Will there B&B a recession?

For the manufacturing sector – which is, unlike financial services sector, productive – a recession is approaching:

UK manufacturing showed no growth last month for the first time in almost three years, a survey has shown, but there was no let-up in inflationary pressures as firms raised prices at the fastest pace since the index began.

The Chartered Institute of Purchasing and Supply/NTC purchasing managers’ index fell to 50.0 in May from 50.8 – the weakest figure since July 2005. The index measures activity among UK manufacturers, with a level above 50 indicating expansion and below showing contraction.

Vicky Redwood at Capital Economics said the figures suggested the “industrial sector is on the verge of recession”. The Cips survey was more pessimistic than EEF data published yesterday that showed a slight pick-up in orders. However, Cips is a broader measure than the EEF, which focuses more on high-end engineering, such as carmakers.

Both surveys pointed to firms increasing prices to offset rising raw material, energy, component and freight costs.

The purchasing managers’ output price index rose to 62.0 from 61.9 in April. Output prices rose in each of the past 34 months, the most sustained output price inflation since the series began in 1992.

More evidence that retailers are passing on rising costs to customers may concern the Bank of England’s monetary policy committee when it meets this week to discuss interest rates. The MPC kept interest rates on hold at its meeting last month because of concerns over inflation.

Howard Archer at Global Insight said: “The further rise in the prices-charged index in the purchasing managers’ survey reinforces the belief that the Bank of England will not be cutting interest rates again soon, even though weak manufacturing activity adds to fears that the economic downturn is deepening.”

The input price index eased slightly from record highs the previous month but remained at an uncomfortable level of 75.9. New manufacturing orders fell for a fifth month. Weak domestic demand was the main drag on total order books as new export orders posted a slight gain.

Archer said: “Most manufacturing data and survey evidence indicates that the sector is now buckling markedly as it is pressurised by slowing domestic demand, weaker activity in key export markets, elevated energy and commodity prices, and tight credit conditions.”

The bail-out of Bradford & Bingley by a US private equity company – in return for almost a quarter of the bank – shows how unstable the banking sector is, and how chaotic it will become:

Bradford and Bingley collapse brings UK recession closer
By Socialist Appeal
Monday, 02 June 2008

Bradford and Bingley are the latest bank to catch a cold in the present financial crisis. They’ve declared a loss of £8m for the first four months of 2008. This compares with £108m profits they made in the same period last year.

The main reason for the losses is because they’ve had to write down £89m of their assets. ‘Write down’ is banker-speak for the fact that they realise they can whistle for their money.

B & B is the market leader in ‘buy to let’ mortgages. One of the features of the housing bubble which has now burst is that people were buying houses, not only to live in, but also to lease to other people. This of course tended to push house prices even higher. ‘Buy to let’ was based on the assumption that house prices would just keep on rising. In that case not only had the buyer acquired an ever-appreciating asset, but they could also make enough money by letting it out to pay the mortgage. Free money!

When the housing bubble burst, the whole logic of ‘buy to let’ went into reverse. Not only is the house price going to fall after the deal has been struck, so the buyer is in effect stuck in negative equity, but tenants are expecting to pay less rent, since they know house prices are headed south. The ‘buy to let’ market, worth £120bn last year is now effectively dead in the water. And of course all those people jumping ship from the housing market will make the house price collapse that much worse.

So the number of those in arrears with B & B has risen sharply this year. It’ll get worse. The bank has had to sell 23% of its shares to the private equity firm Texas Pacific for £179m. Texas Pacific are not philanthropists. They buy into firms for what they can screw out of them. Bradford management are playing a dangerous game.

B & B have also been forced to ask for a rights issue of £258m. This means that shareholders are expected to reach in their pockets and stump up for extra shares. Now ‘investors’ don’t really buy shares so they can have further demands put upon their wallets. They expect to sit at home and watch the dividends roll in and the shares going up. So a rights issue will always hit existing share prices.

