The Bank of England (BoE) launched an unprecedented £50 billion scheme today to bail out Britain’s ailing banking system and help to ease the tightening mortgage market.
The BoE confirmed this morning that it would allow lenders to swap assets for government-backed bonds in an attempt to restore confidence and ease the effects of the credit crunch.
Alistair Darling, the Chancellor, is set provide further information to MPs at 3.30pm.
The BoE will allow banks to swap UK and European mortgage-backed assets in exchange for "safer" government bonds, which banks can then use to raise money.
It is hoped that the rate that banks charge each other will fall, and, as a consequence, homeowners and first-time buyers can secure better and cheaper mortgage deals.
So the plan will have been successful if the mortgage position is freed up and house prices resume their dizzy spiral upwards to the stars. That may benefit the banks and building societies in the short-term, as well as existing home-owners; but I find it hard to see why the taxpayer - through the Bank of England - should wish to engineer a return to an unstable and unsustainable status quo ante. House prices cannot simply go on rising forever - can they?
It will end in tears.
2 comments:
Falling house prices will cause a lot of pain for a lot of people.
In a steady state, one might expect prices to rise in line with wealth, setting aside changes in supply and demand. Obviously the ideal is to avoid excessive inflation but also avoid a price crash, since that will totally fuck up the lives of lots of people, not all of whom are morons who were asking for it, but instead were just people who needed to move house. On the other hand, if we could engineer the ruination of the real idiots who overstretched and thus pushed up the market for sensible people...
yes, falling house prices will be painful but it is an inevitable ending given they are artificially high.
House prices have not risen in line with wealth, they have steamrolled ahead at 215% over the past 10 years which is why this correction is not only necessary, it is overdue.
Thankfully, the house price:salary ratio is notably lower than that of England so we will not feel the effects as badly as those down South.
I do think it's the "real idiots" (the 110% mortgage mob) who will feel the pain most. Not ideal, but necessary.
What I don't understand is, how can the BoE take on £50bn of these dodgy mortgage-backed securities onto its books (effectively) and still not own the risks?
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