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Stephanie Flanders has an interesting article on this too. It's a bit more technical than this but it doesn't fully address the key transmission mechanism for the policy: the decision-making processes of the private sector.

This is in the realm of behavioural economics and the following article lays out the factors that will determine whether the policy works:

As usual Paul your post has the strong aroma of truth and pragmatism eminating from it.

The most frustrating thing I find about all of this is the collective denial and crude attempts to manipulate the flow of information by the ruling classes.

Most people who post here and on RP / SF blog knew all of this months and months ago.

The really really sad thing is that I believe if this type of genuinly decisive action (and much more of it by the way including wholesale bank nationalisation for example) was taken months and months ago there may actually have been a chance of turning it around before the tipping point was reached.

My personal view is that the tipping point is now past and we are heading for a depression.

So what happens next?

Unemployment continues to soar with the nagative feedback loop that invokes, there will be an explosion in defaults as many were already stretched before this hit under the government promoted illusion of 'no more boom and bust'. This will apply increasingly to personal loans and credit card debt as well as mortgages.

The above will be spotted too late because it is already not realised that due to the flexible labour market there is already an un-recorded avalanche of short time working and effective salary cuts working its way through the financial system (unless you work for government that is) which will feed the defaults in an exponential manner and will not be included in governments statistics or financial models.


There will also be further slow burning 'run on banks' both from a solvency concern point of view (we have already seen a huge rise of deposits in the Government National Savings and Investment Accounts) and also a moral one.

Who want to subsidise RBS pension payments with thier hard earned savings or current account contributions?People will start to vote with their savings and current accounts in that respect also.

It will not be as dramatic a 'run' as Northern Rock, but in a sense that will be even more dangerous, it is already happening.

Government debt will spiral even more out of control, Alaistair darlings budget forecast last year will be the most inaccurate in history.

The banks will be nationalised too late.

There will be an economic stimulas package but it will not work becuase there is too much government red tape. It will take 5 years to get the required approvals and consultations before so much as a spade is put in the ground to build some of the badly needed nuclear power stations or tidal power schemes (bound to find a few newts in the path of the development which are protected by EU law).

There may be power shortages in the next few years, not because of infrastruture issues but because of payment issues.

Govenment workers pension rights will be changed as increasingly the 2 tier public / private inequality is exposed and government finaly admits that it can not afford its existing pension commitments anyway.

A lot of people will get very very angry.

There will be no positive outlet for that anger because non of the political parties are in touch with reality. There maybe mass strikes which will only make things worse.

The BNP will pick up votes based on the popular resentment and lack of alternate outlets. I dont think it will ever reach the point where they get any significant power ( they may get afew EU seats and council seats though).

I can not bear to write anymore than that and I continually hope someone will post on here and explain to me why I have got it all so very wrong.

Jericoa (Noah).

It seems to me that this is all be too late. The confidence of the public has been too badly eroded and people will not want to borrow money even if the credit is available and cheap. QE would have had a better chaqnce of working if it had been done much earlier before confidcence was so badly eroded. Presumably the policy makers did not want to propose it last October because it would have given everyone a clue how bad things were and the it could have also led to sterling being picked on (I think this is less of an issue now becuase there appears to be no such thing as a hard currency any more!).

My take on it is that the government has known for a long time where this whole thing is going (Darling's comments during last summer corroborate this view). The government has been slowly drip feeding the bad news over the past 4 months or so to avoid creating panic. The analogy is with putting a frog in boling water - it will jump out straight away; but if you put it in cold water and then slowly heat the water up, it will boil to death.

The public are currently concerned with job losses - it is unlikely that people will borrow with the threat of redundancy looming. Therefore what would help to restore confidence would be for the government to introduce a temporary job creation scheme. The £12bn used for VAT cuts could have funded 600,000 full time jobs for one year at £20k por person (even more if you factor in the savings in benefits and the income tax paid on the salaries).

The underlying assumption of any borrowing must be that the money borrowed will be invested; and will generate a return that will at least cover the necessary repayment with interest.

Any other approach will inevitably result in a reduction in future income and spending; since the repayment will suck money oput of the system.

This is as true of Government borrowing as it is of private borrowing. The question is, therefore, whether anything the Government has done will actually generate a return?

It'sd hard to see it. Even if the Government were right, and their various stimuli were to start the economy ticking over again this would be no more than sustaining unsustainable current spending - there would not be any new, additional activity to cover the cost.