And so it has proved. Bradford shares have dropped by two thirds in the past six months and fell 40% in the last month. The announcement of the loss meant B & B shares took a further tumble. The panic spread to other bank’s shares. After all, they’re all in the same pickle.

Bradford and Bingley have just demonstrated they had an urgent need for more than £430m. These are panic measures. You can be sure they’re in big trouble.

We can all have a good laugh at the problems of financial institutions. But the trouble is, the financial crisis is impacting on the real economy. House prices are now definitely falling in the UK – maybe by 10% a year, maybe more. Does that mean it’ll be easier to buy a house? No, it will be harder. Interest rates are higher, which means a mortgage will cost more. The Bank of England would probably like to cut rates, but inflation is on the rise, so that’s ruled out. The banks are adjusting over a million mortgage interest rates this year, and it’s going to hurt. They are determined to spread their own misery around to the rest of us.

The level of mortgage approvals has actually halved over the past few months, since the house price bubble burst. No longer will the likes of Northern Rock chuck 125% mortgages at borrowers, so you can build a patio and have a holiday in Thailand while you’re buying a house. No, they want only fine, upstanding and, above all, solvent citizens on their books.

A house price collapse doesn’t just affect the unfortunates who buy at, say, £200,000 and find their precious house is only worth £150,000 a year later. They’re stuck in negative equity. They can’t afford to pay for the house and can’t move out. Negative equity blights whole neighbourhoods, as it did in 1992 in the last house price collapse.

And of course it brings new housebuilding to a stop. There are early signs that that is already starting to happen in Britain.

The Financial Times published an article (June 1st) headed ‘UK nears recession’. They quote Michael Saunders of Citigroup as saying. “Lots more economic pain lies ahead. The UK economy is heading close to recession and the recession risks are rising.” The recession is an inevitable outcome of unplanned capitalism, interested only in profit. It’s not our fault. Let’s make sure they don’t dump the pain of their recession on the working class.

Give the banks the Chavez Choice!

The Morning Star’s editorial on this, the day after the bailout of the banking sector:

Give them the Chavez choice
(Monday 21 April 2008)

SOMEWHERE in the depths of the City, lurking behind closed doors, a coven of high-ranking bankers must be pouring out the champagne and celebrating raucously at the tops of their well-bred voices.

And they certainly have something to celebrate.

Following on from years of furious-paced gambling, during which they raked in the profits from speculating on mortgage debt, which they themselves had encouraged eagerly with ill-advised lending, their bonanza came to a sticky end recently with the US sub-prime mortgage crisis.

They lost, they say, billions of pounds. Their little flutters left their banks not only carrying huge losses, but suspicious of each other and unwilling even to carry out their normal business of lending money to their colleagues, fearing that their mates in the other banks were concealing a level of losses that made them a bad risk.

So much, you might say, for solidarity between partners in crime. There’s not much honour among thieves and they deserve what they got.

But the bankers are celebrating. And they are celebrating with good cause because, unlike the normal punter who puts a few quid on the 3.45 at Newmarket, they lost their bets but they aren’t going to have to cough up the readies to the bookie.

That nice Alistair Darling is going to make sure that they don’t, by throwing £50 billion in the pot that they can borrrow to cover their losses, using as security – Yes, you’ve guessed it – precisely those dodgy chunks of mortgage debt that they don’t trust themselves.

Now that’s a pretty good deal by anyone’s standards, especially since the good old Chancellor and the Bank of England have already coughed up a cool £50 billion to cover the Northern Rock crisis.

But are they satisfied? Not a bit of it. In fact, one banker, who rejoices in the job title of “head of spread betting at GFT Global Markets,” said: “The market reaction, at least in the short term, may well be one of disappointment that further funds have not been earmarked as part of a more long-term plan.”

There’s no pleasing some folk, is there?

And, considering that the banks have already refused in large numbers to pass on interest rate cuts to their customers, is it at all likely that this latest largesse will turn them into public benefactors with generosity oozing from every pore?

