“Constructing a Humanist Politics”


Issue No 2 Friday 12th September 2008



This week


·        Brown and Darling pull a shabby trick on first time buyers

·        Why Britain's banks are on borrowed time....



News Stories

Highlighting  news stories important to the Civic Republican view, particularly those that are overlooked or little covered in the main media.




·        Brown and Darling pull a shabby trick on first time buyers



The government announced at the beginning of September measures to address the problems with the housing market. But we should seriously question what its motives are in doing this. It is far from clear who all the measures are designed to help and whether the “help” is well directed.


There are five measures:

·         Stamp duty currently levied on properties over £125,000 will now be applied to properties costing £175,000 or more - but only for the next 12 months.

  • "Free" five year loans of up to 30% of a property's value for first time buyers of new homes in England
  • Extension of powers for councils and housing associations to be able to pay off debt for homeowners who can no longer afford mortgage payments and then charge rent.
  • Shortening from 39 weeks to 13 weeks the period before Income Support for Mortgage Interest is paid
  • Bringing forward spending from future years to encourage more social housing to be built


The first measure to reduce the number of properties subject to stamp duty is not likely to be very effective as it will amount at most to £1750 which in a market currently falling at an annualized rate of 20% is not too significant. We should question the motive here. For if it is to prop up house prices then the government is trying to do the impossible and will only result in people paying more for their property than what it is really worth.


The market was at its peak probably 50% overvalued thanks to the lax lending regime under Brown’s chancellorship. It HAS to fall for the market to function and it is only a matter of time before this happens.


The last three measures which are designed simply to help those in trouble are to be broadly welcomed. What is strange is the second measure and this merits closer consideration.


What it allows is that first time buyers with an income (which may be joint) of up to £60,000 will be eligible for a loan of up to 30% of the property’s value, which will be free of interest for five years. At the end of this period there will be a fee which is yet to be specified.


Let us consider this in a little more detail for the details tells us a lot about the government and its attitude to the economic situation it has created.


The average wage in Britain currently is £24,000. Imagine a person on this wage wanting to buy a property worth £140,000 - of which at present there are not too many. They may receive 30% of the value, i.e. £42,000, on which they will pay no interest for five years and use this as a deposit to obtain a mortgage on the remaining £98,000, which would be at about four times salary. The figures might not be able to work quite like this but this example is using fairly “average” figures so should not be far adrift.


Assuming they could manage the mortgage payments for five years they would have the Damocles’ sword hanging over them that in five years interest payments on the loan would click in. What kind of financial advisor would recommend this scheme? There may be conditions that have not been spelt out but it sounds like madness.


OK, we have all got used to mad lending during the Brown Boom but to see this kind of activity being now actively encouraged by the government is beyond belief.


This can only be a policy to prop up house prices artificially. That is, it is designed to enable people now to pay more than their houses are really worth so that the government can temporarily save some face. It is labeled a policy to “help first time buyers”. To help them to what? Into an economic mire?


No one should take up this offer from a desperate unpopular failed government.


It cannot be stated too clearly. You cannot prop up a market that is drastically overvalued. For a government of the country to try to facilitate people to enter this market with 100% loans shows just how remote it has become from the people it is there to serve.


This, like so many current policies, is a last desperate attempt by Gordon Brown to save his political skin. In typical Brown fashion he has paid scant regard to who might get hurt.




  • Why Britain's banks are on borrowed time...

Here’s another potential banking crisis on the way in the UK. our poor old British banks have been really feeling the pinch over the last few months. Yet unlike the rest of us, the bankers have been quietly scurrying round to the Bank of England on a regular basis to refill their moneybags.

But sadly for the banks, their cosy little scheme is coming to an end. Even worse, they’re now completely hooked on it. Any re-hash will just make their addiction worse. But unless someone cooks up something soon, it won’t be just banks going bust…

The Special Liquidity Scheme has kept the banks going 

Feeding a habit doesn’t make it go away. That’s so obviously common sense it’s hardly worth saying. But the problem facing the Bank of England earlier this year was that the UK’s commercial banks had already gone into overdose territory.

