China’s war on nature: it’ll end in tears

OK, first a clip from Boxing Day 16 December 2006, when the idea that the US housing market could bust was.. oh, unthinkable (link courtesy Antony Mayfield):

Note that this does all the tropes of US news (and yes, it is Fox News, so it’s even worse than normal) as noted by Kieren: nobody is actually allowed to say anything – note how the anchor interrupts people as they’re about to wind up their point – and nobody considers that anyone else has anything sensible to say; the idea is just, and literally, laughable.

What a lot of idiots the ones who aren’t Peter Schiff of Euro Pacific Capital (may his tribe increase) suffer the silence of the phones.

Next, a fascinating post about “Chimerica” – which is a chimera of China and America – by Niall Ferguson, who points out that an interesting ramification of that:

In our view, the most important thing to understand about the world economy over the past 10 years has been the relationship between China and America. If you think of it as one economy called Chimerica that relationship accounts for around 13 per cent of the world’s land surface, a quarter of its population, about a third of its gross domestic product and somewhere over half of economic growth in the past six years.

But now that party is drawing to a close, and not just because of the housing bust in the US (which was paid for by the money accrued by those saving their wages and company profits selling goods to the US that were made in China, which put it in banks which used it to buy US Treasury bonds, which issued it as cheap money to US banks, which lent it out to people to take out big mortgages on homes in excess of their value but which they could use to buy more goods made in China, which kept the circle going.. until people in subprime-land couldn’t keep up their repayments. Breaking the circle. But it’s not only in the US that the circle is being broken.

If the United States has a War on Terror, China has a War on Nature, by which I mean that the environmental effects of China’s breakneck industrialisation resemble an unprecedented assault on the natural world. And it does feel a little bit like a War on Nature when you visit China. I was in Beijing not long after the Sichuan earthquake happened, on the day of that extraordinary and universally observed public silence. It reminded me strongly of the atmosphere in the United States after the terrorist attacks of 9/11. But who was the enemy? All the extraordinary, formidable devices of the government’s propaganda machine were deployed to extol the virtues of the rescue workers and to emphasise the suffering of the victims. But there was no enemy except nature. It is nature, I suspect, that will resist China’s industrialisation far more effectively than anything else. But until environmental constraints begin to bite, Chinese growth represents a huge challenge to the world’s ability to produce commodities and extract fuels. That is the main reason why commodity prices look as if there is a war on.

OK, scary. And that’s before I’ve found the link to the piece I read the other day (on my iPod Touch, so can’t find the link here) with graphs about how housing had held up the US through the 2001 “recession”.

Credit Default Swaps explained; but there’s only $34.8 trillion of them..

I said I’d explain Credit Default Swaps. Just to give you something before it’s on everyone’s lips again. As it may be this coming week with the Lehman’s CDS auction. So here’s the reasons why they are toxic, with (hopefully) some simple-to-follow spin.

You live somewhere. A house or flat, say. You have stuff in it. Naturally, you take out insurance against your place burning down. You contact an insurer, who agrees to insure it, for a premium you pay. If it burns down, they’ll pay out.
Now, you can’t take out insurance against *someone else’s* house burning down – in law you don’t have any “interest” in it (and it might make people think you wanted it to burn down, because you’d get the big payout with no personal loss).

But with CDSs, anyone can play. They are insurance against any house (read: financial deal) burning down. You can get one, two, three, four, five, any number of people betting each other about whether this or that financial thing (company bond, mortgage-backed security, Treasury bond, etc) is going to turn into dust.

As long as you can find someone who’ll be a counterparty – that is, take the opposing view, and take the position of “insurer” – then you’re off and running.

And this market is completely unregulated. So to quote Dirk van Dijk’s explanation (at, I think, the original place it appeared):

If you buy a bond from, say, General Motors (GM), you are lending them money for a set interest rate for a specified length of time. You face two sets of risks in doing so. The first is that they go bankrupt and don’t pay you back. The second is that interest rates rise and the bond falls in value (think of bond prices and interest rates as being on opposite sides of a see-saw).