Mr Darling didn’t seem to think that he could raise considerably less cash to help out the poor victims of Labour’s cock-up over the 10p tax rate, so one would think that the latest little miracle of finding £50 billion to help the rich would leave the bankers reeling with stunned gratitude. It hasn’t.

But has Mr Darling any choice in the matter? He clearly doesn’t think so. With the importance of the banking and finance sector, he is worried that this bank-induced crisis could cause a catastrophic slump and damage the economy of the country.

But there are other choices. Choices that could be made in a democracy, if the word democracy has any meaning at all.

If it is the government that runs the economy – as the politicians insist every election – and not the bankers, then direct control of the speculators is a choice that could and should be made if they can’t control themselves.

It might be described as the Chavez choice, which the Venezuelan leader gave to big oil.

Work for the country and not for your private interest, or we will take the choices out of your hands.

Ukania’s economic crisis

Ukania – the centralised British state – could come under increased pressure in coming years as the UK economy unravels. Alex Salmond, leader of the Scottish government has been complaining about the Bank of England’s handling of the credit crisis.

The WSWS’s Chris Marsden has an informative piece on recent reports issued by the International Monetary Fund and the Organization for Economic Cooperation and Development. Here’s the bit about Ukania:

Britain has long been recognised as the European country most exposed to the economic turmoil unleashed in the United States and most heavily dependent on world financial markets. The IMF downwardly revised UK growth figures from the Treasury’s estimate of 2 percent this year and 2.5 percent next to 1.6 percent for both 2008 and 2009, the worst performance since the last recession ended in 1992.

After nationalising Northern Rock and injecting £50 billion of liquidity into the markets, the Brown government and the Bank of England plan to risk billions more, emulating the US Federal Reserve by taking over bad mortgage debts from banks in return for secure government bonds.

House prices in Britain already fell by 2.5 percent last month and are expected to decline by as much as 10 percent this year. Britain’s Royal Institution of Chartered Surveyors reports that the number of residential property agents saying prices declined exceeded those reporting gains by 78.5 percentage points in March, the worst since records began in 1978.

Britain is also labouring under staggering levels of personal, unsecured debt.

Total UK unsecured debt is £1.3 trillion—more than the rest of the European Union put together. Lorna Bourke, writing in Citywire, rejects claims that the present housing crisis is not as bad as that in the 1990s, when there were 78,000 repossessions a year, because unemployment is lower. She notes that “In the early nineties high unemployment created by the collapse of the debt market in 1987 and rising inflation meant homebuyers could not meet their mortgage obligations. Does that sound familiar?”

Credit card debt is much greater than it was in 1990. Financial analysts Mintel have reported that mortgage costs in Britain trebled during the past 10 years and now account for 25 percent of consumer spending, compared to 14 percent a decade earlier. The debt management company TDX Group estimates that the number of people struggling with debt is set to double during 2008. Around one million people have unsecured debts totalling £25 billion, averaging a staggering £25,000 each. Some 60 percent is owed on credit cards, with the rest mainly in personal loans.

London’s role as a financial centre will translate into a massive and relatively immediate impact from a global economic downturn. JPMorgan Chase analysts estimate that 40,000 City of London jobs could be lost as a result of the credit crunch, doubling the forecast by the Centre for Economics and Business Research.

Amongst the cuts already announced are 900 jobs at UBS, the European bank worst hit by the credit crunch, representing 10 percent of its London workforce. Merrill Lynch has warned of 450 imminent job losses in London.

Initial signs have emerged of a rise in unemployment from its present 1.6 million. Although the claimant count rate fell by 1,200 in March, the previous month’s 2,800 decline was revised to show a 600 increase—the first since September 2006.

Sterling has hit repeated all-time lows against the euro, which is presently worth more than 80 pence. The Bank of England has cut interest rates to 5 percent in an attempt to stimulate the release of credit by banks and building societies.