Everything the Government has done is only justified by the argument that, had they not done so, things would have been even worse. The problem is that, since nothing they have done is going to help us to pay for all this, it is going to get even worse anyway.

(In this regard QE is just a form of borrowing from ourselves, which will inevitably be paid back though devaluation of the currency and inflation.

"And when it does work?"

No-one wants to contemplate what happens if it doesn't.

I can't see anything but rampant inflation which means we will all be much worse off. What a shame we didn't save for a rainy day but instead spent as if there is no tomorrow. If there was something left in the coffers we could have started some infrastructure projects. I don't think that's on the cards now.

We will all be forced to live within our means and the sooner people cotton on to this the better.

Hanging onto something you can't afford is more painful in the long run than facing up to the problem in the first place.

I've managed to get hold of a long out of print book by Adam Fergusson called "When money dies - the nightmare of the Weimar collapse."

I think the main point is that the point at which QE _stops_ matters more than when it starts.

Secondly, can someone explain whether this new money is debt-free or the conventional kind?

Lastly, money is only a representation of work and 90% of work in our economy is done by fossil fuels, mainly oil and gas. Has anyone at the BoE or Westminster done the maths or checked to see whether UK plc will be able to access sufficient fossil fuels AND pony up the wherewithal to acquire them.

If not, the only answer may be to print and print and print. In which case, Fergusson's book might be worth reprinting as a how-to guide for the people formerly known as UK consumers.

..... why the obsession with zero or near-zero interest rates.?

I have yet to find anyone who can tell me why this is so important to the process of recovery.

Castor Oil maybe, its a punishment not a cure ....

Since bank lending only cares about Libor, and that appears to only have a tenuous link to BofE base rates, all zero interest rates do is punish the savers, the only innocent lot in the whole debacle..

Not many of us have had much benefit in the recent series of rate reductions; if I want out of my fixed-rate 5.99% mortgage, I am still having to wait until May when I can swap out for a reduced penalty, and I bet I don't get offered a new (variable, even) rate remotely close to today's base rate cut.

Mind you, I still cling to the naive belief that the guilty get punished and the innocent get rewarded. Another planet, another dimension perhaps.

Regards,

The fact that capitalism will be different need not be a bad thing. Also that the next generation will have different choices need not be dystopian.

Sure, we are all going to have to work harder but we have had it too soft for too long as it is.

The fact that there will be too much government debt is going to be a challenge but it will mean that a greater realism will apply.

What has bothered me the most about the last dozen or so years has been the grotesque level of private consumption funded by personal borrowing and the obscene amount of waste in the state sector funded by public deficits and stealth taxation. In the future none of this will be acceptable.

A good place to start rebuilding is on what we will have left, namely the simple realities of everyday life. Or am I being too optimistic?

THE PARTY PRINCIPLE

How depressing that adversarial, party politics will dominate every aspect of Britain's finances in the election run-up.

Tweedles Dumb and Dee will each rule out VIABLE strategies, if they amount to any dropping of guard against opportunist attack.

How depressing.

SPOIL PARTY GAMES.

the cds will expire in 3-5 years. which will mean 50 trillion off the books. so its just a case of hanging on till then.

its not the end of capitalism. it might be the end of deregualtion for a bit.

the failures are due to the laws of economics working not because they failed. people ignored the rules so it blew up in their faces. so the blame is not on the system but those who ignored its rules.

anyone who balances their home budget is a better financier and has a better grasp of the rules of economics than all those who didn't. including the govt.

It seems to me the thinking that got us into this financial mess wont get us out of it and I can see what I think is an obvious solution, however I may simply not know enough about banking.

The government have already put £1.3 trillion into shoring up the banks, and now QE in an attempt to get the them lending again and to get the housing market going again. At the same time they are urging us, the tax payer to spend more in order to get the economy going again; we all know the story!

I am wondering why we support banks that are in such trouble. What if we put the tax payers money into securing the savings and investments that people have in those banks and we use the infrastructure in the bank to administer that more sensibly. What if every bank or building society that needs a government bailout had to write off all debt owed to them. In other words many people would now own their house outright and have their debt from loans etc. cancelled.