With a CDS, you could go out and find someone who will insure against the default risk. For a given premium, the seller of the CDS will pay off on the GM bond if GM goes belly up. Now, if it was from a real insurance company, the insurance company would be regulated and would have to hold enough money in reserve to pay you off in case GM actually did go belly up. This is just like how a Life Insurance company has to have enough cash on had to pay off on your policy in case you die.

However, since this is an unregulated market, someone can sell you a CDS and blow the money in Las Vegas. In that case, if GM did go belly up, you would just plain be out of luck.

In the case of life insurance, there are strict limits on who can take out a policy on you. You can take out a policy on your own life, and on close family members. In some circumstances you can take out a policy on your business partner, but beyond that there are not many people you can take out a policy on. You have to have what is called an insurable interest; you can’t just wander the halls of the hospital looking for people who are unlikely to make it and take out life insurance policies on them.

This is not true for the CDS market. You are perfectly free to take out a “life insurance policy” on GM, GE (GE) or any other firm that issues a bond, and you do not have to be holding the bond. You can even take out a “life insurance policy” on the synthetic garbage the Wall Street has been pumping out.

And when people suddenly wake up and go “huh? Why did I think that people would pay out on policies on mortgages with horrendous reset payments?”, and those mortgage-holders default in huge numbers, your CDS suddenly comes due. Someone’s on the hook. Is it you? Is it that guy over there? How do you know? If they offer some financial stuff as collateral against a three-month loan they want of some money, how do you know which of its CDSs and so on are good and which are junk – or, worse, expose you to paying out on something that might happen in those three months?

The market in CDSs ballooned because, as van Dijk explains, hedge funds found them amazingly useful:

People use this market to bet on the credit worthiness of companies, and often hedge funds will hold both long and short positions on the same underlying credit. For example (NOTE: figures are made up here, not a reflection of the actual creditworthiness of GE), the hedge fund might make a bet that it is worthwhile to get $200,000 up front and be on the hook for $10 million if GE defaults sometime in the next five years. Then after a few months, GE raises a bunch of capital which significantly strengthens its balance sheet and lowers the risk of default, so it can make a bet with someone else who would now be willing to take just $100,000 to bet that GE will not go belly up within then next five years. The hedge fund could have a perfectly matched book, so in theory they were totally indifferent if GE survives or not.

However, suppose that the person who they made the bet with goes bankrupt themselves and can’t pay up. That hedge fund might then have a hard time paying its counter party. This is where the fear of “cascading cross defaults” comes in.

And that’s where we are. If you want a little reassurance, though, there’s Paul Kedrosky’s Infectious Greed blog: he used to be a broker/banker/on Wall Street, and writes a very informed (well, duh) blog.

For instance, you can stop worrying about CDSs on mortgages. They’re only 1% of the CDS market, which has been downsized! Yes, to only $34.8 trillion! Yes, I said trillion! So that’s.. um, 0.34 trillion of mortgage-based CDSs – or $340 billion worth. Come on, that’s just a rounding error, isn’t it?

As Kedrosky , points out: ”

The Deposit Trust & Clearing Corporation folks do some weekend working debunking myths about credit default swaps (or, as I like to call them, rodents of unusual size). Among other things, the DTCC says that net Lehman-related CDS fund transfers will be closer to $6-billion than the $250 to $400-billion figures that had been bandied about last week. It also says that less than 1% of the CDS contracts extant are directly mortgage related.

And as has been pretty obvious, the size of the CDS “market” has been wildly overstated, in many ways.

Reported estimates of the size of the credit default swap market have so far been based on surveys. These surveys tend to overstate the size of the market due to each party to a trade separately reporting its own side. Thus, when two parties to a single $10 million dollar trade each report their ‘side’ of the trade, the amount reported is $20 million, which overstates the actual size by a factor of two since both reports relate to a single $10 million contract. When examining the outstanding amount of actual contracts registered in the Warehouse (not separately reported ‘sides’) as of October 9, 2008, credit default swap contracts registered in the Warehouse totaled approximately $34.8 trillion (in US Dollar equivalents). This is down significantly from the approximately $44 trillion that were registered in the Warehouse at the end of April this year.

