The mortgage market needs confidence, not Government-backed loans

No doubt I am not the only Conservative to feel deep misgivings at this morning’s news of a £50billion Bank of England intervention to kick-start the high street mortgage market.  Not content with nationalising Northern Rock, the government that had “ended boom and bust” now under the auspice of the Central Bank seeks to build up a mortgage and credit card debt portfolio on an unprecedented scale.

Naturally this will be supported to the rafters by many amongst the banking fraternity; but it is worth remembering that it was the reckless lending and trading in complicated derivative products by the self-same banks that led to the credit crunch in the first place.

The effect of today’s initiative is further to conjoin the fortunes of this and any future UK government with the financial services sector.

But what happens if this massive cash injection fails to achieve its goal?  Will we then be expected collectively to double our money and take £100billion or more of sub-prime debt off high-street lenders’ hands?

I fear that government intervention at a time like this – just ten days before crucial local elections, remember – looks more like a panic measure than a means of restoring confidence to the battered financial markets.  As history tells us, even Central Banks cannot always buck the market.

Comments

[Adam-]

By providing these bailouts for the mortgage market the Bank of England has crystalized the staggering inflation that has been caused by the overvalued housing market.

Do you know what I think we should do? Let the mortgage market grind to a halt. Yes. It will cause a house price slump. I don't care. Neither will anyone who's actually bought their house to live in.

Too bad that they are now the exception rather than the rule.

I don't want me savings devalued printing new banknotes to bail out middle-class types hogging overpriced housing stock "as an investment".

With any luck it will make things clear that you CAN lose on property. It's not a risk-free get-rich-quick scheme.

The Tories had the guts to allow the neccessary correction in the early-1990's, despite being lampooned in the media ("Our house, in the middle of the slump, our house...") and ultimately things worked through.

[David Belchamber]

I wonder if the BoE is wishing right now that it had another 400 tonnes of gold in its reserves.
Could someone remind us who got rid of such an amount at a knock down proce?

[Tony Makara]

A government that panics is not one that inspires confidence. At a time when Sterling is vulnerable the last thing we need are measures to artificially continue the credit culture. If the economy is in need of a natural correction after years of wanton borrowing its better to let the economy cool and take stock of the situation rather than opting for this type of patchwork solution. I worry that this measure is going to further erode price stability. The Labour government ought not to be playing politics with our economy.

[Dr Charles Tannock MEP]

I have to say there is a whiff of "moral hazard" whereby risky behaviour is being encouraged by government bailouts ie it is now ok for our banks to lend recklessly and pay huge salaries and bonuses to their bankers who made vast short term profits for the banks without considering the long term risk of default or damage to shareholders interests, and now that the downside of all this excess is evident the BoE bails the banks out and places the burden on the taxpayer as this all potentially generates inflation as interest rates are artificially lowered to restore banking solvency and profitability -so the public ends up footing the bill for the overlending in the past!
In the 1980s some 10% of UK corporate profit was in the financial services sector in 2006 it was 40% and of which some 60% was paid out in salaries and bonuses. This was probably amounting to a distortion in the economy which we are only now appreciating and its ironic all this took place under a so called Socialist Labour government. For once the European continent has with its more cauthious lending come out better than the UK.
I can see there is a risk of contagion if banks are allowed to fold but in exchange they will have to put up with more stringent controls and oversight and an end to the trilateral UK system and powers should be centralised in one authority.
Ther will also be calls for more regulation and controls of credit agencies here in the EU and Conservative MEPs must ensure it is proportionate and as light touch as possible but that there will be more regulations looks highly likely globally which the banks everywhere will not like!

[Mark Wadsworth]

Adam hits the spot.

Anyway, having done a bit of research, the market capitalisation of the biggest UK banks is in the order of £250 billion.

Assuming that £50 billion is enough to fix the problem for now, shouldn't the banks be encouraged/forced to do a five-for-one rights issue, like RBS (three-for-one)? BoE and FSA can always issue a veiled threat to let them go *pop* and/or nationalise them.

BTW, UK households have £1,000 billion cash on deposit with banks, so it's not like the money isn't there.

[Andrew Lilico]

I would recommend those of you expressing the view that the current scheme is a bailout to check the required haircuts list - in the appendix here: http://www.bankofengland.co.uk/markets/money/marketnotice080421.pdf

You'll see haircuts of 22% on residential mortgage backed securities and securitized credit card debt, with additional percentage points to take account of exchange rate risk, the lack of a traded market price, and other technical factors. These are stiff requirements.

At this stage, this is the kid of scheme Osborne was advocating, I reckon, and I see little reason to attack it. Whether matters will stop here seems to be the crucial issue. (My guess is that they won't.)

[Andrew Ian Dodge]

Well if you are fiscal conservative this certainly gives you a rather ill feeling in the belly. The biggest worry, of course, is that the taxpayer will have spent all this money and it will not have work.