I have a mortgage with Abbey National who have not been bailed out by the tax payer and so I would not benefit from this, however let's suppose I did benefit; then I would have £700 per month more AND I would own my house. This would seriously encourage me to spend. As a start I would immediately put a new bathroom in my house.
I work two hours drive from where I live but at present I could not put my house on the market as even if I could sell it I wouldn't get enough for it to give me a decent deposit on a new house. If I owned my house outright it would encourage me in getting a new mortgage and moving closer to my place of work.
Some people, if they now were debt free would use some of their extra income to help their children to put a deposit on a house.

Doing this could start the housing market moving again and get high street spending moving again. It appears to me that with no mortgage to pay, and owning their property outright, many people would start spending again. Some would immediately re-mortgage and put the equity released into their business or into starting a business. Some would collectively finance management buy outs.

Few people that I know agree with bailing out the banks with 1.3 trillion pounds of tax payers money and no one seems hopeful that this QE will work either. We have a chance to restart our economy and look at it differently but if we simply shore up the failing banks we are simply doing more of the same that got us into this mess.

This may seem like a crazy idea and it most certainly needs a wiser set of eyes than mine but what if it could work? Right now we need fresh thinking and from people open enough to consider ALL the possibilities rather than simply dismiss without a "what if it worked?" perspective.

#10 bookhimdano

3 to 5 years sounds like a very long time to me when observing the current state of the curve in both the financial and the real world.

If the current crash represents the 'laws of economics working' I would hate to see them not working.

Is this what we want?

The alternative by implication to your argument is that human nature should change to something superior to avoid this in future is it not? ( I am sure someone tried that before...what was his name again?)

Do we want to change this?

Maybe deep down we all like the rollercoaster ride?

That double edged chinese blessing / curse comes to mind again

' may you live in interesting times'

I dont know the answers but the questions are very interesting.

Jericoa

12.

its just a case of realising you can't go outside the laws of nature and expect to get away with it.

if we had 'light regulation' [ie if effect none-turn a blind eyeism] on the roads or air traffic control then we would expect massive crashes.

its the same in the markets. it needs rules just like anything else.

the chicago school school of economists -the people behind the light touch- presented financial oligarchy as liberal democracy and the politicians were their front men explaining to a bemused public why office cleaners got taxed more than executives because 'its good for the market'.

the reason people break rules is because of greed or fear.

yet Gordon and Blair deny responsibility now even though the evidence of their words are openly documented.

confidence comes by people seeing things are governed by rules.

the cds 50 trillion is insurance so it will only kick in if certain events happen. The Usa have said AIG is too big to fail so they will have to prop it up till these cdus expire and free up the books.

The real size of the whole derivative problem is about 700 trillion [3/4 quadrillion] but talking about that would just freak people out. The whole world stock market value is 50 trillion.


if ordinary people knew the real state their guardians have created they would not tamely listen to those who say itsnotmegov.

#13. bookhimdano wrote:

"The real size of the whole derivative problem is about 700 trillion [3/4 quadrillion] but talking about that would just freak people out. The whole world stock market value is 50 trillion."

Derivatives are generally held and traded between financial institutions. So is it not reasonable to consider that there will be a huge degree of offset when in the fullness of time the 700 trillion is settled?

If for no other reason that a reasonable proportion of the organisation are bankrupt and will default. However as nobody, even the institutions themselves, knows what they are worth or even can predict within a reasonable degree of error what they are worth or may be worth then should we not set up new 'clean' banks to go forward and not try to 'trade' the existing institutions out of the gigantic financial black hole that they have dug for themselves?

Notwithstanding that the hole digging has been substantially assisted by fraudulent and corrupt economic theories and ill educated and wrong economists (from Chicago/ Milton Friedman etc.) and their political friends, regulators and central bankers from Reagan and Thatcher onwards to those in office today.

I feel that on balance that the economic shock of mass bankruptcy and the associated destruction of pension funds may be preferable to the ongoing nonsense from the Bank of England and the MPC in the UK. After all getting back to trading goods and combining capital with labour is what economics and economies are really about aren't they?

What do you think? Is it 'better' to draw a line under the old and start again? Or to struggle on with what we have got? Oh and you had better say what you mean by 'better' too!

14.

yes . final settlement is likely to be a lot less [but still big in ordinary terms]. which is why talking about any figures is probably meaningless and just scares people unnecessarily.

as for what is better.? Better relates to the word good. So what is good? that which has most benefits.

do you 1.prop up old industry with no/little growth potential or
2.invest in new industry with more growth potential.

