Thursday, January 22, 2009

Where will the credit come from?

The UK housing market is a monster. Last year, lenders extended mortgages amounting to £257 billion. That is equivalent to about 19 percent of GDP. Despite this huge inflow of credit, property prices nose-dived.

The year before, mortgage lending was much higher. In 2007, banks lent some £363 billion. The credit crunch extracted some £107 billion worth of lending out of the property market.

Here we come to a little difficulty for Brown and Darling. This year, they want to borrow £120 billion in order to finance the government deficit. If the housing market is going to recover, it needs to find a similar amount of credit. They also want to keep interest rates close to zero. Then there is the private sector, who also has a potentially enormous demand for credit.

How does the government intend to reconcile these competing objectives? It is going to ask the Bank of England to print money.


  1. When another 30% or so has come off the cost of housing, mortgages will require less of the lending pie.

    Let's hope next time around the people who deserve it - innovative engineering companies bringing valuable new products to market - will get the better part of lending.

    B. in C.

  2. National Savibgs and Investments seem recently to have made new issues of Index-Linked Savings Certificates at a much slower rate than they did in 2003-2004-2005. I wonder why?

  3. It doesn't matter how much money they print, or how many subsidies they hand out to the mortgage market. To see the effect of government bailouts, look to what the US is fdoing for the banks--then look at their share prices, which continue to plummet because the banks are worth so much less than a year ago. The same with housing. All Brown and Darling will do is give temporary and false hope to homeowners. Prices must come down, as they have always done in the history of mankind when a bubble ends; and the second history lesson is that you cannot instantly reinflate a bubble that is burst. The next property boom will be in about 20 years. Until then, property will be for living in, not speculating on. And that will be a sobering realisation for homeowners and speculators when their houses are worth 75% less than they paid for them.

  4. AC: "If the housing market is going to recover .."

    It's not going to recover for at least a decade.

  5. I can't bear to watch any more. You're great, Alice but I'm deleting you from my link list [collective 'hurrah ! He's gone]

    I think there are times in life when the only option is a head in the sand.

    Good luck to you and everyone here.

  6. Here's the problem as explained by Dennis Healey - after learning the hard way:

    “The trouble with theoretical economists is that they don't understand that when you have a deficit, you can only finance it by borrowing, and you've got to persuade people that it's worth lending money to you and that they'll get their money back... there's no way of escaping it.” Dennis Healey during the 1976 Stirling Crisis.

    Printing money will debase the currency and cause a run on the pound. Things will feed back on themselves and get out of hand very quickly indeed.

    ( The problem is that the Brown govt has no credibility anywhere except with the Guardinista media class. Maybe a Conservative govt could get away with it for a short time, but event hats risky. )

  7. 'It is going to ask the Bank of England to print money.'


  8. MIS: "The problem is that the Brown govt has no credibility anywhere except with the Guardinista media class."

    Don't forget, Brown has won no friends anywhere with his perpetual whining and lecturing about how wonderful his economic miracle has been.

  9. One of the really big lessons to be learnt when hindsight looks back on this current era is that nothing but nothing is "too big to fail".

    Having learned that lesson then just maybe we will end up with a healthier ecosystem of moderately sized companies and corporations.

  10. Your site crashed my browser twice today, Alice. You may correctly detect a note of complaint.

  11. M0 (real coin and paper money printing) is already out of control in the US. Up 100% in the last year. It averaged 6% growth per year since the 60s.

  12. OK. I'm back.

    I feel much happier down here (see new avatar.) And Gordon Brown continues to tell me that we are best placed ... blah-de-blah ...

    I have moved my Sterling into stocks - stocks of baked beans, rice pudding, Bombay Bad Boy Potnoodles, water purifying tablets, candles ...