Round the houses

It’s becoming clear that, over the last decade, house prices have been wildly and unsustainable high. The news from Nationwide today that house prices have fallen 18 per cent in the last year is both arresting and oddly comforting.

Too many young people have been unable to even claw at the first rung of that Jacob’s housing ladder. Far too many mortgage borrowers were forced to take loans that they must have known would lead to negative equity.

Bankers, politicians and regulators have all landed in the public blame cross-hairs when, in a way, they should turn the gun on themselves. Private debt is a product of individual greed and capitalist competition, yes. But it was also, in many cases, the only way that people could afford to get a place of their own.

The best things in life are free

Yesterday, as most of Britain frolicked in a winter wonderland, businesses were counting the cost of the heaviest snowfall for almost 20 years.

It’s estimated that “snow day” cost Britain in excess of £1bn and that figure could rise to £3bn as the cold front looks set to remain for the rest of the week.

Over one fifth of all British workers (at least those who aren’t striking) couldn’t make it to their desks as transport links across most of South East England were disrupted. Of those who clambered through the wilderness to make it to work, 80 per cent of them did so late. Britons yesterday essentially pulled a nationwide sicky.

Mandy’s wheels come off

Lords, eh? They know how much things are worth. Take Lord Taylor, yours for a cool hundred grand a year. Today evil overlord Mandelson himself announced a loan scheme for Britain’s – pinch of salt needed – ailing car manufacturing industries, amounting to £2.3bn of taxpayer’s money – having almost nothing to do with his recent trade trip to India and Jaguar being owned by Tata.

As with so many of Mandy’s headline grabbers, the announcement of such a scheme was tempered with a salient thought provoker:

Britain needs an economy with less financial engineering and more real engineering.

Save us the history lesson

Whisper it quietly. Shout it from the rooftops. It’s finally here. The word that has been written, reported, blogged and tweeted countless thousands of times since last September finally gains credence. The UK is officially in recession.

It’s perhaps not the most compelling or unexpected of news stories but it does lend some perspective to what the Tories are labelling, only half-unfairly, Gordon Brown’s Recession.

That an article of such economically cataclysmic content is treated as old news is news enough in itself.

We have just experienced our worst quarter since the depth of the last recession – the word’s usage has apparently increase 2000 fold recently – in 1990.

History is a guide to navigation in perilous times.

- Pulitzer Prize winner David McCullough

The natural tendency once something of this magnitude has been confirmed is to seek solace in history. Previous events set precedents that can cajole us into believing that, although we are in awful shape, we are not in that scariest of positions – uncharted territory.

We hear that the pound is at its weakest against the dollar for 23 years. Unemployment is encroaching on levels not seen for 15. Economic growth is the slowest in 27.

Yet we are are in unprecedented financial times in many ways. The Bank of England’s base rate has never been lower. Media reporting of job losses and instantaneity of market transactions have never been quicker nor, lamentably, more prone to error.

History cannot console us. Look back and comparable figures show that the last time Britain’s economy shrank by 1.5 per cent, we were still in the mire. The oil shocks of the Seventies were still rippling and inflation soared to levels not seen since – you get the idea.

Analysts understandably look to history in order to predict a recessions course. But all they provide us with are a set of rules that apply to different times. No recession is identical and no country has exactly similar problems. In this recession alone we have had ‘worst since 1990′, ‘worst since 1980′, ‘worst since 1929′ etc. Will we have the worst ever?

I wouldn’t bet against it, just as I wouldn’t advise anyone to attempt further predictions based on historical premise.

One modicum of solace can be taken from history, in the Nineties recession, to be exact. On the morning of 22 November, 1990 Prime Minister Margaret Thatcher, after over seeing a meteoric boom in unregulated financial growth followed by crippling bust, resigned from office. Are you listening Mr Brown?

Now the credit crunch has a face

Charles Ponzi is a man you may hear a lot more about over the next few days. In 1918, the broke Italian immigrant noticed a loophole in a Spanish international postal reply coupon that would allow him to make a lot of money, very quickly.