Hey, so that’s $10 trn we’ve pared off right there. Actually, the CDS market must be a lot smaller *in terms of the money changing hands* – rather as the options market is far smaller than the numbers quoted, because not all options are exercised.

The trouble comes though once securities start to fall, bonds turn to junk, and the CDSs come due. Then people are on the hook for money they may very well not have. It’s the whole margin call thing that magnified the 1929 crash – but this time, global.

Did I mention that unregulated selling of financial instruments is bad? OK, now I have.

A graph to really scare you about another mortgage shock waiting in the US – and so, us

The scary debt reset coming in 2010-11

You thought that $700 billion will be the US banks’ toxic assets? It won’t – not by a long chalk. There’s another bunch of toxic mortgages just waiting around the corner, in 2010 and on, which will be just as bad, and hit more people in the US. The graph above has been swimming around a bit (here and here, particularly) but it’s worth reading the analysts’ note it originated in. (For a version of the graph with the axis in years, see the second link. It’s just as big and scary.)

The work comes in a Credit Suisse note titled “Mortgage Liquidity du Jour: Underestimated No More” (that links to Scribd, where you can download it yourself and groan).

The timing is interesting – in March 2007, who’d heard of the credit crunch? It hadn’t happened: those Bear Stearns funds hadn’t turned sour. So these people were miles ahead of the curve. Too bad too few people listened to them. (Let’s hear it for Ivy L Zelman, Dennis McGill, Justin Speer and Alan Ratner. Hope they’ve kept their jobs – they at least deserve to.)

After walking you through the craziness of the US housing market, where people were fighting for market share, and damn the consequences – “As one private builder indicated to us, in the past nine months anybody with a pulse that was interested in buying a home was able to get financing, which certainly helps explain the poor performance thus far of 2006 loan vintages” – they look at the growth of “exotic” mortgage products.

You’ve heard of subprime, of course, but probably not Alt-A – which is a step above subprime, typically (in the past) for people in the US who’d had a mortgage go bad, or missed payments. Alt-A exploded to become 20% of the market in 2006. And there it lies in wait.

The analysts note:

The “big brother” of interest only mortgages is the negative amortization mortgage, which in recent years has gained popularity. The neg-am mortgage, which is often used synonymously with “option ARM”, provides homebuyers with an extra payment option each month. In addition to paying the fully amortized payment or just interest costs, an option ARM actually allows borrowers to make a “minimum” payment that is less than interest costs. The minimum payment option results in a homebuyer actually having negative equity in their home, absent an increase in the value of the house (i.e. the borrower owes more at the end of the month than it did at the beginning).

I actually had a “mortgage” like that once – in 1988. It was sold to me in the UK by Security Pacific, though it wasn’t interest-only – there was an endowment attached (thank God; it’ll mature some time in the next few years). But it did let you not pay all the interest, which was then rolled into the principal (the amount you owe overall, an on which interest is charged). It seemed like magic – at first. My first use of a spreadsheet was to model our payments (I bought with a friend). Abruptly I realised we were going to be in deep and hot water if we didn’t rapidly increase our payments. And when interest rates shot up following the ERM debacle, it was suddenly time to get straight out of that mortgage.

But now meet our newest friend, the option ARM (ajustable-rate mortgage):

Similar to an interest only mortgage, option ARMs only provide borrowers with these payment options for a finite timeframe, which sets the stage for a significant payment shock when payments are recast to the fully amortizing rate at the current interest rate level. Depending on the amount and terms of the loan, monthly payments could increase in excess of 40% upon rate reset on these types of mortgages.

Option ARMs are super toxic to borrowers. That’s all you need to know, really. And if they’re toxic to borrowers, they’re toxic to lenders. They’re the light blue-y ones in the graph. They don’t even begin to show up until 2009 (24 months from the start of the graph in Jan 2007).