At the moment we are doing no 1. because the economy has too many 'too big to fail' companies. which in itself was a mistake to allow the existence of such firms because that always makes the public the holder of losses and the profits private.

ideally we would do no 2. but part of the economic mismanagement of Brown and Blair [and others] means we have the 'too big to fail' companies. so no 1 is a given although one could trail that off over time and put more into no 2.

if the govt sets it's mind to become an insurer and banker for 5 years taking on all those risks that currently are not taken on then in my view that would see us through till settlement and have the most benefits. Because insurance is a bet and the bet that the uk will still be here in 5 or 10 years looks a pretty safe one. And if its not then it wouldn't matter anyway?

trouble is the govt are more likely to be playing elections than economics saving this and that firm in marginals and all that stupidity. Which is why we need an election now so that the correct long term decisions can be taken.and those that do it need a mandate from the people.

Reading Satyajit Das's Traders, Guns and Money gives an alarming sense of how much of a scam the whole derivatives industry is.

Derivatives were hailed as providing reduced risk and increased market efficiency. It is becoming abundantly clear that risk has actually increased substantially, and rather than helping to "price" assets, the real values have become completely obfuscated.

Das says on more than one occasion that financial trading does not create wealth, it merely re-distributes it.

Therefore, as 700 trillion dollars haven't been created / generated by the money markets (instead is double counting of the real assets), it probably means that either a proportion of people are the only ones who have a genuine claim on the real worth of the assets, or everyone has a genuine claim on only a proportion of all the assets.

The consequence is either massive redistribution of wealth, probably across national boundaries (owing to currency related collapses combined with nationally enforced legal protection - the real protectionism we should be worried about!), or inflation on a truly global scale (probably created by a chain reaction or ripple effect).

The markets should reap what the markets sow, but I suspect more than a hint of national (financial not economic) protectionism will inevitably occur.

#14 and 15

Thanks to you both, really apreciating your debate from the sidelines from a perspective of a reasonable understanding of these things but not at an industry insider level.

I think #15 makes some good points about the election. However there is a dilemma here, the obvious succesors (the Tories) would need to adopt socialist policies i.e. effective nationalisation of the banks, whether that be in a legal sense or a virtual one due to the level of insurance / other support they will provide).

Also the tories traditional support group will not be able to glavanise a key section of society i.e. blue collar workers in general / lower middle class.

In order to truely have a mandate from the people they will need to re-invent themselves and recruit MP's and views from outside their traditional base and populate the front bench accordingly. It will be a very tough few years and as full a mandate as possible will be very important for our collective success.

Ideally i would like to see a completely freash approach but on a practical level i think the Tories need to embrace the times we are in and make their party fit for the purpose that is required of it.

That will mean embracing a much broader spectrum of society than it has done before.

To do that it needs to recruit many more people who are not public school toffs (in essence) to greater or lesser degrees. They dont have long to do that now but it is very important.

I met by accident the perspective tory candidate for Sheffield recently, he came accross as a well educated upper class stereotypical Tory.

I found myself thinking, 'he may well win this seat, but he will not be able to lead the people of it effectively because the vast majority of them will not be able to relate to him and his background / even the way he speaks.

I am sure that scenario will play out in many many seats. It is not what the country needs to get through this as best we can. decisiove change is needed from DC.

Jericoa

If we must have QE then vital thing is to make it as much fun as possible. Here are few suggestions to bring a smile various faces and help in the great fight against Depression.

Cancel all student 'loans' and refund in full all collections to date of this wicked form of deferred stealth tax.

Tax pensions above £40K per year at 85% but letthe pension funds to retain the additional tax raised and offset it against tax on dividend income. This both correct the historic abuse of occupational pension schemes in favour higher earners and strengthen the schemes for ordinary members without causing undue hardship to anyone.

Deem all charitable donations and collections made over the past five years to have been out of taxed income, allowing the institutions to recover tax and simultaneously abolishing all the idiotic box ticking that is associated with 'covenanting'.

Force every police and local authority to admit to outrageous abuse of power by extorting money out of traffic and parking enforcement. Deem every parking and camera generated fines over the past three years to have been excessive to the tune of 75% and order repayment along with a grovelling apology.

Anyone have any more ideas?

#11 Fiona Hayes

I totally agree. I posted pretty much exactly the same thing on Mr Peston's blog a month or so ago, and was informed that this simply would not work.

I did not receive a single good reason why this would not work though.

Time for the revolution me thinks... if someone could just let me know

* where I need to go
* what time to be there for
* if I should bring a packed lunch

Thanks

The BoE buys second-hand gilts from banks, insurance companies, and other institutions.

