortgages in the buy to let sector where speculators jumped on the rising property market bandwagon only to see their costs rising and their property portfolio value falling.

The hope for the government is that in the longer term,they will vbe able to sell this portfolio back at a profit to the taxpayer when the mortgages have been paiid down and the property market recovers.

Alsitair Darling is convinced that the hard work over the weekend had no alternative.Speaking on the today programme earlier he said that

The government was taking quick, decisive action , to let Bradford & Bingley go down would have been very destabilising - every developed country in the world is seeing a problem

The Economist points out that

This is the fourth British bank to have crumpled in the face of ongoing turmoil in the credit markets. Northern Rock was nationalised in February and both HBOS, Britain’s biggest mortgage lender, and Alliance & Leicester, a small bank, have since sought refuge in takeovers by bigger banks amid worries that they would not be able to raise new loans to repay existing debts.

And unlike many of the problems,this was basically down to bad management and not a result of the American credit crunch.The strategy of chasing the buy to let market was incorrect as the bank was trying to find itself a niche in the lending sector

Ronaldo and Winehouse more boring than the credit crunch

Amy Winehouse is considered more boring than the credit crunch.

Brand Republic reports that

Almost half of Londoners are bored by constant newspaper stories about Amy Winehouse's ongoing drug and relationship problems, according to a media consumption study by Rainier PR.
In its poll of 1,000 Londoners via Facebook about long-running news stories that have interested them the least this summer, 48% said they were bored with news about 'Back to Black' singer Amy Winehouse.

Whereas says the report

The credit crunch to be least boring with 8% saying they were tired by recession reports.

Stephen Waddington, managing director of Rainier PR, said: "At a time when many people are watching the pennies, it's not surprising that the public have become tired of news about rock stars being odd, and pampered celebrities holidaying in exotic locations.

A rock and a hard place for Darling

Today's Crosby report on the Mortgage market couples with the latest figures on new home loans makes dire reading for economy watchers.

Loans in June were 67% down on the comparable figures for last year,have fallen for 14 consecutive months and are at their lowest level since 1993.

The only good news is that the cost of deals for new mortgages is finally being cut.

This is essentially the nadir of the credit crunch which has seen funding effectively dry up in the Western economies.Sir James Crosby's report is gloomy sand says that this shortage of finance will remain until 2010.

For the economy this will mean continuing depressed house prices and the associated lack of consumer confidence.Where does this then leave the government?

The answer is in a tricky position.It initiated the Crosby review and will find it difficult to shy away form its recommendations.

These are that

1. industry-led initiatives to develop a consistent, high-quality mortgage-backed bond to create a "gold standard" bond attractive to investors

2. the Bank of England could extend its existing special liquidity scheme to encourage new issuance of mortgage-backed bonds although Crosby notes it is "debatable" how much help this would be

3. the Financial Services Authority could tackle "regulatory distortions" between banks, building societies and investment sectors

4. a government guarantee to transfer the risk of investing in mortgage-backed bonds from investors to the government.

But Alistair Darling will find himself caught between a rock and a hard place.Political pressure on Gordon Brown means that he will have to be seen to be doing something.However how can the government support a scheme that will essentially be securing taxpayers money against falling assets and increase government borrowing.

There is also the issue of Northern Rock,a company that no longer wants any domestic mortgage business.Its activities are damaging the market as it offloads mortgages in order to repay back the loan from the government.