As shown in Exhibit 29 [one of the graphs], an estimated 23% of total purchase originations in 2006 were interest-only or negative-amortization mortgages. According to our private builder survey, interest-only and option ARMs represented 24% of total home sales in 2006, in-line with our market-wide estimates. This was down slightly from the levels seen in 2004 and 2005, most likely due to the decline in investors in high priced markets, as well as lenders tightening qualification standards

The trouble though is that while the subprime bomb has exploded, the option-ARM still hasn’t. People won’t be able to make the payments – especially if things are worse in the US than they are now. (At the time of the note, the analysts were able to talk breezily about “recovery” as they looked past house price falls. Nobody’s saying that word now.)

Another point that a friend (who’s an IP lawyer who understands all these things as he works in the City and deals with thme) is that in the US, a mortgage attaches to the property – not the person. If you’re in negative equity and you hand in the keys, you’re not liable for the outstanding loan. Sure, it will affect your credit score, which does affect your ability to get credit, but that’s not the same as what you’d have in the UK, where you’d pretty much have to declare bankruptcy.

So things are even worse for the US banks and mortgage lenders than you might have been led to believe – and that’s coming up in two years’ time.

Can’t we reflate the housing market, some people wonder, by cutting interest rates? Mark Shuttleworth (he flew to the moon, you know, and is behind Ubuntu) says it’s a solvency problem, not a liquidity problem:

Dramatic easing of interest rates will help to slow down the pace at which we have to deal with the bankruptcies, but they won’t change the cold reality of the situation, and they run the very real risk of making things worse by encouraging another round of speculation based on free money. We are once again in a situation where the US discount rate is effectively a negative real rate of interest, as a gift to the banks, but staying there for any length of time puts us back into a state of addiction.

Next time we’ll deal with credit default swaps. Those make Alt-A ARMs look like a safe investment…

August’s mortgage details mean estate agents earned £241 per *office*

Estate agents typically get about 2% of a house sale, don’t they? Hang on, it’s 1.5% + VAT. (They don’t get to keep the VAT, of course – it’s passed on to the government.)

OK. Now notice that mortgage lending rose by barely anything in August:

Mortgage lending rose by just £143 million last month, a mere two percent of what was advanced in August 2007 and the weakest growth since the series began in April 1993.

Of course, the mortgage won’t be the whole price of the house – but it’ll typically be quite a large slice. Let us, for the purposes of a vague argument, assume that in fact in those mortgages, a full 50% of the house sale price was actually covered by cash (from the sale of the previous property in the chain, say).

That means that estate agents got 1.5% of £286m. In other words, £4.29m, in August.

Not bad, you think? Except that that’s for every estate agent across Britain.

And a 2006 figure tells us…

According to latest statistics from UK Property Shop, publishers of the online National Directory of Estate Agents, the total number of offices of UK estate agents and letting agents now exceeds 17,800. There are over 14,700 offices providing estate agency services with property for sale, 10,000 offices providing letting agency services with property to rent and around 1,100 offices offering student accommodation.

OK, so they’ll have turned their hands to letting, and we’re ignoring commercial property lettings and sales (not that those are anything to cheer about, I hear), and closures since then. But if those figures have stayed anything like static, then the average estate agent in August brought in from house sales a grand total of…


And of course, that’s allowing (generously) for the mortgage being quite a small part of the house sale (50%). Rank it up higher – say, to 90% of the sale price – and you’re getting £133 per office. It hardly covers the bill for the electricity.

Silt in the machine: the real metaphor for the Wall Street ‘bailout’

Over the weekend I watched the car-crash interview of Sarah Palin being interviewed by Katie Couric, particularly on the “bailout” of Wall Street. (The video is later. Read me first. No skipping.)

First, I wonder, why is it that people are calling this a bailout? I’d feel confident that’s not what Hank Paulson called it. Bailouts are what sinking ships need. This isn’t so much a sinking ship as machinery gumming up.

That’s what so far nobody seems to have found – a good metaphor for the reason why this money was needed. (Since they’ve now gone ahead and agreed the form, though the Today program had an American pundit saying that popular opinion – expressed through letters and calls to senators and congressfolk – is running at 40-1, 60-1 against it.