Bleeding obvious, Darling

On BBC One’s ten pm news programme Sgt. Bilko (my pet name for Nick Robinson) said Darling was stating the bleeding obvious.

On BBC Two’s Newsnight, Michael Crick also said the Chancellor was bleeding obvious.

What was it that Alistair said?

In a frank confession that shocked Labour MPs, the Chancellor said the party lacked a clear message and had failed to connect with voters. […]

Speaking on a visit to China, Mr Darling said: “We have got to make sure that … we sharpen ourselves up, that we have a clear message of what we are about.” […]

The Chancellor rejected suggestions that senior ministers, including Schools Secretary Ed Balls, are jockeying for position in a Labour leadership contest in case the Prime Minister is forced out. […]

“This is a time when we should remember why we stand for government, the purpose of being in government.”

Erm, what’s that then? To serve ordinary working people? No, don’t be silly – they’re in it to help out the super-rich.

Gawd knows, they need our help:

The Bank of England is poised to launch a new lending programme for UK banks in an effort to break the logjam in the credit market, the BBC has learned.

Final details are still being worked out including the scale of the plan and the exact terms.

But it will be similar to moves in the US, will be backed by the Treasury and could be launched as soon as next week.

The scheme would temporarily allow banks to swap their mortgage-based assets for government bonds.

That’s a clear enough message, Darling!

Brown promises “unpopular decisions” – what, more?

So, the government urges banks to pass on the interest rate cut – but the bank it just bought, Northern Rock, hasn’t done this, so the banks have instead hiked rates. And in return for not passing on the rate cut, the government has allowed the Bank of England has again pumped billions into the money markets…

There’s a great editorial in The News Line today:

PRIME MINISTER Brown said yesterday that he will not be diverted from taking ‘unpopular’ decisions to ensure Britain gets through the global credit crunch.

Afterwards the Bank of England confirmed that a further £15 billion had been put into the banking system to try to ease its no-cash crisis, on top of the almost £200 billion that has already been handed over to Britain’s bankrupt bankers.

A 10 Downing Street spokesman also tried to insist that the talks between Brown and the bankers from Lloyds, Barclays, HSBC and the Royal Bank of Scotland were not a crisis summit, an assertion that left most people laughing.

As is well known, the bankers are demanding that they have the same facility available to them as the Federal Reserve bank has put at the disposal of the US banks.

These get unlimited cash credit with all of their bad mortgage debts accepted by the Federal Reserve bank as collateral.

That this is the road to state bankruptcy, prompted by a truly desperate situation of a financial and growing industrial collapse, is more than obvious.

The Bank of England, appreciating just how vulnerable a badly indebted Britain is to a worsening of the crisis and a run on the banks and the pound, leading to sky high interest rates, is hesitating before taking such a huge and desperate gamble.

Brown, for his part, is seeking to insist that the bankers do the minimum, that is pass on any cuts in the Bank of England’s interest rate to their mortgage holders, something that the cash hungry banks are refusing point blank to do.

Meanwhile, Brown’s trade minister and the former CBI bosses organisation leader Lord Digby Jones has said that he is sticking with Brown, and not resigning from the Labour government.

Jones however confirmed he will quit before the next election because he cannot back the Labour Party.

He added: ‘I am a supporter of and believe in what Brown is doing. My plan now is to get on with the job.

‘I will continue to give him personally my full support and I am delighted to be doing this important job for my country.’

Brown responded that Lord Jones was ‘doing a good job’ and was ‘staying on as a trade minister’.

In fact Brown’s government of all the talents is an embryo national government with open representatives of the bosses and the military in its ranks, such as Jones and Admiral Lord West, the security minister. Whatever the frictions between Brown and the ruling class, the bosses still need Brown for the dirty work that lies ahead. This is why Jones and West are staying on board.

Jones says that he wants to get on with the job, while Brown states that he is not afraid of ‘taking unpopular decisions’.

