Credit Crisis - The Banks Dont Think We Can Pay Our Mortgage
“The lack of liquidity in the money markets” Why? Because of the “US Sub Prime Mortagage Market” What does that mean? Banks have sold these mortgages as part of a security and if people can’t pay their mortagage then the security is effectively worthless, or, even worse, the bankers dont know what the securities are worth because they don’t know what it’s made of.
The problem now? The banks don’t want to buy any securities, and if the banks don’t want to buy then they can’t sell, hence the shortage of cash.
Why the problem with mortgages? Interest rates. People have arguably over borrowed and worse still at low interest rates. When the interest rates have risen the effect is multiplied. If more people that can’t repay their mortgages, the more securities that become worthless. And if the securities become worthless, then their value is taken off the banks balance sheet.
So what is the Bank of England trying to achieve by buying these securities? Well to give the banks more money so they can lend to other banks. I’m sorry, but why would the banks want to borrow money at the moment. The trend at the time of writing is for the banks to cut back their current lending. Why? Is it because they dont have the money to lend? Or is it because they need as much cash on their books as possible to cover any potential losses they might incur from the securities they are holding losing their value. Going by what the HBOS are doing at the moment ie raising cash, then banks obviously want as much cash on their books as possible.
So what effect is the 50billion pounds provided to the banks by the Bank of England going to have. Very little. This is the metaphorical rubber ring for a drowing man. They will keep this cash to protect them against the uncertainty of the future. Its NOT going to encourage them to lend. This money will get swallowed into the black hole that is securities. Not forgetting this 50billion is our money.
Whats the answer? The government has got to be tough and the banks have got to accept the good times with the bad. What does this mean? Well, for a start the financing by the Bank of England has got to stop. Is is artificially prolonging the life of vauless securities. People have got to be allowed to lose their homes. And if the situation gets too bad the government has got to step in. Step in??? How?? They have to FORCE the banks to renegotiate the mortgages they have with the customer and NOT reposses the house.