OK, so I thought about it for five minutes to try to find the metaphor for what’s going on. Here’s what you should say if you’re a presidential or vice-presidential candidate. Though obviously if you do, you’ll be nicking it from me, with all that implies.

Think of Wall Street and those companies are running a giant machine. It needs oil; but they put oil in, turn the handle, and out comes money which they can lend you so you can buy a house. There are lots of places you can put the oil in.

One day some folk came up with a formula for the oil which had a Special Ingredient. It generated more money for the same amount of oil. Fantastic! Everyone started taking advantage to lend more money out.

Then they discovered – around April 2007 – that there was a bit of a drawback to the oil. It turns to silt. Which meant that you turn the handle, and far less comes out. Pretty soon the whole machine is silted up. What Hank Paulson is proposing is to drain the machine of silt, and spend $700bn on real, proper, known-to-work oil so that the machine can get back to normal. It won’t be able to generate money at the speed that it did in those glory years – but that was false, because that was running on the silted oil. The $700bn is required to drain the sump.

But why, you say, should we reward these Wall Street people for failure? Well, hang on here – what we’re fixing is the machine. We’re not saying that you reward the operators who happily poured the new formula oil in without first checking what its long-term effects would be. They’ve got some serious explaining to do.

OK? Got that? That’s how you would explain it, I hope, to an American prime-time TV audience. And that’s by me, just thinking while driving to the station – took about two minutes. Yes, you can argue some of the particulars, but silt in the machine is the clearest way to understand that you’re not “bailing out” the bosses, you’re bailing out (if you must) the machine that ultimately funds the businesses you work for and buy from and lend from.

Now let’s see how one of the vice-presidential candidates managed:

(Two points: first, when you’ve said enough, stop talking. Second, before the interview: this is doing the classic American TV trope – “let’s have a discussion about something that you’re going to see instead of just showing you the whole thing, thus cutting up information into tiny twitching pieces, because you’re stupid, aren’t you, American TV viewer?” – as described by Kieren.)

Why not explain the $700B bailout with a comic – you know, like Google?

A very quick thought on the financial perhaps-it’ll-turn-into-a-full-blown crisis now engulfing the US stock markets.

Why, rather than writing up a bill said to be “the size of two bookends” to justifying the $700 billion bailout (really, a purchase of “toxic” assets whose real value is uncertain – so how are they sure they’re worth $700bn? – meaning that Wall Street gets real money to play with, while the US government owns lots of dilapidated homes in Florida) – why, instead of that, didn’t they just follow the example of one of the biggest companies around?

After all, when Google wanted to launch a new browser, it didn’t do it with big long thick press releases. (Or if it did, I certainly whizzed past it.)

Instead, it hired a cartoonist to explain it. Which he did, very thoroughly, making the problems of runaway processes, browser hangs, Javascript compilation and regression testing comprehensible to anyone who has got past moving their lips while they’re reading. (Unless they’re giving speeches, of course, President Bush.)

I do think there’s just a chance that a cartoon might have made it all moer comprehensible. Not least to the poor American electorate who are going to have to explain to their children why their banks are all owned by China. And their car makers. And supermarkets. Though their houses – ah, their houses are their own. In fact, everyone’s.

I wonder what that comic would read like, though? Anyone care to hack the Google Chrome one? It’s Creative Commons, after all.

Like water on a stone, slow processes work: bank penalty charges declared illegal. Update: *maybe* illegal

And to think it all started with a little note by a barrister in Guardian Money. Richard Colbey, wherever he is (probably hiding from angry bankers), wrote a short piece that suggested that credit card charges didn’t conform to contract law. That was 2004.

Years on, we have this:

UK banks could be forced to return billions of pounds of overdraft fees to consumers after a high court judge said the fees could be challenged by the Office of Fair Trading.

The strange thing: somewhere along the line, people stopped worrying about credit cards and focussed on banks. I don’t know quite where.

