Sunday, October 12, 2008

How much worse can it be?

Gordon Brown's frantic efforts to herd G7 and EU finance ministers stems from the growing nightmare scenario of negative equity, with the 110% mortgages and wickedly overinflated values of recent years (the UK housing market was uniquely overpriced in Europe and even the US). This was a state of affairs roundly encouraged by the government, to help float and maintain the feelgood factor on a sea of fairy credit. Here's a very simple illustration of the day of reckoning.

House purchased/remortgaged for £200k in 2006/7 with £200k mortgage. Value in 2008 £150k. Will the purchaser...

a) continue paying off a £200k loan for £150k of equity
b) hand back the keys and bugger off in that shiny new BMW purchased using the "equity released"...

Did you buy a used car courtesy of this man?

Millions have used cash they didn't own to acquire assets they still don't own, so perhaps Gordon will be appointing the experts of this type of finance to replace the heads of the retail banks being nationalised.
Sadly, Swiss Tony advises TMP that he
and his colleagues are not currently available for
consultation from their tax haven at
Ford Open Prison, but have
suggested that his inspiration in all things fiscal and hirsute,
Mandelson, might
be available instead.

...this just in - Mandy gets a new fur wrap and seat in the Lords.

In the increasingly likely the event of (b), then just how many UK mortgages are of the "toxic" variety? Probably more than a million, so here is another £200,000,000,000 (it looks more scary when expressed that way, doesn't it?) for Broon's already anorexic piggy bank to account for.

People still have to live somewhere, of course, and local councils must be bracing themselves and reading up on their obligations to house the wilfully and not wilfully homeless, having very wilfully tipped their funds down the Icelandic drain on the advice of New Labour's stalwarts - Capita. So a scheme for turning these owners into tenants is probably already being worked out, for what the government is most likely doing when nationalising the banks is preparing to become a vast provider of rented accommodation.

The reason for Broon's fluster and bluster is that no other European country has anything like this situation with such overpriced houses, hence the mild bemusement on the faces of the G7 and EU finance ministers when asked if they all intend to back Broon rescue plans. Why should they? This is more the UK's own self-inflicted problem than anyone else's!

The most useful thing that could happen next week is for Broon and Co is to scare the rest of the world's financial markets into believing that they are indeed teetering on the same precipice as the UK, when in all probability, they are not. Expect more than one of these finance ministers to become exasperated with Broon's bullying antics and tell it as they see it; and then stand well back...

However, this tactic is also handing many failed left-leaning politicians across the globe a nifty opportunity to indulge in some systemic nationalisation that in "normal" circumstances they could never get away with. So maybe they will all just smile for the cameras - and snatch at the opportunity - whilst making a mental note to send Gordon and Alistair a Christmas card Meantime, everyone claims a brave victory has been snatched from the jaws of a disaster conveniently failing to note that it was entirely of their own making. As Broon's political hero Margaret Thatcher once observed, it's a funny old world.

The result for GB is likely to be the continued loss in value for the £ and the all the inflationary consequences - something those of us who recall all previous Labour governments will find sickeningly familiar. However, it is not entirely clear why equities should be taking quite a such a bath when the real malaise is quite narrowly confined to the US and UK housing and associated finance sectors - hence TMP's rebound predictions. And especially since UK equities will look even cheaper with £ heading south so quickly.

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