Monday, 13 October 2008

The national sickness

The UK obsession with housing is never far from the surface. On the day that the government had to nationalize a huge chunk of our banks on account of an overblown property bubble, the Prime Minister is again ramping up the market.

According to the BBC, Gordon Brown believes that UK has "pent-up demand" for housing. He added "UK problem was not shortage of demand for homes at the right prices but a shortage of mortgages at the right prices for people to buy. So the problem appears to be a lack of credit, not a huge overvalued market where prices are at unsustainable multiples of income.

These comments were ominous given today's announcement about the treasury recapitalisation plan. As a condition of accessing funds, Banks must maintain their credit growth levels consistent with 2007 for at least three years. So it would appear that Brown wants a return to the crazy days of the housing bubble.

This would be madness. In the best case scenario, the UK has just dodged a systemic banking crisis that threatened to obliterate every high street bank. This catastrophe was avoided only through the government pumping in massive amounts of taxpayers money into failing banks.

The crisis also forced the Bank of England to reduce policy rates and effectively make them negative in real terms. The BoE also pumped in huge amounts of liquidity to prop up banks that were in danger of total collapse. In the long run, negative real interest rates will only serve to distort savings and investment decisions and if they persist long enough, we should see inflation take off.

It is just possible that in these circumstances that a wave of hysteria and optimism could grip both the banks and the UK public. Another surge of credit could quickly lead to renewed house price inflation, despite the unprecedented lack of housing affordability.

However, it won't take long for the banks to quickly find themselves in trouble again. However, we won't be so lucky a second time. A government funded rescue is unlikely to save us from a devastating and inevitable banking collapse.

16 comments:

Markbaldy said...

Of course Brown wants a return to the housing bubble - the whole basis of his "miracle" economy was founded on house price inflation !!! (well it wasn't based on a balance of trade surplus was it !!!)
People felt "wealthy", borrowed against their appreciating assett to buy new fidges, cars, more houses etc... which in turn generated more house price inflation and so the cycle continued.
I have said in past posts on this website that Brown and his cronies would try every trick in the book to re-inflate the housing bubble and it appears I was bang on in my predictions.

Sackerson said...

I sure hope your last sentence is wrong, but I can't see why it should be. If GB thinks we can go back to the madness of 1997 by pumping in money, he still hasn't understood the distinction between liquidity and solvency.

Alice Cook said...

sackerson,

central banks can hide bank insolvency problems very easily by huge liquidity injections. This is what has been happening in the UK.

I think it is perfectly possible for there to be a short term recovery in asset prices, quickly leading onto a more serious credit crisis later.

We never learn.

Alice

blooKat said...

"quickly leading onto a more serious credit crisis later."

Like next week.

dearieme said...

Jesu, he's gone mad.

Sackerson said...

Or we have. I've felt like Alice in Wonderland ever since 1997 - is that why you're "Alice", Alice?

Alice Cook said...

Sackerson,

Ha, ha.....

No....

I have a middle name too.

Alice

RenterGirl said...

No shortage of homes at affordable prices? How odd. I am sensing a strong thread of nostalgia for the good old days, when your friendly bank manager (and not the computer) said yes (or no.) And when houses cost no more than twice your annual wage. Housing costs (rent or mortgagae) should not swallow up such a high amount of income. Houses are too dear. I know that; how come Gordy doesn't?

RenterGirl said...

No shortage of homes at affordable prices? How odd. I am sensing a strong thread of nostalgia for the good old days, when your friendly bank manager (and not the computer) said yes (or no.) And when houses cost no more than twice your annual wage. Housing costs (rent or mortgagae) should not swallow up such a high amount of income. Houses are too dear. I know that; how come Gordy doesn't?

Nick von Mises said...

I think Brown has capitulated to King and is taken his orders from the BoE, while stomping around in front of the camera acting like he's in control.

The credit crunch is unstoppable. The recapitalisation just gives a buffer to absorb writedowns. None of these banks are crazy enough to increase lending again.

Crack open the economic history books. They are full of unthinkable collapses which an unprecendentedly interventionist government cannot stop. They tend to be accompanied by all kinds of wishful thinking verbalised by the leaders.

fajensen said...

Houses are too dear. I know that; how come Gordy doesn't?

Gorgo doesn't pay rent, fuel for the car, train tickets, groceries or any such trivia. He probably never buys anything for his own money outside of the airport duty-free shop! "Man of the people", eh?

Mark Wadsworth said...

What Markbaldy says.

Anonymous said...

Let's be clear: Gordon Brown is a scumbag and the worst chancellor/PM in UK history. Of course he wants a return to the go-go bubble days. And he will pull every crooked trick in the book to get it back. And he may well get short term boomlets of a few months. But the system is so badly sick, the British in such rough shape, it will go off the rails again. Having said all that, I think London will ride this crunch with no ill affects.

Nick von Mises said...

"I think London will ride this crunch with no ill affects."

Presuming that massive job loss, housing price collapse, bankruptcy, huge migration flows and increased crime are not "ill affects"

Anonymous said...

nick von mises: just can't see a single thing harming London so far. I walk around all the time and I see nothing but packed restaurants, people buying stuff like it is going out of style, and packed pubs. It may be grim up North, but in London, la dolce vita continues.

Nick von Mises said...

Anon 17:44

A man jumps off a tall building. As he races past each floor he shouts "so far so good.... weee this is fun!"