How not to manage an economy

January 22nd, 2008

It seems that following the special treatment of Northen Rock by the Government, other banks are keen to get in on the action. Banks and mortgage lenders are raising pressure on the Bank of England and the Treasury to help them raise funds to provide homebuyers with loans, warning that without support the level of lending will plummet.

Industry groups such as the Council of Mortgage Lenders, the European Securitisation Forum and private banks have urged the UK authorities to back the securitisation industry, the sector that enables bankers to turn loans into bonds and other instruments. In effect, they are asking the government for support of the kind it has offered Northern Rock in a bid to sell the loans made to the stricken lender since the bank run in September.

On current trends, industry experts estimate that the outstanding values of mortgages in the UK will rise by £90 billion in 2008, but new deposits from retail and institutional customers are likely to reach only £60bn. Without the securitisation market reopening, mortgage providers fret there will be a £30bn lending shortfall – potentially enough to force lenders to slash the amount of loans they can provide to households, putting a serious dent in the economy.

Sir John Gieve, the deputy governor of the Bank of England accepted the potential severity of the situation in a speech last week, when he said the disruption in the UK banking system “brings a risk of a deeper downturn”.

In the US, mortgage lenders have been able to offset similar pressures by using the loans they hold on their books to raise funding from the Federal Home Loan Banking system, a state-supported institution that has extended about $750bn (€514bn, $384bn) of loans to lenders in recent months.

However, importing such ideas faces stiff resistance from many UK officials. “Taking the easy option and giving in in the short run without looking to the long-run consequences of those actions is damaging,” said Mervyn King, the Bank of England’s governor. Any public sweeteners would require central government’s agreement, but the Treasury indicated it wanted the industry to find a market solution.

The problem is that banks are likely to seize on the government’s plan to underwrite the securitisation of its loans to Northern Rock, in effect making the loans risk-free. They can argue that if the public sector can help one lender, it should provide similar support for others. In other words, if the mistakes of Northern Rock can be solved by a cosy stitch up with Gordon Brown, why should other banks not try the same thing. This seems to have been a factor forgotten by Brown in his hasty arrangement of a deal that attempts to salvage his reputation for economic competence by simply moving the problem to the other side of a general election.

This entry was posted on Tuesday, January 22nd, 2008 at 6:30 pm and is filed under Personal Loans. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

How not to manage an economy

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