Massive bailout for banks: Get ready for inflation.

WTF?_2

Ever made a bet that you didn't win?

So did you think to take your betting slip to the government and have them pay out anyway?

That's crazy talk surely - why on earth would the taxpayer bail out someone who had been so stupid and reckless with their money?! No government would do that....

... unless of course, you are the UK banking system and your bad bets totalled tens of billions of pounds putting you on the brink of insolvency:

http://www.reuters.com/article/marketsNews/idUSL169544420080416

LONDON (Reuters) - The Bank of England is close to finalising the terms for an intervention in the mortgage market, the Financial Times reported, after leading bankers warned the government on Tuesday over the growing strain on small lenders. Citing people familiar with the proposal -- which still needs government approval -- the paper said on Wednesday that the plan would see the Bank would swap UK mortgage-backed securities for government loans for a period of one to three years.
The newspaper said the Bank would not accept mortgages agreeed after the end of December 2007.


Essentially this is as near as dammit to monetizing bad debt. It is going to be massively inflationary meaning that your savings and salaries will be buying you a lot less in years to come. On the other hand, it might halt the slide in the housing market. Maybe - but only by making everything else so expensive that houses look vaguely good value.

It's a bit like Northern Rock times twenty. The government (ie. us, the taxpayers) take on the debt related assets of the banks that the financial markets don't want to touch with a bargepole. The idea being that having got their money back from their disastrous fiscal schemes of the last few years, the banks will play nice again and make borrowing money good and cheap so the debt-addicted masses can have their opium again.

And never mind what that does to the monetary system as a whole.

kingkano

Without resorting to being called an HPI cheerleader, stupid, thick, etc etc as is want on this board.....

can someone explain why slightly higher inflation would be a bad thing? Im not talking 15% or anything just maybe relaxing it to 5% or so? I know it makes the prices of things go up. But salaries linked to inflation would go up too yes? and isnt that how our parents and grand parents really afforded houses?? within 5yrs of buying due to inflation their mortgage payments hit their pockets alot less. 10-15yrs later it was peanuts in comparison - right? Or am I silly?

tomstickland

I think the government will do anything such is the fear of a crash and their reelection hopes. That's one way of looking at it; the other is they can't let the system come crashing down for "the good of the country".

Trollfever

Just testing my new signature.:hello:

m00m00

Private Profits, Social Losses.

m00m00

kingkano wrote: »

Without resorting to being called an HPI cheerleader, stupid, thick, etc etc as is want on this board.....

can someone explain why slightly higher inflation would be a bad thing? Im not talking 15% or anything just maybe relaxing it to 5% or so? I know it makes the prices of things go up. But salaries linked to inflation would go up too yes? and isnt that how our parents and grand parents really afforded houses?? within 5yrs of buying due to inflation their mortgage payments hit their pockets alot less. 10-15yrs later it was peanuts in comparison - right? Or am I silly?

recorded inflation bears no relation to what's going on in the real work.

work out how much petrol has gone up in the past 12 months, and try and co-relate that to any recorded figure

oh, but USB memory sticks have halved in price, and had their weighting in the figures doubled.

WTF?_2

kingkano wrote: »

Without resorting to being called an HPI cheerleader, stupid, thick, etc etc as is want on this board.....

can someone explain why slightly higher inflation would be a bad thing? Im not talking 15% or anything just maybe relaxing it to 5% or so? I know it makes the prices of things go up. But salaries linked to inflation would go up too yes? and isnt that how our parents and grand parents really afforded houses?? within 5yrs of buying due to inflation their mortgage payments hit their pockets alot less. 10-15yrs later it was peanuts in comparison - right? Or am I silly?

First, we're not talking about slight inflation. We already have more than slight inflation as it is and it's growing without any 'help' from this disastrous idea. This is going to be massively inflationary. Basically, hundreds of millions of pounds worth of shortfalls in the bank's capital caused by irresponsible lending are about to be 'forgiven'.

The end result will be billions of extra pounds of cash in the system, cash that under free market conditions would not have been there. Cash that taxpayers are underwriting, cash that will inflate prices making our savings and salaries worth less.