These banks, insurance companies and other institutions could easily sell the gilts on the secondary market anyway. What help is it that the BoE buys them? I guess the BoE would pay above today's market price?

The government issues new gilts at auction.
Banks, insurance companies, institutions and foreign investors buy them.

Eventually, the BoE has a lot of gilts on its balance sheet and the banks, insurance companies, institutions and foreign investors have a lot of gilts on their balance sheets.

Then where do we go from there?
Can the government quietly default on repaying the gilts owned by the BoE?

..but not at an industry insider level...

in your opinion?

i broke the cdu story [Tappan of Bondtrac [as an 'insider' i'm sure you know who he is]let the cat out the bag] on paul's blog before anyone else used the phrase in mainstream press. Even predicted on Paul's blog people would have to learn what it means. likewise libor.

i even predicted months before Lehman on the blog this was the greatest financial situation in western civilisation.

before others talked about it i pointed out the correlation with 1929 on the blog. even posted a link to a chart.

i have repeatedly said on the NN blogs the bond market is the 'all seeing eye' and the predictor of events.

its all documented.

for people to disagree with my 'solution' is one thing and i am happy with that as more than one solution is needed. However its suspicious that there is also a need to suggest to others its financially illiterate?


...(the Tories) would need to adopt socialist policies i..

no they wouldn't.

i know some have an agenda on those lines.

there is the economic problem and then there is the political effect. Some mix them up and some can't tell the difference and might might even think there isn't a difference?

Why bang on about more housing when the immigration system is not addressed, and, until we seek changes to EU rules or pull out, is not addressable. And that's i sjust internal EU immigratuion - most immigration is coming from outside of the EU - action? I think not - not while media staff are in cuckoo land that's for sure.

You can cover the country in concrete and it will never be enough - get it?

What you don't point out with Queasing is that if this doesnt work - then lots more money would have gone into the banking system, making the rich even richer while the poor abandon all hope. Worth pointing out??? I would have thought so. Because it shows how much we are being tricked, and how much it stinks.

20

...Can the government quietly default on repaying the gilts owned by the BoE?...

in the same way the money to buy them was invented the loans could be 'cancelled'. no need for default.

also the expected inflation will reduce any debts over the next 30 years.

its about buying time and kicking it all into the long grass.

QE is a really good idea as long as one has indicators that trigger an exit strategy. i have no idea why people get the wobblies about it.

#21 bookhimdano.

..but not at an industry insider level...

I was refering to me not you!!

It never occured to me you may interpret it as some kind of slur on your knowledge! The opposite was the intension!

Crikey I seem to have hit a sore spot there, entirely unintended but it did succeed in revealing a somewhat ecotistical self promoting side to you...I this ...I that.

Yuk.

I think they call it an own goal.

Jericoa

#24. Jericoa wrote:

"#21 bookhimdano.

..but not at an industry insider level...

I was referring to me not you!!"

Jericoa - you will I think admit that the sentence that bookhimdano misinterpreted is a little ambiguous.

The problem with the majority of "industry insiders" is that they got it very wrong and were not prepared to listen to sound and well reasoned advice. Those insiders who expressed concern about the direction of policy were ignored or sidelined (c.f RBS's risk manager etc.)

However this side-lining is typical of the final stages of bubble economies. (see the Tulip - Tea Pot Dome - South Seas - Argentinian Railway bubbles etc. etc.) I would go so far as to say that it is a classic symptom of the end stages of a bubble economy!

#25

Ambiguous yes, quite so, but that is the thing about ambiguity, I intended it one way (and could not see the other) and visa versa for bookhimdano.

The interesting thing is why was that the case and the reaction that followed.

I had to read it 3 times before I realised what he was going on about!

I meant it as a compliment to you guys at my expense (in terms of financial knowledge), and I get a monologue of how clever he is in return with a couple of vieled attacks on me for good measure!

Maybe he used to work for HBOS and was in the press recently..that would make sense.

Bloody depressing stuff, if I may say so.

11.

Okay, the fact that you honestly think your idea (which amounts to little more than "GIVE ME A FREE HOUSE") is either socially just or even viable shows how little grasp of economics you have.

The reason no-one has given you a serious reason why it wouldn't work is because no-one has taken your suggestion seriously. Not surprising either.

The problem with having a Debt Jubilee is that those debts are owned by other people as credit. This is the fundamental concept of assets and liabilities. So to cancel your housing debt, savings and investments with the bank would also need to be cancelled.

