It is comforting to know that our Chancellor now recognises the severity of the current situation but it would be more comforting if he reacted with deeds rather than platitudes.
It is four weeks since the governor of the Bank of England met with our major banks to discuss the crisis but we are still waiting for some action from the Bank of England, apart from the modest increase in liquidity being pumped into the market this week, which the Chancellor seems to think is a big deal.
Presumably, our Chancellor and Prime Minister still have some influence with the bank and maybe after the Chancellor’s summit on Tuesday with the chief executives of our major banks and Nationwide Building Society, the Government will at last demonstrate some leadership. However, on past performance, this has to be a hope rather than an expectation.
On Sunday, Gordon Brown said: “Although the Bank of England has cut rates in recent months, the banks have not always been passing those reductions to their customers.”
Perhaps Mr Brown needs to be reminded of basic economics. Just as the price of commodities has risen because demand is exceeding supply, so it is with the cost of mortgages. If lenders collectively do not have and cannot obtain sufficient funds to meet demand, then it has to be rationed in some way.
Some lenders are behaving more responsibly than others in this but in general the alternative to rationing by price and criteria is to ration solely by price or solely by criteria.
If lenders were to restrict the maximum loan to value ratio for all new loans to, say, 50 per cent, then rates could be reduced. Limiting new loans in this way would, however, have a devastating effect on the housing market and the wider economy.
Since the Bear Stearns’ rescue, there has been some improvement in investors’ confidence as a result of the Fed’s handling of the situation.
Eurobond issues have increased in each of the last three weeks but the sterling market is still moribund. This highlights the Bank of England’s impotence compared with the ECB.
Perhaps self-interest is our best hope of salvation. The Prime Minister must call an election within two years. The polls currently indicate that he will suffer a crushing defeat and the macro-economic consequences of a continuing meltdown in the mortgage market will only make that defeat worse.
It is too late for the Government to bring back the feelgood factor before the general election but with prompt and appropriate action to deal with the current liquidity crisis they may just have a chance of avoiding the feelcrap factor.
Ray Boulger is senior technical manager at Charcol