Mr Justice Andrew Smith agreed with the OFT that charges were covered under the Unfair Terms in Consumer Contracts Regulation 1999.

This paves the way for a further hearing in which the court will decide whether the charges are unfair and, if so, what a fair charge should be.

According to the OFT, banks receive up to £3.5bn a year in unauthorised overdraft fees – nearly £10m a day.

They charge up to £39 for a bounced cheque, standing order or direct debit, and critics of the system say this does not reflect the actual cost incurred by the banks, which could be as little as £2.

The ruling followed a test case in January between the OFT and eight banks and building societies.

I think it could be a while before we see banks pass on interest rate drops. Just a.. feeling I’ve got.

The intriguing thing is that the OFT hasn’t done this with credit card companies – are they next?.

But the bad news, BT customers, is that the earlier case against it failed. BT seems to have law on its side:

at Walsall County Court, District Judge Michael Ellery ruled the customers had been given proper notice of the charge, that it was fair and was a core term of BT’s contract. It is the fifth time BT has won a county court case over the charge.

This doesn’t stop it feeling wrong, very wrong, since there’s no processing involved in internet banking, for example. Paging Richard Colbey..

Update: as suggested by Mark in the comments, they’re only maybe illegal. So I changed the headline.

Update: in comments which got spam-trapped and then deleted, “Jojo” added:

The OFT have already done this with credit card companies – 2 years ago. Default charges were restricted to £12 (anything over that was to be automatically considered unfair and therefore illegal), though some people think this is still too high, especially as the actual cost to the companies is probably closer to £2 than £12.

A race of dwarves and giants: visualising income inequality

The scary thing about the following is that it’s now an underestimate. So, start reading:

Imagine that we live in a world in which, owing to genetic mutation, income translates directly into height. The richer you are, the taller you are. Then imagine that the entire population of Britain marches past you, in the course of an hour, ranked in order of their income. What sort of procession would you see?

After three minutes the walkers would be 2ft tall. After a quarter of a hour they would still be dwarfs, of about 3ft; they would reach 4ft after 24 minutes. You would have to wait until 37 minutes before a person of average height, about 5ft 8in, walked by. In the final quarter of an hour, abnormally large people, more than 7ft in height, would start appearing.

With three minutes left, people of twice average height would be passing by. In the final minute, the figures would be giants 30 yards high. Yet even they would not be the biggest. In the hour’s closing seconds, a small number of super-earners would walk past: each would be earning pounds 1m a year or more – and thus each would be at least 235 yards tall. These freakish beings – top barristers, leading City analysts, a few chief executives as well as stars in the entertainment industries – are the products of a society that is increasingly organised in a new, freakish way.

This comes from “How fat cats rock the boat“, by Charles Leadbeater – when he was deputy editor at The Independent. Guess when it was written?

November, 1996. Since then, income inequality has got worse.

It’s one of the most insightful pieces I’ve ever read on how celebrity culture feeds on itself:

In theory competition should make it more difficult for a small elite to charge excessively high prices and make monopoly profits. Yet in fact more competition helps such elites. In highly competitive markets there is a premium on perceived value – on standing out from the competition by looking distinctive; after price, the biggest influence on consumer choice is brand. So those people and companies that are particularly good at marketing, advertising and self- promotion will tend to do better, everything else being equal. Success will breed success, celebrity will beget celebrity.

Thus, in television a handful of comedians have cornered the market in light entertainment, becoming a self-perpetuating elite. And, of course, celebrities like to deal with other celebrities; that is a symbol of their status.

If you are a film celebrity, you want your divorce handled by a celebrity divorce barrister, your hair done by a celebrity cutter, your home decorated by a celebrity designer and so on. As well as being more competitive, however, markets for many goods, whether they are computer games, books, films or legal services, are becoming more international. And larger markets mean larger rewards for the people who win. Being a winner in a purely local market – a school sports day – might bring you a small cup; winning in a global market – the Olympics – brings you vast rewards.

Remember, this was all before the rise of magazines like Heat. But it shows why they rose: because we focus on those at “the top” or near it, and that attention begets more attention. But it also has dramatic effects on income inequality.

