Nuts!

It’s not going to work.

Bring it on I say, means my mortgage is now accruing at 2.35%, and I’m paying back a monthly amount calculated when it was 5.85%. Overpay-tastic

Explaining its decision, the Bank said the level of contraction in business activity had “increased during the fourth quarter of 2008, and that output is likely to continue to fall sharply during the first part of this year”.

It added: “Surveys of retailers and reports from the Bank’s regional agents imply that consumer spending has weakened.”

Are they trying to p1ss those of us with savings off so much that we just blow the lot?

They seem to be missing the point that the problem isn’t the interest rate, but the supply of credit, and cutting the rate isn’t going to help that (I could make a rational argument that it could actually make things worse in the long run).

Personally I’ll be taking my money out and sticking it under the mattress – if enough of us do that they’ll be forced to put the rates up to avoid runs on banks, and their decreasing liquidity making credit supply even worse.

Are they trying to p1ss those of us with savings off so much that we just blow the lot?

In my uneducated (in economics) view then that’s exactly what they appear to be doing. Makes no odds to me since my mortgage reached its floor at the last cut. Can’t see how it helps the banks either, since they will make less money on loans and there is less incentive to save money in them.

Crazy!

two sides to every coin, consumer debt and business finance. Companies need money to do anything, this is almost always through credit and bank loans. No credit no money no business.

Do wonder why bank rates at 1.5% have no affect on Credit Card rates? If the government wants endebted people to spend you need to give them money. I forsee government action on credit card interest rates in the near future.

they seem to be trying to recreate the circumstances that caused the problem in the first place.

If the interest rate is low on savings then this increases spending in the economy as people are less like to save so they spend instead. Obvioulsy the more people spend then the more the economy grows. The government don’t want people saving just now. Thats one reason for cutting the rate.

I couldn’t understand why negative interest rates are not feasible. The bank lends you some money and at some later time you pay most of it back and they’re better off than if they’d kept it and lost it :o)

Similarly, savers can be penalised for having too much money…

The equivalent of negative interest rates do exist, and in fact in the US recently government bonds were trading for negative yields – i.e. the market is pricing in a preference for loosing a bit of money over time, but ultimatley a guarantee of getting paid back, over a positive return in the long term but a risk of default on repayment of loan.

read more here

stoner, correct me if i am wrong, bonds are issued by companies and governments as a way of getting money, they are issued with interest as an incentive to purchase. but with a date at which they can be redeemed in full.

What happens if the company/Government is unable to buy back the bonds?

Not quite the same as negative interest rates Stoner – bonds are kind of like another commodity being traded, if rather safer than any other thing to put your money into. If banks did offer negative interest, then see my mattress suggestion above (I’ll be going for that if rates hit 0% – though realistically there will always be somebody offering more than that I reckon – having just checked where to move my money I can get 2.75% on an almost instant access account, and that’s just the first place I looked).

You lose your money.

Hence the rating system.

Rating is supposed to be an independant mechanism to judge the capacity of the bond issuer to not only pay interest but also the redemption value of the bond on its redemption date. US Govt is AAA. GM motors….isnt.

The price at which the bonds trade in the market is the risk adjusted expected value of the coupon payments (interest) and the ultimate redemption value of the bond for the rest of it’s life. If the expectation is that the bond wont be repaid at redemptino (i.e. the expectation is the issuer wont honor it, or is insolvent) then that is taken into account in the price. “Junk bonds” is often used to describe these poor quality loan notes.

“stoner, correct me if i am wrong, bonds are issued by companies and governments as a way of getting money, they are issued with interest as an incentive to purchase. but with a date at which they can be redeemed in full.

What happens if the company/Government is unable to buy back the bonds? “

they will make the bank of england buy them. printing money by the back door. or quantitative easing as they like to call it. darling said he wouldn’t print money but i expect he’s lying.
sterling is not an attractive currency at the moment.

i love the way the short sighted can only see past the end of their nose, ‘wahey my mortgage just got cheaper!” when you are about to lose your job and the asset you are paying off (your house) has been losing £500 of value every week.

whoop – that means I can get more takeout next month

aracer – I know its not truly neg interest rate as the coupon amount stays the same, but the effect of the balance of price versus income and redemption is the same as paying someone to look after your money for you.

As I (mis?) understand it, the BoE cttee has one task (maintain inflation below the chancellor’s target – and maybe above “something” ?) and has been given only one tool to achieve this.

As a result, it’s hard for them not to take a simplistic view – no ?

just curious as to what happens when a country can’t honour its bonds, a company goes bust, but a country?

Surely if lenders pass on this rate cut to existing borrowers they are actually making themselves less profitable / cash rich / less financially stable, and therefore actually less likely to loan to new customers, the latter being what is actually needed.

or am I missing something ?

mrmo:

Argentina, 2002

and

Russia, 1998

You’ve pretty much summed up my reasons for suggesting it might make things worse, marcus (that and savers withdrawing money).

marcus – nearly right.

A lot of exsting loans are stated as x% on top of base rate.

This means that if the base rate falls, while the total revenue to the bank falls, in theory their own cost of funds falls. But their margin remains the same – which in theory means that their rate of profit increases as a proportion of their capital. However, in the current circumstances the corrollory is that the the rate of default from borrowers is increasing – not due to lack of affordability of loan repayments (since we have seen these are coming down) but because of redundancies. If the number of defaults is increasing, but the margins are priced for a market when defaults were lower then profitability will fall again.

this then brings us to the balance of trade etc, The UK consistently spends more than it makes. I assume that is what balance of trade being negative means?