They’d been so keen to compete with each other in “picking up market share”, they broke their own rules on sensible lending. In fact they completely lost the plot, particularly when operating in the States. And by handing over far too much cash to more and more people with ever-dodgier credit records and ever-diminishing abilities to service their debts, the lenders managed to dig themselves a very large hole.

They found they couldn’t raise the cash they needed for their foolish lending from the usual source, the money markets, without having to pay the sort of usurious rates they were used to charging their own customers. And as we now know, it was all too much for Northern Rock. But bankers tend to have plenty of friends in high places, so it was no great surprise to hear that a handy little get-out clause was compiled to help out the rest.

Hence the Bank of England dreaming up its emergency measure, the ‘special liquidity scheme’ (SLS). Basically this was a bailout, which after April allowed the commercial banks to swap their highly ‘iffy’ so-called ‘mortgage-backed’ securities for top-notch government bonds held by the Bank. That meant those banks could start borrowing, and lending, again.

Well, they haven’t been doing too much of the latter, except to each other. Overall ‘lending to individuals’ was up less than 1% over the three months to July, according to the latest Bank stats, while the latest dive in mortgage approvals, down by two-thirds on last year to a near 11-year low, is a sure sign that there’s no pick-up on the horizon. More likely, the end of the housing market as we know it.

And money supply measure ‘Adjusted M4’, which shows the amount of cash that British businesses are holding, is still shrinking, as those firms’ borrowing has also started to do. All very bad news for the economy, investment and jobs. No wonder that yesterdays’ KPMG/REC report showed that permanent vacancies have fallen at the fastest rate since 2001, flagging that another surge in the unemployment numbers is on the way.

Why we may be heading for another banking crisis

But back to the banks and their borrowing…that’s a different matter entirely. “Troubled UK lenders may have tapped the Bank of England’s emergency funding scheme as much as £200bn, double the previous most aggressive estimates”, says the Telegraph. And the real problem is that the bailout scheme is set to end in October.

Bloomberg yesterday reported that it’s so serious that several banks may even face insolvency unless Bank governor Mervyn King gets a new system in place by then, according to analysts at UBS. At the very least, British banks would have £200bn of “exploding funding” to refinance within the next three years and would be forced to cut back on lending and shrink their assets, said UBS’s Alistair Ryan, meaning house prices could plunge 40%.

And who are the main addicts? It seems that Britain's No. 1 mortgage lender HBOS may be the biggest SLS user, ahead of Lloyds TSB, Barclays and Royal Bank of Scotland, says Alex Potter at Collins Stewart, who reckons that UK lenders have a £285bn “funding gap”, i.e. the difference between lending commitments and deposit funding. Apparently, though, the asset swaps under SLS are unlikely to total that much – because the UK banks have been borrowing from the European Central Bank as well.

Somehow I’m not sure that last bit provides too much solace.

The official line, as usual, is ‘no comment’, though of course the UK authorities will be straining every sinew to make sure that there’s no repeat of Northern Rock. But I’m starting to feel that it’s all getting very scary. And that it could turn very nasty.

The credit crunch isn’t going away. If anything it’s getting worse. All the credit stress indicators, like the LIBOR-OIS spread which is the difference between what banks charge each other for three-month dollar loans and the overnight indexed swap rate – a short-term interest rate measure - are staying “elevated”, says the Bank for International Settlements in its quarterly report, with the strains in global money markets probably persisting “for some time”.

"If UBS forecast is right, then the British banking system is relying much more heavily on state support than either Europe or the US”, says New Star economist Simon Ward, “which would suggest the banking system here is in greater trouble”.

Basically, it seems that some of our banks are all but bust. That means hardly anyone will be able to borrow any money. This week’s estimate by Richard Roberts of Barclays that 150,000 UK businesses could close within the next 15 months could easily prove much too low. We’re being told by our government that Britain is in the same boat as everyone else. If so, that would be fairly cold comfort. But the harsh truth is that it looks like we’re going to be facing something a lot worse than the rest…

Courtesy of MoneyWeek


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…….Until next week