The credit bubble just burst. Prepare for a bumpy ride.

[Taxloss]

Three fresh sets of figures have been released today.

The DTI reports insolvencies are up 57% on last year, and bankruptcies up 37%. The DCA adds that repossession orders are up 50%:

http://news.bbc.co.uk/1/hi/business/4676636.stm

NB repossession orders are NOT repossessions; they are the beginning of a court process that can lead to repossession. But don’t celebrate yet - the Council of Mortgage Lenders reports that actual repossessions are up 70% on last year:

http://www.cml.org.uk/cml/media/press/651

All these figures have conveniently been buried on a Friday.

Also, it’s worth noting that this is not “Christmas hangover” – these are figures for all of 2005 compared to 2004. 1Q 2006 figures will be similar and possibly far worse as hangover kicks in.

There are also two sets of unreleased figures I have seen. The first set, which is NGO-compiled, confirms the above in “oh, shit” tones. The second set are more esoteric but they indicate that certain lenders are beginning to become somewhat alarmed.

This could mean we’re in deep economic trouble. Remember: all this has happened without a significant rise in interest rates or unemployment. If either of those start going pear-shaped – we are definitely in deep economic trouble.

(PS: told you so ...)

[fedsron2us]

1. The wheels are starting to come off the British economy

just as North Sea oil and gas production are going into rapid decline. These key indicators all suggest that there is a very real danger of a cascading debt default. If all the hot money slopping about in the world economy gets a sniff that UK plc is in trouble then a run on sterling is a possibility. It could trigger rises in interest rates which would probably feed through to higher unemployment. Once the process starts then the crisis could soon develop its own momentum with each set of debt failures causing further tremors in the currency market. The ensuing avalanche is likely to ruin millions of individuals, destroy thousands of businesses and to ensure that whatever party was in government at the time of the crisis was kicked into the political wilderness for a generation. Given this scenario it is little wonder that some lending institutions are getting edgy. They know that the British public are in hoc to them for over a trillion pounds. Much of that debt could be completely unrecoverable in a crash. Even those lenders with liabilities secured on property are vulnerable since mass repossessions are almost certainly going to result in a sudden glut of property on the market which would cause house prices to collapse. The result of this sorry situation will be untold misery for many families. At the moment the politicians and central bankers are whistling in the dark praying it won't happen. My own view is that it is probably inevitable. Get ready for the clock to rewind the economy back to the 1970's. No wonder the BBC is showing 'Life On Mars'.

[TheBaldyMan]

2. I'm not surprised at this news ...

Interest rates have been low for the last few years with little wiggle room to lower them further. Rather than say this is a disaster for the UK economy I'd say it was symptomatic of people overextending their borrowing hoping house price inflation would bail them out.

Spells of rising inflation rates squeeze less cautious borrowers, this risky behaviour is indicative of greed, ignorance or wishful thinking. Personally I have been advising people not to 'max their card' for a few years now, simply because rates are at a historically low level.

If only the lenders had been giving that advice as well, we might be seeing fewer stories like those on the BBC news website.

[fedsron2us]

3. It is a classic asset bubble

The borrowing is largely underpinned by property values that are over inflated in relation to their historic link to average earnings. The problem with bubbles is that sooner or later they burst with unpleasant consequences. When it happens it will be a disaster for Britain since so much of the economy is dependent on domestic consumer spending. Once that collapses then many businesses will have no alternative but to fold. Personally I blame the politicians and the financial institutions for this situation. Their lax handling of lending and their unwillingness to impose any form of serious credit controls has allowed many people to run up ridiculous amounts of debt.

[Taxloss]

4. The Bank of England has deliberately caused the credit boom

with the blessing of the government. This policy went into action after the East Asian financial crisis in 1997. Consumer spending, fuelled by debt, was the only way to keep the economy growing. The policy was stepped up after the dotcom bust and 911 in the full knowledge that eventually the bottom would fall out, ruining thousands of lives.