I'm sure you'd have absolutely no objections to that idea because creditors would be left with nothing and you'd be left with a free asset.

So the only way of your idea working would be if you also gave up ownership of your house, which basically is communism or anarchism (depending on who governs ownership).

Bet you're not so keen on your masterplan now ... ?

#28

I am not in favour of randomly giving houses away either.

The way out of this will need to be radical though. To start the thing that needs bottoming is the rewarding of utter failure and, indeed support for it by the hapless taxpayers.

I think the taxpayers should vote with their bank accounts and move all their salaries and savings and anything else (home insurance and the like, business accounts etc) to ethically run institutions. What have you got to lose with 0.5% interest rates?

That will send a very real message to the government and the banks about acceptable behaviour.

Hit them where it hurts, in their balance sheets.

By doing this the banks whom have behaved ireesponsibly will need to be nationalised as 'bad banks', banks that have behaved ethically and have ethical values written into their policies will benefit.

It will mean huge turmoil and job loses amongst those 'bad banks'. That is never a pleasant thing but hard times need hard choices and they should reap what they sew. Once they are suitably collapsed by the people and wholy government owned as bad banks we can go about dealing with the wrekage they have left behind in their balance sheets as dictated by whatever mandate is given in the next election by the people of this country.

The banks that have behaved sensibly / ethically will benefit at the cost of those whom have not.

I really do not understand why anyone would want to put their salary into RBS or Llyods for example. I recently shifted all my financial dealings to the co-op bank, to a simple account with no overdraft facility but a debit card / all the other basics you need.

It was quite liberating, dont burn your bra anymore (ladies) burn your fancy bank account and replace it with something that makes you feel good about yourself and will not fund any failed boardroom pension deals.

I really dont understand why everybody does not do as I have, it took about 1.5 hours and 4 phonecalls. That was it.

If the government is not prepared to put actions where its mouth is (you naughty naughty banks the government keeps saying while propping them up) we can.

Get on with it all of you, it is non violent and if done on mass it will be a very very effective democratic protest.

What are you waiting for?

Jericoa

What will be the effects of the 'queasing' ?

Am i correct in thinking this is effected by creating an unbalanced figure ( 150bn ) on a BoE journal and then distributing the money into the economy, which will debase the money already in the economy ?


So if all else remains equal the effect could force increases in imported commodities e.g food, oil,gas and at the same time devalue the worth of pensions and assets ?

And will the bulk of this 'queasy money' go into the economy via part nationalised banks, who will levy interest on the money ?


Would it be unfair to say that the effect could be to maintain and nourish the sick banking system at the expense of the community. And at a disproportionate cost to the lowest paid ?

Is this equitable ?

#29 - Jericoa

There is a conflict in the property price question which will just not go away. The hugely inflated price of real property was primarily due a lack of affordable housing in the private sector and low commitment to social housing. This problem has not gone away simply because the bubble has burst because the price of property is irrelevant if you cannot finance the borrowing.

Basically, part of an overall recovery will be a modest recovery in property prices because that creates equity which enables people to borrow for other purposes. Ironically, you can only achieve this by artificially maintaining the scarcity value. If you proceed, as one post puts it 'to cover the country in concrete', you may achieve a significant social objective but at what cost to the long term economy?

There needs to be a mind shift towards a more continental approach. An Englishman does not actually have to own his home in order for it to be his castle. Buying your own home does not need to be a first step but rather a step up the ladder of social mobility. You then arrive at the situation where home owners can afford the liability and use the equity to take on additional liabilities as income allows rather than trapping people in no win situations where they are pumping a disproportionate amount of income into a deteriorating asset. What is needed is nothing less than a radical rethink in housing policy. Then, and only then, will the physical business of building houses make any sense.

In the meantime, there is a great deal of commercial real estate out there which is susceptible of conversion into a specific model for the largest growing sector - single or childless urban dwellers.

#29

Did you really meamn me? I did not say anything about property in my post!

No matter, I agree in the sense that it is one of the key elements of this economy of which the hitorical dynamic must change.

Any new build social housing as part of that required shift should go hand in hand with a new system of local government with it.

If we are going to build new communities they should be sustainable and more locally accountable. The new build social housing must be a desirable place to live and a proportion of all rent paid while in work should be a personal investment by the individual in the properties equity such that if they live in it 25 years they own 51% of it (or similar).

