CIVIC REPUBLICAN NEWSLETTER No 2
“Constructing a Humanist Politics”
No 2 Friday 12th September 2008
Brown and Darling pull a shabby trick on first time buyers
Why Britain's banks are on borrowed time....
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:
currently levied on properties over £125,000 will now be applied
to properties costing £175,000 or more - but only for the next
five year loans of up to 30% of a property's value for first
time buyers of new homes in England
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
forward spending from future years to encourage more social
housing to be built
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
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.
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.
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.
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.
wage in Britain currently is
Imagine a person on this wage wanting to buy a property worth
- 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.
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
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
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
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
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
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
If you wish to comment on these articles or anything other
…….Until next week