At the Council of Mortgage Lender’s annual conference in London today, School of Economics Professor of European Political Economy Willem Buiter said HBOS’ demise is due to the BofE’s decision to give a closing date for the Special Liquidity Scheme.
He said: “The SLS was a remarkably good idea – swapping treasury bills for illiquid mortgage-backed securities. But then it stopped.
“A terrible mistake was announcing that the SLS will be closed to new business from October 20 – this was effectively the death sentence for HBOS, because the SLS was really the HBOS financing facility. What you do when you announce a closing of a facility is you create a focal point for speculators co-ordinate on.
He said the BofE recognised this and gave an extension to the SLS closing date, but Buiter thinks this made things worse. But he said it was too late for HBOS.
“It was a tragic error,” he says.
Buiter also predicted a grim 2009 for the UK economy. As well as predicting the need for a base rate of 0 per cent in the near future, he reckoned a long wait before UK households will stop feeling the pinch.
He said: “Compared to Iceland the UK is ready to handle a recession, but it is one of the most vulnerable economies in the world. It has the most highly indebted household sector of any industrial country.
“Household deleveraging – which is anther way of saying household reduction in borrowing – will be with us for years to come. Financial institutions can deleverage in a hurry, households can really only deleverage slowly.”