Goodbye boom
The credit crunch, which has been optimistically described as a financial sector problem, has hit home with a vengeance in the past few days, in the shape of a mortgage famine. Worried homebuyers have watched helplessly as attractive deals have been shut down because of huge demand, and at least 1.4 million people face the prospect of having to pay much more when their current cheap loans expire.
This is the sharp end of a problem which began in the packaging and sale of risky US loans into 'asset-backed securities'. Those who hoped for an early end to the credit crunch have been frustrated by the fact that the market in these securities, once seen as a fabulous way of reducing risk, has all but dried up. Accounting rules have forced banks to mark down these assets, possibly to much lower levels than their reasonable worth, in turn weakening their balance sheets and adding pressure to sell at even more distressed prices.
Intense discussions involving the Treasury, the Bank of England and the UK banks are going on over how this blockage might be cleared. One possibility is that the authorities might either purchase or guarantee assets to put a floor under their prices, the theory being that it might encourage investors, who are staying out of the market because they fear prices might fall even further, to wade back in.
Unblocking the credit arteries would be quite a feat for Chancellor Alistair Darling and his boss, both of whom will be demolished by a housing market collapse. But it is a delicate and high-risk undertaking. It would probably involve buying up assets at more than their current value but less than their 'real' value - supposing that could be ascertained. Paying too little might not give enough help to the banks, while paying too much would be squandering taxpayers' money.
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- Darling considers credit guarantees Bloomberg.com 11 Dec. 2008 Dec. 10 (Bloomberg) -- U.K. Chancellor of the Exchequer Alistair Darling is considering credit guarantees for households and companies to spur bank lending, a person familiar with the plan said. Read more
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