Just look at the effect that current rises in the price of food and energy are having on people. Now imagine what happens when that effect starts to increase and accelerate. Wants inflation gets a grip, it's a spiral.

And don't expect 1970's style pay increases. With the economy importing a lot more than it exports, including food, there isn't the cash there to pay workers more as businesses are squeezed to constrain costs.

All that price inflation will do, in the absence of wage inflation, is make it less easy to service existing debts as the amount of cash you need to spend on everyday stuff rockets. Times are set to get harder for the general population as everyone in the country holding or earning money pays to bail out the bad decisions of the banks.

MissMoneypenny

kingkano wrote: »

Without resorting to being called an HPI cheerleader, stupid, thick, etc etc as is want on this board.....

can someone explain why slightly higher inflation would be a bad thing? Im not talking 15% or anything just maybe relaxing it to 5% or so? I know it makes the prices of things go up. But salaries linked to inflation would go up too yes? and isnt that how our parents and grand parents really afforded houses?? within 5yrs of buying due to inflation their mortgage payments hit their pockets alot less. 10-15yrs later it was peanuts in comparison - right? Or am I silly?

We had (and were use to) high interest rates and our salaries went up accordingly. Therefore when the interest rate dropped to say 10%, our salaries were still high.

Lately we have had very low interest rates and the salaries rises were low to reflect this. There is only one way these historically low interest rates are going to go and people just won't have the salary coming in to combat this.

A rise in a mortgage rate from 4% to 6% is a 50% rise:eek:

BobProperty

kingkano wrote: »

Without resorting to being called an HPI cheerleader, stupid, thick, etc etc as is want on this board.....

can someone explain why slightly higher inflation would be a bad thing? Im not talking 15% or anything just maybe relaxing it to 5% or so? I know it makes the prices of things go up. But salaries linked to inflation would go up too yes? and isnt that how our parents and grand parents really afforded houses?? within 5yrs of buying due to inflation their mortgage payments hit their pockets alot less. 10-15yrs later it was peanuts in comparison - right? Or am I silly?

I think !!!!!! has answered this in part. This is what happened in the early 70's. House prices rose slightly IIRC but wage inflation and goods inflation went berserk. I can remember that a typical new family car cost about £600-£700 at the end of the 60s but by 75 you were paying over £2k for the equivalent. Similarly wages went mad. I knew a local government clerk, next to no qualifications, started on about £400-£500pa and was earning over £2000 within about 4 years. That's how silly the price rises were. This time round the government will have to keep its spending in check so no "in line with inflation" pay rises for most civil servants, job losses in quangos, contracts not renewed, etc.etc. Some people/industries/areas are in for a kicking.

carolan78

!!!!!!? wrote: »

First, we're not talking about slight inflation. We already have more than slight inflation as it is and it's growing without any 'help' from this disastrous idea. This is going to be massively inflationary. Basically, hundreds of millions of pounds worth of shortfalls in the bank's capital caused by irresponsible lending are about to be 'forgiven'.

The end result will be billions of extra pounds of cash in the system, cash that under free market conditions would not have been there. Cash that taxpayers are underwriting, cash that will inflate prices making our savings and salaries worth less.

Just look at the effect that current rises in the price of food and energy are having on people. Now imagine what happens when that effect starts to increase and accelerate. Wants inflation gets a grip, it's a spiral.

And don't expect 1970's style pay increases. With the economy importing a lot more than it exports, including food, there isn't the cash there to pay workers more as businesses are squeezed to constrain costs.

All that price inflation will do, in the absence of wage inflation, is make it less easy to service existing debts as the amount of cash you need to spend on everyday stuff rockets. Times are set to get harder for the general population as everyone in the country holding or earning money pays to bail out the bad decisions of the banks.

So in theory your pension could be worthless unless it rises with the rate of inflation but that then brings further burdens on financial institutes or am I way off the mark? Could this in theory be the start of a vicious circle we will struggle for years to get out of as a country?

Treadmill

When is this recession starting ? I keep hearing that its already started but growth and unemployment figures etc would suggest otherwise.