This came straight from Eddie George at a conference in Hastings early in 2005.

[TheBaldyMan]

5. IMO it also is linked to another thread about housing originally started

by Taxloss, it was about housing policy in general.

A modest proposal to revolutionise British society - forever.

It gives some insight about the problems with the housing and property market in UK. This is intimately related with the current credit situation. Worth reading.

[Taxloss]

8. It is indeed all linked.

You favour direct state intervention, if I remember?

[TheBaldyMan]

9. not just that, I favour a housing policy that doesn't make matters worse.

All the current solutions seem to pander to house price inflation, it keeps the middle classes happy but screws people who haven't got on the property ladder or have no hope of owning their own home. The proposed partial equity schemes will only add inflationary pressure to an already overheated market.

[FBBulldog]

6. while broadly in agreement...

I doubt that we are going to see economic Armageddon just yet.

This could be the first gusts of a storm but there's still plenty of cheap credit available.

Repossessions are only just starting to increase and are still historically low.

Insolvencies are up because it's been made easier and less taboo to do it.

I'm sure Gordons tax-&-spend-on-cheap-money express will derail eventually but it may run for a while yet.

[Taxloss]

7. Well, that's exactly what the CML says.

And let's hope it's the case.

But the really worrying thing is that these very dramatic increases occurred without any outside shock. No huge interest rate rise, no great rise in unemployment, no great rise in prices. And you still get these dramatic spikes. Q1 2006 results are going to look bad, almost inevitably. And the insolvencies reforms are a double-edged sword; they mean that a chain reaction could spread very quickly, and take far longer to turn around. You can't cure a credit glut with more cheap credit.

Also, the CML uses that "historically low base" line. That's thanks to the "safety net" or "cushion" of rising house prices. If house prices started to drop, shrinking the cushion, you'll see three-figure percentage spikes quarter-on-quarter, and that historically low base would be history very quickly. As would Gordon's "Golden Rule" as the PSBR goes sky-high.

We might struggle on for a bit, but the fact remains that £1.1trillion in consumer debt represents a massive structural weakness in our economy, one that can rapidly cause a crisis if we don't take action. We won't take action, of course, but there you go.

[TheBaldyMan]

10. don't forget there is big difference between ceasing to trade and

insolvency. As someone who had to wind a business up while I could still pay my bills, I know.

Making it easier to go into insolvency will hit suppliers and clients. That's the danger, it's bad enough with late payment being endemic in the UK, cash flow is a nightmare, add in non payment and I think it's a cowboys charter to wreck other people's businesses.

[fedsron2us]

11. Kicking this old thread back to life

because the contents seem particularly pertinent in view of the dire nature of the financial crisis. Unfortunately, my very gloomy prognostication back in 2006 have largely come to pass (interest rates are far lower than I expected but I do not expect that to last once sterling really comes under the cosh). In fact if anything I think the forecast was a bit too optimistic.

[dipsydoodle]

13. I don't think

they'll the bank rate now to prop Sterling - would simply create a "hot money" situation.

[fedsron2us]

16. It depends how bad the panic gets and how fast Sterling falls

To be honest this is the one part of the scenario that has not played out as expected. Being a child of the post war era I blithely assumed governments could easily inflate debts away even if it forced interest rates up. I had not figured how big those liabilities had become and how they would wind up as a kind of financial black hole that would simply suck money out of the rest of the economy. I am not going to beat myself up on this point since a ton of other more highly paid financial wizards and politicians have got this call wrong as well. Now I know what the poor sods in the 1930s were up against.

[LeftishBrit]

12. Sadly, this has turned out all too accurate.

[D-Notice]

14. It'll be interesting to see

what effect this has on the next election:

How much will Labour get punished?

How many people will vote for ther Tories, in spite of their complete lack of ideas about what to do?