If i keep on spending money i don’t have the bank will have a fit and take me to court.

If a country can no longer get money the **** also hits the fan.

At what point does this happen?

Stoner – That being the case, surely from the banks point of view, to be profitable it has to lend money at a sufficiently high rate to offset these defalt payments. I.e If more people are defaulting the banks have to increase rates to help off set the bad debts ?

Oh and make sufficient money to pay off their exiting ‘bail out’ loans to the government

marcus – exactly right, hence the phenomenon of credit card interest rates going up while bank base rates fall.

The cost of funds to the lender (bank base rate plue a bit) is 3/5 of FA of the cost of the interest to the punter. The vast majority of the interest rate charged to those borrowing on credit cards is default margin. Again, you’ll regularly see the lack of most politicians and commentators to see this in their usual spouting of bollox in the press. Headlines usually pour in about “poor being charged more to borrow than the rich”. Well duh. Of course they are, overall they’re less likely to be able to pay th ebanks back. And as soon as some idiot might be driven to MAKE the banks charge the same interest to all regardless of capacity to pay back, anyone with any sense (and wealth) will get their loans from an unregulated, but far cheaper market somewhere else.

Anyway, this letter in the Guardian 5th Jan showed a bit more sense than most written words of late:

While not wishing to appear as an apologist for the banks, I do wonder if the evidence supports your headline? The evidence cited is that mortgage approvals are at a record low, and house prices are 16% down on last year’s figures. Economics is, at one level, about “supply and demand”; so are mortgage approvals down because of a restriction in the supply of loans (your apparent interpretation) or because there is a collapse of demand? Or is it a bit of both? More analysis is required, but the evidence you cite may belie an industry awash with funds to lend, but with so little activity in the housing market that supply outstrips demand. Perhaps the current situation is explained by, on the one hand, a decrease in the demand for mortgages as householders become less sanguine about their ability to repay and, on the other hand, by banks operating more prudent lending rules.

Moreover, while the banks are castigated for having lent imprudently in the recent past and, thus, are seen as culpable in the present economic climate, it is a little harsh then to castigate them further for not lending now at those previous levels. It is hard to believe that banks, whose profits derive in large part from their lending activities, are denying loans to individuals and businesses who are good risks. Is a larger proportion of potential borrowers now being refused loans relative to a year ago? And if so, does this merely reflect what used to be called “prudent banking practices”?
Professor AC Darnell
Durham

And Interesting essay on current account deficits here

Headlines usually pour in about “poor being charged more to borrow than the rich”. Well duh. Of course they are, overall they’re less likely to be able to pay th ebanks back.

I presume people have also forgotten already that giving loans to the poor on the same basis as they are given to the rich is what started off this whole mess!

I LOVE falling interest rates!

I think my personal credit crunch is now over!

I’m on a tracker mortgage so I benefit but still don’t think this cut is a good thing…I’d much rather see a reduction in stamp duty or to increase the levels for each band as a direct incentive to encourage the housing market. All reducing interest rates does is devalue the pound and therefore increase the cost of imports which, inturn, is passed on to consumers.

Well my mortgage is a BOE base rate tracker so it should go down. I took it out with the Portman which of course is now the Nationwide. It will be interesting to see if they try to tell me they are not dropping my rate as Nationwide mortgages have a floor. There is no mention of a floor in my original agreement so hopefully they will honour that without me having to chase them. Will I start spending more though? Not a chance, I’ll just keep overpaying it trying to reduce my borrowing as much as possible as I think the job losses are going to keep piling up. Every company in the country is now looking at it’s staff and thinking who they can let go. Lets face it there is no better time to get rid of people as you can be pretty sure that those you keep will take up the extra work without making too much fuss. If you don’t believe that look around you at work tomorrow and put yourself in the business owners shoes, I bet there’s someone you’d just love to see the back of.

as a direct incentive to encourage the housing market.

so encouraging people to borrow 5-6x their income for overinflated assets that are currently losing 2% of value every month is a good thing?

Well I’m delighted, large tracker mortgage taken out 3 months ago and its saving me hundreds every month.

Doubt nationwide will pass this one on… interest rate on my tracker is currently 1.9% as it is 😀 Smug factor 9.

so encouraging people to borrow 5-6x their income for overinflated assets that are currently losing 2% of value every month is a good thing?

Nope, didn’t say that

…actually I can’t be arsed to rise to the bait

Was chuffed to get a decent fixed rate at the start of last year as rates were rising, oh well, I guess this is the payback for wanting predictability, sigh…

At least house prices around here have apparently gone up slightly, not dropped, not that anyone would buy it if we tried to sell.

had a conversation the other dayabout house prices in Reading with a coleague.

He was saying how he thought houses weren’t loosing value localy, as estate agents were still advertising the same prices as they were in the summer. I pointed out that the same agents havent sold much since the summer! So if he actualy wanted to sell he’d have to do so for less than the ones that aren’t selling (at the summer prices), so prices have droped.

fingers crossed rates stay low and prices keep droping, at this rate I may actualy be able to buy a house in a few years!