Give them some buy into society and the place where they are living.

Jericoa

My IQ seems to have tripled overnight after I dreamed I was rahere.

Dug up some figures on the Lloyds bailout, with the idea of examining whether the Treasury model is bust.

Lloyds bear the first 25bn losses. Their premium is 16bn, on 260bn exposure, principally to UK housing market losses.
The risk is to a difference between the fire-sale value of the Halifax mortgages in question - in effect, somewhat but not materially below the true-value definition of a stable market, given that it's so close to zero any material difference would mean they'd be paying you to take it away - and the mortgaged value, often overinflated at 100 or 105% of the true value of the property, in the expectation of a rising market compensating for any default.

Therefore, the Treasury believes that marginal loss should be less than 41/260 or 15.75% of the housing market. It's to be recalled in addition that an unknown proportion of the market are honourable, covering their losses on the principle of de Maupassant's Mme Loisel: however, there's the added complication of the redundancy rate, 259000 in the last three calendar months of 2008 and running in a straight line, or 1.2m per year against an employable population of around 25m, or 5% grosso-modo. That means that in each calendar year, 5% of the housing market will be forced to default by redundancy alone - honourable intent or not, quite apart from negative equity default, covering another 5% and not including default through being put on short time working or a straight salary reduction, an invisible factor statistically In terms of employment figures) but increasingly a major contributer.

This is not inconsistent with HBOS' accounts for 2008, which showed 10bn defaults on 435bn advances: 5% of 435bn is 21bn default costs per year, but the acceleration in redundancies only kicked in in June, according to the National Statistics site, so one can halve that comfortably - and that's just looking at HBOS.

The Lloyds Groups' true default risk for 2009 may be of the order of 40bn, or in other words the premium will only cover this years' losses. AIe aie aie, the model's wrong...perhaps they simply decided taking the entire bank over would be premature, however we now see the capital adequacy of the bank would have been exhausted at any moment, which must have forced the Treasury's hand.

In other words, in the last 3 months HBOS has racked up a further 5bn losses, Lloyds TSB much the same, and that took them over the edge.

Stephen Timms' presentation to Radio 4's Today program carefully circumlocuted any question of whether or not the premium would cover likely losses. He's Gordon Brown's #4 in the area, the Financial Secretary to the Treasury, to save you looking it up, and his functional responsibility is fiscal policy, only straying into this area in the domain of Corporate Social Responsibility, which is a singular anomaly given that's the last thing on his mind in trying to save the banks.

My IQ seems to have tripled overnight after I dreamed I was someone else.

Dug up some figures on the Lloyds bailout, with the idea of examining whether the Treasury model is bust.

Lloyds bear the first 25bn losses. Their premium is 16bn, on 260bn exposure, principally to UK housing market losses.
The risk is to a difference between the fire-sale value of the Halifax mortgages in question - in effect, somewhat but not materially below the true-value definition of a stable market, given that it's so close to zero any material difference would mean they'd be paying you to take it away - and the mortgaged value, often overinflated at 100 or 105% of the true value of the property, in the expectation of a rising market compensating for any default.

Therefore, the Treasury believes that marginal loss should be less than 41/260 or 15.75% of the housing market. It's to be recalled in addition that an unknown proportion of the market are honourable, covering their losses on the principle of de Maupassant's Mme Loisel: however, there's the added complication of the redundancy rate, 259000 in the last three calendar months of 2008 and running in a straight line, or 1.2m per year against an employable population of around 25m, or 5% grosso-modo. That means that in each calendar year, 5% of the housing market will be forced to default by redundancy alone - honourable intent or not, quite apart from negative equity default, covering another 5% and not including default through being put on short time working or a straight salary reduction, an invisible factor statistically In terms of employment figures) but increasingly a major contributer.

This is not inconsistent with HBOS' accounts for 2008, which showed 10bn defaults on 435bn advances: 5% of 435bn is 21bn default costs per year, but the acceleration in redundancies only kicked in in June, according to the National Statistics site, so one can halve that comfortably - and that's just looking at HBOS.

The Lloyds Groups' true default risk for 2009 may be of the order of 40bn, or in other words the premium will only cover this years' losses. AIe aie aie, the model's wrong...perhaps they simply decided taking the entire bank over would be premature, however we now see the capital adequacy of the bank would have been exhausted at any moment, which must have forced the Treasury's hand.

