Failing to address the banking crisis is hampering recovery
Mark Bathgate 8:59amAs another £30 billion of taxpayers’ money is handed over to banks, the role of banking sector in the continuing UK recession cannot be understated.
1990s Japan taught the world that developed economies with zombie banking systems don’t grow. Crippled by bad debts, lending margins on solvent borrowers increase, credit availability declines and ongoing bailouts are needed. This hampers growth in the rest of the economy. The more indebted the private sector, the greater the damage a bust banking system inflicts.
The above chart shows how margins on UK mortgages – the gap between borrowing from the Bank of England and what is then leant to mortgage holders – have soared since September last year. In most other countries mortgage rates fell with the central bank rate: mortgage rates for existing borrowers are between 1% and 2% in much of the rest of Europe now. The massive increase in Britain has cost households over £30 billion during the past year, unless they have been lucky enough to be on trackers. £30 billion is more than 2% of UK GDP, explaining the underperformance of the UK economy over recent months.
Credit growth has also collapsed. While mortgage lending has risen slightly in recent months, the 95% slump in lending since the start of the crisis in mid-2007 has not been addressed. As well as the dive in new mortgage availability, remortgage flows have slumped. With banks like Barclays and Northern Rock charging almost 5% to customers trapped on standard variable rates, it is certainly not lack of demand for cheaper mortgages holding things back. Lending to businesses for investment has also been severely curtailed since the start of the bank crisis.
The above chart illustrates recent trends in non-mortgage lending, on credit cards for example. With banks falling over themselves to cut credit limits and shut down accounts, credit availability has collapsed. None of the cheap financing the taxpayer provides the banks, via the Bank of England, is passed on in lower monthly credit card interest bills.
The advent of another massive bailout package for UK banks simply reinforces how botched the job of fixing the banks has been thus far. The cost to the UK economy and taxpayer is very high.
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BigAl
November 4th, 2009 9:14am Report this commentSavers have been clobbered as well by the 'low' interest rates. A massive double whammy of benefit to the banks.
Dorothy Wilson
November 4th, 2009 9:32am Report this commentBut, of course, Gordon's scheme to bail out the banks saved the world. Didn't it?
Moraymint
November 4th, 2009 10:04am Report this comment... which reinforces my view that the UK has yet to experience the real-economy effects of the banking crisis. All this talk of us climbing out of recession strikes me as a phoney recovery. The foundations for economic growth seem to me to be so much shifting sand.
Are we not faced with the process of massive de-leveraging here? Is it not the case that we shall now spend many years trying to unravel ourselves from huge over-indebtedness, whether it be businesses, mortgage holders, credit card spenders or, above all, our stupefyingly debt-burdened state?
If anyone ever wanted a case study in how a heady mixture of rampant Marxist ideology delivered by a dishonest, spin-obsessed political class was a surefire way to screw a nation in double-quick time, you need look no futher than the British Labour Party.
We all know that the Labour Party has knackered this country on several previous occasions, but this time under Gordon Brown's unique and sinister tutelage, the Labour Party may well have done irreversible socio-economic damage to this country.
Why do so few people, not least in the mainstream media, seem terribly bothered about this? Is there really a problem here, or is all this just some sort of arcane economic technicality that the nation will take in its stride?
Or perhaps the practical implications of our woeful economic circumstances will only start playing out into society with a vengeance from next year, and thereafter?
Despite all the media coverage of supposedly leading indicators of economic recovery, I don't have a good feeling about this at all.
2trueblue
November 4th, 2009 12:27pm Report this commentMoraymint, the reason the media are not bothered is because we have had 12+yrs of a government that have cowed opposition of their views on any matter. Think of the people they have discredited over the years simply because they did not agree with the party line. We have very few journlists who are prepared to put their own view forward, or perhaps is it that there are none?
There are a handful of economics who saw it coming and are aware that the path to recovery is not going to be a hop and a skip, as some seem to be saying it is, but that the austerity we will have to go through is not something that can be endured without aspiration and discipline.
There is in our society very little of either.
The true level of debt is not declared, either here or abroad and lending will be slow. The credit card debt is not eve in the picture, either here or in the U S. Germany has already stated that they are expecting credit crisis in the 2nd quarter of 2010.
Yes, you are right, next year will be worse.
oldtimer
November 4th, 2009 2:41pm Report this commentThis is both informative and true. The triple whammy of excessive government, business and consumer debt levels will hold the economy back for years on present trends and policies.
Perhaps, in a future analysis, you can chart debt levels in these three categories. We know that government debt is still rising and out of control. Business debt is, I suspect falling, partly because of the banks` reluctance to lend and partly because many have been busily destocking. My sense is that the consumer savings ratio is, now on the rise. It would be helpful to have your view on this when the next set of relevant data appears.
Ian c
November 4th, 2009 7:07pm Report this commentThere is only one thing that will get us out of this mess and that is growth. To achieve that we have to cut taxes on jobs and enterprise - income tax, NI and their thresholds and corporation tax - and add it to spending - VAT. We need to be incentivised to pay down debt as fast as we can so that the sooner it is done the sooner we recover. Painful but done quickly than dragged out through timidity and fear of the markets. If we have to pay higher interest rates for a couple of years, so be it.
So more money in personal and business pockets is the way to solve this. As we don't produce much here it will effect other economies while we claw ourselves back to honest finance.
Kathryn X
November 23rd, 2009 6:33am Report this commentThanks
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