[fedsron2us]

15. None of the political parties has a clue

The Tories only policy is to rehash the Thatcher policies of 1979 and blame everything on public sector workers etc. The truth is that this catastrophe was largely caused by excessive borrowing by the private sector encouraged by the very deregulation of capital markets that the Tories encouraged from 1980 onwards. This excellent article from the Guardian business pages gives the hard figures

http://www.guardian.co.uk/business/feedarticle/8288576

For example, despite acres of media reporting devoted to government profligacy the US government deficit has only grown 11.5 times since 1975. This is a pretty large figure and is greater than the 8 fold growth in GDP over the same figure but is still below the levels of debt incurred immediately post World War 2. By comparison private debt has risen a staggering 22 fold in the same period, nearly 3 times GDP. It is hardly surprising that the world is experiencing a credit crunch.

This mad credit binge is not going to be addressed merely by sacking civil servants and screwing other public sector employees. It requires a root and branch reform of the financial system so that it services the rest of the economy rather than living off it as a parasite. Of course, this will means and end to the well paid jobs for the boys in the City for which so many Tory and Labour politicians yearn. This prospect is so unthinkable to our political and financial elites that they are prepared to bankrupt the country in an attempt to avoid it. Sadly for them none of their ploys are going to work. Indeed by so foolishly trying to bail out an insolvent banking system with public money they are actually threatening to make the situation worse by using cash that could be invested in the rest of the economy to cover the huge bad loans that the banks have made. As Simon Jenkins pointed out this week precious little of this cash will ever feed back to the rest of British business. Instead it will be carried away to oblivion in the huge black holes that exist on the banks asset sheets. The article ends with a killer quote from the governor of the BOE in the 1930s

Sir Montagu Norman, governor of the Bank of England in the depression, later reflected: "We achieved absolutely nothing except that we collected a lot of money from a lot of poor devils and gave it to the four winds." It is astonishing that precisely the same blunder is being repeated, and millions will suffer.

http://www.guardian.co.uk/commentisfree/2009/jan/21/treasury-banking-keynes-demand

[non sociopath skin]

19. Hi, D-Notice

Would you be he of the same moniker whose Saws of Wisdom I have savoured in Another Place?

The Skin

[D-Notice]

21. You mean

the place that shall not be mentioned on here? Yep

[non sociopath skin]

22. Or, indeed, anywhere else.

The Skin

[LeftishBrit]

17. BTW - has anyone heard from Taxloss?

I haven't seen him post here for a while.

[Anarcho-Socialist]

18. He quietly left some time ago

A mixture of reasons, a house move, a new job, and he eventually became bored with the level of debate on DU. As far as I know he's doing fine. On his profile he's got a link to a Charlie Brooker article on the topic of debating over the internet, which I think is what Taxloss is pointing to as a clue to his becoming fed up with DU and the other online messageboards he frequented.

[fedsron2us]

20. I remember the Brooker article and some of the points are doubtless true

However, I have picked up a lot of interesting insights and links to articles on message boards that I otherwise would have missed. The quality of debate everywhere is of mixed (just watch Parliament TV) and DU is no exception, but some of the threads on this site such as the Stock Market watch are very well informed and most of the discussions eschew the childish bickering that Brooker hates. What is also particularly interesting is that some posters can give you an insiders view of a major news story unmediated by the press. I find these the most fascinating as they often reveal what lies, half truths and uninformed rubbish we are fed by the media. Maybe that is why Brooker was so keen to dismiss them.

Of course all message boards have their fair share of trolls, provocateurs and time wasters but the simplest way to deal with them is to ignore them.

[T_i_B]

23. UK unemployment climbs to 2.47m

http://news.bbc.co.uk/1/hi/business/8258405.stm

The number of people out of work in the UK has risen to its highest level in 14 years, official figures have shown.

Unemployment increased by 210,000 to 2.47m in the three months to July, taking the jobless rate to 7.9%, the Office for National Statistics said.

Claims for unemployment benefit in August grew by 24,400 from July to 1.61m, the highest since May 1997.

There have been signs the UK economy is beginning to pick up, but jobless data tends to lag behind other measures.