In other words, in the last 3 months HBOS has racked up a further 5bn losses, Lloyds TSB much the same, and that took them over the edge.

Stephen Timms' presentation to Radio 4's Today program carefully circumlocuted any question of whether or not the premium would cover likely losses. He's Gordon Brown's #4 in the area, the Financial Secretary to the Treasury, to save you looking it up, and his functional responsibility is fiscal policy, only straying into this area in the domain of Corporate Social Responsibility, which is a singular anomaly given that's the last thing on his mind in trying to save the banks.

No. 30. superiorsnapshot wrote:
"What will be the effects of the 'queasing' ?"

To my way of thinking, something has to give. In order to finance stimulus plans, a government cannot simply sell gilts to itself (the BoE is an agent of the state). If it were that easy, governments would be doing it all the time and there would be no unemplyoment or poverty anywhere in the world.

I think the price we'll pay will be a fall in the value of sterling. Both Japan and the USA have strong currencies, which allow them to employ QE. Britain in contrast has a weak currency.

If the British government issues large numbers of gilts at a time when tax receipts are falling, it will find it harder to repay the gilts without eventually cutting back on its spending. Investors may decide not to buy gilts in the future, and choose to buy US treasuries instead as a hedge against sterling falling against the dollar. Necessities such as oil, food and other commodities are priced in dollars on the world market. Therefore, when all countries are experiencing economic difficulties, it's better to invest in a currency that can be used to buy necessities (dollars).

Hence, sterling will fall and we end up with imported inflation. Britain will see input prices increase at a time when there is low demand and high unemployment. This will be a bad situation - "stagflation".

The only way out would be for the UK government to invest its stimulus spending in those companies which can provide a return on the investment, by generating enough profit for the government to redeem the gilts.

As one of the 4.5 million people on the council house waiting list I am worried that my taxes will be spent on providing the funding for, and underwriting the losses on new mortgages. I do not see why my tax money should be spent underwriting the equity in the homes of people who are lucky enough to have somewhere to live, whilst at the same time I am paying to price myself onto the street. Thats not a free fair market, nor has it got much to do with social justice. I thought we were all in this together but it seems to me that there is a danger of on the one hand of kicking off another credit boom only this time underwriten with our money, and on the other of creating some kind of state funded underclass. If billions of our taxes go into mortgages then the government should match that money pound for pound with new spending on social housing.

Hi Paul

Here is my post on Stephanie's blog. If either you or your posters have the answers let me know.

" I saw excerpts of your interview with Mervyn King. He emphasised that central bank money used through the Asset Purchase facility will find its way into the "wider economy", not the banks per se and has as its objective the maintenance of CPI inflation at 2% - the inflation brief. My previous posts seek to test this assertion.

Alistair Darling set the remit for the APF at 50billion for purchase of private assets to include corporate paper and bank debt guaranteed by HMG etc.

The investment strategy under the APF is key to testing the asserted objective of inflation management as opposed to HMG debt management / Bank Bail Out Number 4 .

The lion's share of gilt holdings are owned : as to 44% Insurance and Pension Funds ; as to 36% Overseas investors ; the remainder Other Financials, building societies, local authorities and public corporations - not Joe Bloggs down the road. The reverse auctions organised will have a restriction on gilt stock size of not below 4billion GBP? HMG need to raise 146billion GBP by issuing gilts to finance public sector borrowing for 2009. Alistair Darling has coincidentally authorised purchases of gilts in the secondary market to a similar level at up to 100billion central bank sterling - purchase strategy targeted at medium/long gilts.Institutional demand for gilts can be 'lumpy'.If these positions are liquidated in the secondary market by BoE, Insurance and Pension Funds would reinvest in new HMG issuance to substitute and cover their long positions, wont they? Banks are being told to increase their Tier One capital by purchasing gilts. If Overseas investor gilt positions are liquidated, how does this cash in their hands get to the 'wider economy' in the UK ? Wont they reinvest in new HMG issuance or take their profits home? If they are holding gilts, they arent going to invest in riskier classes of assets, are they?

What reason is there for us not to conclude that central bank money is being created, in the larger measure, to provide a liquidity platform for purchase of new HMG debt to raise the 146billion needed and lower cost of government borrowing - I dont see how this boosts money in the 'wider economy'. How much of the 50billion for private sector asset purchase will be used to buy bank paper and other illiquid assets on their balance sheets ( asset backed securities etc.) How much will be invested in riskier corporates?

I cant find any answers, can you?"