80 years later, after the Great Depression and the dot com boom, after several destabilising cycles of economic fluctuation – “boom and bust” – in the midst of looming recession, the Spanish have once again been had.

Santander has amazed analysts by keeping its nose relatively clean as other banks get theirs smeared across the bricks of Wall Street. It had not only appeared to withstand the toxic shocks of America’s sub prime mortgage market, but it has actually expanded its asset base, swallowing up British banks Alliance and Leicester and Bradford and Bingley.

Yesterday we found out that Santander was doing the dirty on its savers all the while.

It was not the only bank to have been sucked into the calamitous pyramid scheme, brainchild of ‘mega fraudstar’ Bernard Madoff. He cajoled the greed and avarice of the rich and power drunk into investing in a financial black hole. Madoff by name…

A story with this level of embarrasment could be a metaphor for the whole global economic crisis. Maddof, former head of the Nasdaq - how terrifying is that? – is now completely vanquished. His respectability and reputation are shattered.

But apart from him and Jerome Kerviel, who else has been prosecuted. Many bankers, traders, brokers and fund directors are guilty of criminal mismanagement and incompetence. The threat of job bonus losses are not sufficient to stop companies getting excessively leveraged. Is prosecution?

Don’t count on it. Madoff might end up in prison. The only difference between him and the hundreds of others who recklessly gamble with savers’ money is that he got caught. For that, we thank him.

Short of cash? Have some more cheap debt

Do the banks have any moral obligation to hand on the Bank of England’s base rate cut?

The Nationwide, HBOS, the RBS/NatWest group and our own Northern Rock have announced that they will pass on the full cut of 1.5% to its lenders in December. It seems Darling’s enticements of “coffee and bacon rolls” sufficiently appeased/threatened bank chairmen to help out borrowers and small business owners.

Admittedly, this will help many homeowners struggling to meet their mortgage repayments. It will also help businessmen borrow at more competitive rates. But a cut in the Bank of England’s base rate wont help the banks themselves.

Because banks don’t tend to borrow from the Bank of England, they borrow from other banks. The Libor, although on the way down, is still far higher than 3%. Any liquidity that the Treasury had hoped the Bank of England’s violent rate slashing would produce will not materialise until the rate of lending between banks dips further.

Governmental and retail pressure has seen banks capitulate in their refusal to alter rates offered to customers. Such political posturing epitomises the mess that part nationalisation has produced for all concerned parties. As preference shareholders in the big commercial banks, the Government (and, by extension, us) should like them to make a quick profit and pay us back. But they won’t make a quick profit by lending at unrealistically low rates.

Furthermore, if the easy availability of debt and mortgages the public couldn’t afford were what got us into this pickle, does anyone really expect more cheap lending to help? People on the high street – the same people who will struggle to make their repayments, who may have to close their businesses – need get used to spending and borrowing less.

The banks are trying to save themselves. But in doing so, they just might be teaching us all a valuable fiscal lesson.

Watching with interest

The Bank of England has slashed interest rates by 1.5%, the largest cut since 1981. The new rate of three percent is the lowest since Elvis Presley sang “Heartbreak Hotel”. This is unprecedented territory.

It is the kind of radical action financial experts and small business managers were calling for, but it will amount to little if banks don’t pass on the saving to their customers. Stock markets are clearly unconvinced.

“I think it’s essential that the banks do pass on the benefit of lower interest rates to people and to businesses,” said Alistair Darling, before admitting there was absolutely nothing he could do to make them.

It appears the Bank can’t win. Were it to err on the side of caution (as it has recently,) critics would be quick to point out the measure’s insufficiency. It may now have done too much, too late.

People will panic. If such drastic action cannot persuade lenders to start borrowing at sustainable rates, then what can? Banks’ reluctance shows that they see the profound gravity of the UK’s economy. And the shopper on the street soon will too.

Christmas may well plaster over the gaps in people’s bank accounts. Credit cards will be festively maxed, money woes will be put off until for a less jolly month, and  January will bite. People will then realise just how much trouble we’ve got ourselves in. By then it might be too late.