Ten signs you’re in a recession

I’m trying to remember these from the last time we had a proper one (1990-2). The title is obvious enough though…

  1. People stop talking about how the price of their house has gone up in the past six months
  2. People start talking about this wonderful new water filter thingy they can sell to you, and actually would you like to buy a few and sell them on? It’s this amazing “multi-level marketing” idea…
  3. Sight of a car with new numberplates makes you blink your eyes
  4. People cut you off if you ask how their house sale is going
  5. Rents drop like stones because everyone’s taking in lodgers
  6. Newspapers get really scarily thin – too thin to mop up, say, a spilt cup of coffee
  7. Starcostabucks start shutting down because people realise that a brilliant way to save £60 per month is simply not to buy one of those bloody fattening lattes in the morning. (Bit of a guess, this one. We didn’t have Starcostabucks in the last recession.)
  8. People at dinner parties and other social events start offering you cappuccino makers – and would you like to buy a few, because they can do them on this amazing multi-level marketing scheme…
  9. Newspapers start running stories like “How to sue your surveyor” and “how to gazunder“. Ooh, look, happening already.
  10. The “six months on” in Property Ladder, Location Location, etc return and find that the people haven’t sold the house and have had to declare bankruptcy.

Come on, tell me all the ones I’ve missed.

Update: one that wasn’t around for the previous recession: blog spam. So, the next one we can add is:

  • you start getting (attempted) comment spam, amidst all the usual crap for poker/pr0n/pharmaaaa that reads “Secured Home Loans for UK Homeowners... Secured loans can be the best form of loan for homeowners when looking for competitive loan rates...

which I’ve just noted in my filters.

The end of cheap credit means a big shock for those who grew up on it

Have you noticed how mortgages are disappearing like snows in spring sunlight? Take a look at Money Guardian:

Some borrowers coming to the end of two- or three-year fixed-rate deals could currently be on a rate of 4%. This type of deal is now non-existent.

“Non-existent”. But it’s actually worse than that. The number of mortgage products available has shrunk from 7,726 to 5,700 – that’s a 27% fall, and in some cases mortgage lenders have simply withdrawn fixed-rate mortgages and are only offering variable-rate mortgages linked to the Bank of England base rate (or possibly, worse, Libor – the London Interbank Overnight Rate, which I first heard about in Michael Lewis’s Liar’s Poker: the trainees on their first day, in front of the chief executive at whichever investment bank it was were asked what Libor was. Woe betide if you didn’t know).

OK, so cheap mortgages are gone. And you know what’s next? Cheap credit cards. Credit cards that increase your credit limit endlessly when you spend more on it. That’s over. I don’t need to talk to City folk to feel this happening. You can see that it’s going to happen, like A following B: big-ticket credit (you can call it a mortgage) gets tight. Then small-ticket credit (call it credit cards) gets tight. I think that 0% transfer deals are already dead.

Which means that people who have spent the past ten years or so living off cheap credit – for flat-screen TVs, gadgets, gewgaws, shoes, clothes and of course don’t forget student debts… – are going to get a sharp, sudden shock as the tap is turned off.

That’s going to be ugly. But there is one small recompense: those who have been living off cheap credit are most likely the people who have found it impossible to get onto the housing ladder which has been infested with buy-to-let purchasers taking advantage of the tax breaks that buy-to-live people couldn’t. Which means, once they’ve waited for house prices to crash (yeah, let’s use that word) and saved up the 10% deposit that they’ll need, while having paid off their credit card debts, that they’ll be able to think about buying a house. If that’s what they still want to do.

But face this: the era of cheap credit is dead. It was fuelled by cheap lending generated from the US property market, leveraged by 20, 40, 60 for every dollar actually paid (or lent). Unsustainable, and now over as the banks try to regroup to discover some real money down there amidst all the paper promising to pay the bearer just as soon as it has figured out who actually owns the cash.

The credit crunch is nine months old, but it’s barely beginning in the effects it’s going to have on society.