‘The treasury ducked move on credit woe’ (From Business in Dorset)

‘The treasury ducked move on credit woe’

6:30am Sunday 1st June 2008

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Dear Sir, By cutting rates from 5.25 per cent to 2.25 per cent since September Ben Bernanke carried out the most dramatic rescue since the creation of the US Federal Reserve and delivered salvation for the banks. And the rate cuts continue to try and boost the US economy.

Using their monopoly privileges, the banks have been able to ride the "steepening yield curve", to borrow cheaply and lend back expensively to the same US government on long-dated bonds. This method of rebuilding balance sheets works wonders and even better, from the banks point of view, few people are aware of this massive bail-out.

The Federal Reserve put a floor under the entire shadow banking and $516tn derivatives crisis - the mortgage industry has been nationalized.

The UK government was also forced to bail out Northern Rock and recently nationalized further bad loans by underwriting the banks to the tune of £50bn of our money.

Although the cascade of defaults, business closures, and job losses has barely begun, America and Japan are in recession, according to Goldman Sachs. Britain, Ireland, Spain, Italy, and New Zealand, are tipping into housing slumps and demand implosions of varying severity. Ontario and Quebec have stalled. Canada's growth is the weakest in fifteen years.

Australia is on borrowed time with household debt at 175 per cent of disposable income, with England, Ireland, Denmark, and Holland. Together these countries and regions make up roughly 45 per cent of the global economy, and over half global demand.

There is strong evidence that this group will be sliding towards deflation within a year as the commodity bubble pops and job losses set off a self-feeding downward spiral.

The rising oil price is dangerous and similar to the crisis in the 70s, 80s and 90s. Increases in oil prices have been held responsible for recessions, periods of excessive inflation, reduced productivity and lower economic growth.

Significantly this time predatory lending has been more reckless and even though interest rates have been historically low, Europe will suffer 40 per cent of the entire $940bn global losses stemming from the credit crunch. Euro banks alone will lose $123bn (compared to $144bn for the US).

"Loss recognition will need to catch up," said the International Monetary Fund (IMF). Adding: "Liquidity remains seriously impaired. Lenders are tightening credit standards, particularly for loans to enterprises.

"The deteriorating economic outlook could weaken European and corporate balance sheets appreciably."

On it goes, more or less dire. "Europe's emerging economies are susceptible to financial shocks, which could make the situation dramatically worse," said Michael Deppler, the fund's Europe chief.

"Banking systems that are heavily dependent on foreign borrowing to support credit growth could face a sudden shortfall," said the IMF.

The fact that things were heading this way was known to both the UK treasury and the Bank of England a long time ago. Nevertheless back in July 2003, when the housing boom looked like faltering, the Monitory Policy Committee inexplicably voted in a rate cut to 3.5 per cent to keep it going. Perhaps politics and votes got in the way of an allegedly independent Bank of England?

One day this will be seen as having been the tipping point for what we are facing today.

Chris Slocock
Immediate Past President Dorset Business
Vice Chairman South West Chambers of Commerce

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