Wednesday, August 12, 2009

Beware the green shoot

House prices bounce back! The Daily Mail became an even greater parody of itself last week as it proclaimed the return of the housing boom and celebrated the end of the recession. The City of London has decided that the good times are here again, and a government desperate for good news is echoing its triumphalism.

Well, I hate to be a moaning minnie but the recession is most definitely not over, and we'll be living with the consequences for many years, as unemployment mounts and public spending is axed. All that has happened is that the banking crisis has been resolved by the input of hundreds of billions of public money. If you throw 1.2 trillion pounds at any economy and start printing money by the tens of billions, then something has to give.


We've borrowed ourselves out of a debt crisis, and someone will have to pay. The only thing certain is that it won't be the people who were responsible for the crisis in the first place. Stuffed with our cash, the bankers have stopped panicking and returned back to doing what they're really good at, which is rewarding themselves. Well, they're like rock stars aren't they, or professional footballers. So said John Varley, the chief executive of Barclays last week, whose name has yet to appear on the transfer list for Real Madrid. Bankers, we're told, are just paying themselves what they're worth. No one goes around saying that Simon Cowell isn't worth it or that David Beckham is overpaid.


Perhaps, but then they aren't being subsidised by public money. Barclays isn't in public ownership but it recorded £4.5bn of bad debts last week and would be in severe difficulties were it not for government support and liquidity injections. Most of the nationalised bank chiefs wouldn't be earning anything at all if the government hadn't bailed them out last year because they'd have been out of a job. They have no right to use public funds to pay themselves mega bonuses again.


But where is the public outrage? How do they get away with it? Sir Fred Goodwin, who was pilloried for taking his £16m pension pot with him as he left the sinking ship of RBS pointed out last week that there were 200 in his own bank who were earning more than he did. They still are, even though Royal Bank of Scotland is in state ownership and its staff are officially classed as public sector employees. Far be it for me to side with the archetypal scumbag banker, but Sir Fred has a point. Executives in all the big banks are as guilty of misappropriating public funds as he was since they are only in business because of the bank of you and me.


It gives me no satisfaction whatever to point out that this is exactly what this column said would happen last year after the government bailed out the banks without reforming them. I said that their first priority would be to enrich themselves; that they would use low interest rates to bolster their own balance sheets rather than lend to business; and that they would block any attempts to extinguish speculation or reform the shadow banking system. Well, bonuses are back, lending is down and regulation is out the window. Faced with a systemic collapse of the global financial system, the government abdicated and handed all power to the banks. But at least we now know who's really running the country.


Just don't say that the market has 'corrected itself'. This has nothing to do with market forces or even capitalism. The economy is now at the mercy of a handful of financial institutions, with balance sheets larger than Britain's GDP, which have been allowed to hoover up far greater subsidies than the old nationalised industries of the 70's could ever have dreamed about. Lloyds reported a loss of £4 billion last week and bad debts of £13bn. But the Lloyds share price actually rose. Why? Because shareholders know that the losses are about to be taken on by the tax payers in the Asset Protection Scheme.

The APS sounds like a kind of bomb disposal for banks, and in many ways it is. However, it is defusing hundreds of billions of mortgages and property loans made by HBOS before it was merged into Lloyds. These are housing loans given to people who can't repay them and dodgy investments in property companies which have since gone bust. Make no mistake – we are taking on the losses of HBOS; saving a dead institution. It's like the government bailing out Woolworths and letting them go back to pick'n'mix marketing. HBOS's terrible twin, RBS, is about to dumpt around £250bn in dud loans and other assets onto the APS so that the vast majority of any losses will be borne by us. So much for the taxpayer making "a profit" on the rise of RBS's share price.


It's the same with Northern Rock. The government is reportedly planning to split it into a 'good bank', with the profitable mortgages and all the retail deposits, and a 'bad bank' holding all the dud mortgages unsellable bonds and other junk. Guess who gets to keep the rubbish? It was the Rock's irresponsible lending – those 125% “Together” loans – that helped push the housing market into cloud cuckoo land. But hey, house prices are booming again, so what's the problem? Soon we'll all be using our homes as cash machines again just like the good old days of 2007.


Well, if house prices really are booming again the last thing we should be doing is celebrating since are still unreasonably high by any historic standards. Young families have to take on onerous mortgages which lock them further into the debt cycle; investment is diverted from productive uses; and speculators start taking crazy risks again. A responsible government would be trying to get house prices back to affordable levels.


Fortunately, the recovery is likely to be very short-lived as actual sales are still barely half of what they were two years ago and mortgages are still very hard to come by for people without cash or housing equity. Many of those who already have large mortgages have been given a huge windfall thanks to the lowest interest rates in British history. They're been trading up to larger houses and buying flats with cash. But anyone who thinks that mortgage rates will stay this low for long deserves everything coming to them. It is all funny money chasing funny money, a new turn of the roulette wheel of debt. The casino economy is back, and guess what: we're all losers.

6 comments:

voiceofourown said...

And still the government persists with it's 'global problem' line of defence.
Apparently no one is to blame because most governments acted in an equally stupid and irresponsible way.
Chickens will come home to roost soon enough for this morally and politically expedient bunch of con-men.
Unfortunately, as you so clearly show, they will be perched over OUR heads.

voiceofourown said...

And still the government persists with *its

Grahamski, Falkirk said...

My, Iain, is that you practically punching the air at the thought of Britain's economic troubles continuing?

Conway said...
This comment has been removed by the author.
Conway said...

So the public are screwed whatever happens,once the Conservatives get into power they will continue with the same policies as Labour, Its time we had a Federal Uk within a Federal Europe with the UK being part of the European single currency."

madgebishop said...

Dear Iain Macwhirter, this is not strictly to do with the economic downturn… But I once had a dream where I was at the opening of the Scottish Parliament (these are the kind of dreams I have - no, really) and you threw an espadrille shoe at me. I know! I am shocked too. Is this the kind of thing you would do? Do you even own a pair of espadrilles (or at least one)??

Any help much appreciated -
From Concerned in Glasgow