Massive bailout for banks: Get ready for inflation.

WTF?_2

danm wrote: »

!!!!!!,

im not sure why you assume that this will lead directly to an increase in inflation.

As far as i can tell all the BoE are trying to do is 'unclogg' the system by helping banks free up capital.
At no point does it say this will be pumped out to borrowers for example.

The Fed and the ECB have been doing this for the last year or so.

I agree that inflation is unwelcome, but i think a full recession brought about through the collapse of the housing market is the worse of the two evils.

i think this is a stability play, and a welcome one at that

I know what you're saying but look at it this way - imagine every time you lost some money on a harebrained financial idea you could just go to the government and get full compensation for the losses you made? Apart from the idea being absurd there's the small matter of what would happen to the money supply.

The money you personally 'lost' is however still out there in the system at large. Now there's an equal amount of extra money in the system to 'replace' it. That's inflation.

The whole reason that banks are allowed to 'create' money - and they do create money since they are allowed to loan more than their reserves - is because the money is supposed to be 'destroyed' at repayment time.

When money is 'created' once by the banks and then again by the government when it isn't repaid, it is massively inflationary. They're talking about three year loans etc but the bottom line is that money supply is about to be boosted massively: Inflation a go-go.

And that new money is going to be directed by the markets into profitable areas because with growing inflation and low-low interest rates you aren't going to leave your cash lying around in a low yielding interest paying investment. You plough it into an asset class that shows strong growth.: More asset bubbles (housing was the last big one).

And what assets are looking like giving potentially the best future returns right now? Soft Commodities (Food) and Energy sources (Oil, gas): Ever higher prices on the essentials.


Double inflationary whammy.

(And it's not just a case of me speculating on future financial misery for us in the west .... there is very real misery in third world countries right now as the bubble of food price inflation literally leaves masses of people unable to afford to buy the food they need to live.)

m00m00

the system is 'broken' unclogging it now will only make things worse in the medium/long term.


it needs a complete overall, not tinkering.

EdInvestor

!!!!!!

* I've provided you with the info that employment only starts to drop after we are in recession and proof that growth forecasts for the economy have been slashed

You provided an IMF reduced growth forecast.However it's worth noting that IMF forecasting is usually wrong.

Did they forcast the credit crunch?No.
Did they forecast the Asian financial crisis?No
Recovery from Asian financial crisis?No
What about the Russian crisis?No
Dotcom crisis?No

IMF forecasts are contrarian indicators.You have been warned.

mystic_trev

So not quite what it looks like at first sight.

With thanks to Globaltrader on TMF.

Under the new and separate scheme, banks would be able to swap some of their present mortgages, which cannot be sold on to anyone else, for government securities, which can. The scheme will not suddenly revitalise the housing market, for that is a longer-term issue, but it will mean that the banks can resume granting new mortgages and rolling over existing ones on a reasonable scale. That is a necessary first step in stopping something more serious happen ing to the economy.


Interesting and I have thought for a few months something of this nature was likely.

The number £40bn in the article is quite interesting. It is a very very small number (in this context anyway) - about 4.5 months of UK RMBS issuance at the rate prior to the market shutting down, about 10% of the outstanding RMBS, 4 months of lending for purchase, about 3.5 months of net lending and just over a month of gross lending. I am guessing it represents the amount of net lending that banks did after the crunch started and would have, but couldn't, then securitise. Net lending post the credit crunch is probably about £60bn so that sounds about right.

For the government to completely replace RMBS at levels just consistent with zero nominal house price growth they would need to be putting about £40bn in every six months. Clearly that is impossible (it would do something like treble the rate of growth of the national debt).

However IF the banks have the facility to do this, then the hope is that they will be able to issue RMBS which investors will then feel safe buying, knowing that if the worst comes to pass then it can be flogged on to the UK treasury. The hope is that just the promise of this will mean it will be able to restart the primary RMBS market.

I am not so sure. The US agency market has flourished - because there is an explicit government backing (I realise it isn't really explicit, but its a lot more so than something that is not even a promise). The question is would you really trust the UK government, which isn't in the best financial state and doesn't have the same market for its securities as the US, to be repurchasing this stuff in a years time when most likely a recession will have drained the governments coffers further.

At best this might result in secondary trading of RMBS restarting and spreads coming in slightly. I can't see any RMBS investor buying on this basis. At worst the money will vanish into the banks balance sheets and new lending won't improve at all.

I think the market is going to hold a gun to the governments head until they cough up either more money and keep doing so - I don't think £40bn in this sort of arrangement is enough; or go the whole hog to an agency style system.

dopester

Thanks for that post mystic trev.

So they are taking a bite of the toxic stuff but not a full-on stomach full.

Looks like a confidence restoring trick. Like that politician who tried to restore confidence in BSE beef by getting his daughter to eat a burger in front of the cameras... (but she never took a bite in the end - and either did he).

mystic_trev

dopester wrote: »

Looks like a confidence restoring trick. Like that politician who tried to restore confidence in BSE beef by getting his daughter to eat a burger in front of the cameras... (but she never took a bite in the end - and either did he).

The Minister of Agriculture, John Gummer, even invited newspapers and camera crews to photograph him trying to feed a beefburger to his four-year-old daughter, Cordelia, at an event in his Suffolk constituency. Although his daughter refused the burger, he took a large bite himself, saying it was "absolutely delicious".

She probably realised her Dad's boss (Margret Thatcher) was a mad cow and didn't wat to end up like her!:rotfl:

danm

so it sounds as though its jut an asset swap effectively.

m00m00, i don't think the system is broken as such. Banks need to use the structured capital markets to disseminate risk. What was broken was the investor understanding and rating agency models.

it will be interesting to see the cause/effect scenario of this on the housing market. I wonder how much of the current downward trend has been caused by a lack of attractive products. If those products return, does the housing market reverse it losses over the last few months

kristianwilliams

People today have a short attention span. They expect a recession to hit over night, and things to change pretty quickly.

What they dont udnerstand is that this is the start of a long road. Things are slowing down, and when they stop, they'll eventually roll backdown.

What we know is that over the next few years, fixed rate mortgages will come to an end. The great value they had is very unlikely to return. Banks withdrew hundreds of types of deals.

This is going to be a "slow" fall, but a fall none the less. What we are seeing now is the start of it. Because of the flow of information these days, people can see this happening sooner then before.

Now, this Government is doing what it can to slow the fall even more. Is this a good thing? not any more. They've been doing it for 3 years. The fall is coming. But now the fall is going to feel worse. Kind of like the loooong ride up on a rollercoster, you know whats coming, and you cant stop it. All you can do is pray for a few more seconds at the top to enjoy the view, before coming back down again. Does'nt matter which side you face. If you look at it straight on, and watch the ground come at you, or if you have your back turned, and keep looking up at the sky. Does'nt change the fact your falling, no matter what you wish. :eek:

(I just thought the smiley looked good with his hair going up like he's falling):T

dopester

I expect the Government will be very selective on what it accepts from the banks in exchange for the liquidity.

Surely they aren't going to accept as security the mortgages of Middleton flats at £90K+ or Salford apartments at £200K+ from speculative FTBs and BTLs. I expect Government only to accept those mortgages which are of some quality in exchange for HM Gov securities.

Even £40 billion doesn't look likely to restore bank lending confidence either.

dopester

Although with NR the Government did that of course... but are trying to actively move them on to other lenders.

Yet now the other lenders aren't lending as Government would like them to.

Its not a good situation is it.