The bankers, Brown and his business and military friends know exactly what the job entails.

In a situation where the worldwide financial and economic crisis is worsening by the hour, and where Britain is even more indebted than the US, a deepening of the crisis will result in the banks and the pound being in the front line.

When this happens Brown will extend his government of all of the talents into becoming a fully-fledged national government, including the Tory and Liberal leaders.

It will then impose draconian crisis measures onto the working class and the middle class, hiking up interest rates, cutting public sector wages by decree, and abolishing benefits that they consider capitalism can no longer afford.

The workers movement and the trade unions will have to respond to such a savage attack by calling a general strike to bring down the Brown-led government to bring in a workers government.

This will only be able to resolve the capitalist crisis in one way, by expropriating the bosses and the bankers and bringing in socialist measures.

Banks won’t pass on rate cuts? Hang on, we own a bank…

Our Darling Chancellor – ahem – has been calling on banks to pass on cuts in the base rate of interest to customers:

He said it was time lenders “played their part” after being helped by the Bank of England putting £15bn into the markets, amid the credit crisis.

So they’ve given the banks a carrot, but where’s the stick?

If Darling had any interest in helping ordinary people instead of sucking up to the banks he’d be threatening to use Northern Rock – a bank we’ve all been forced to bail-out – to supply mortgages direct from the Bank of England.

And he would have scrapped that tax hike on low-paid workers. Something the labour movement has been sounding off about this weeked.

TUC general secretary Brendan Barber said the abolition of the 10p band had come as a “further blow” to workers whose finances were already being squeezed by rising food, energy and borrowing costs.

He suggested the government end the remaining tax breaks for so-called “non-domicile” UK residents to raise the necessary funds to compensate those who have lost out.

These are people who live in the UK but are classed as living abroad for tax purposes – a practice Mr Barber described as “scam”.

Addressing the North West TUC in Liverpool, he said: “When it is so clear that the growing numbers of super-rich are not paying their fair share of tax, it is not surprising that average and low-earners resent any increase in their tax bills.

“The danger for progressive politics is that this leads people to question the fairness of our tax system, which in the longer term risks undermining the pensions, benefits and decent public services that depend on fair taxes.”

That is to say, we need a working class tax cut and a corporate tax hike. Brown and Darling have given the UK the lowest rate of corporation tax of all the imperial powers – so much for the non-existence of the “race to the bottom”…

Note that in the above quote Barber talks about progressive politics but not explicitly in the context of the Labour party. I do wonder if the labour bureaucracy will, in the next few months, use the question of party funding to bargain with New Labour and avoid strike action?

Interest rates are cut, yet banks put rates up! Is the credit crunch set to continue?

Setting interest rates is one thing the Bank of England can do to influence the banking system (the other is pumping billions of pounds into the system).

The Prime Minister has been dropping hints that a rate cut wouldn’t go amiss – suggestions that were condemned by the Tories as threatening the bank’s independence.

Today the Monetary Policy Committtee cut interest rates by 0.25% – but some banks had already announced they were raising interest rates.

As for doling out the dosh:

UK banks seek more BoE borrowing
By Norma Cohen and Jane Croft in London and Michael Mackenzie in New York
Published: April 10 2008 03:00 | Last updated: April 10 2008 07:41

The Bank of England fears that the credit crisis has entered a new and more serious phase as British banks on Wednesday took steps to increase their borrowing facilities with the central bank to insulate themselves from another lending panic.

UK banks asked to increase sharply the reserves they hold on deposit at the Bank this month to the highest ever level amid concerns that the instability of the banking system could suddenly leave them desperate for cash. They fear another bank crisis – akin to the collapse of US investment bank Bear Stearns – could see the market seize up.

Banks have asked to keep total reserves of £23.54bn on deposit that they can borrow to meet short-term financing needs if they cannot borrow in the interbank market. This is up from the nearly £20bn they had on deposit until yesterday. This is money the banks keep on deposit at the Bank, earning interest, but that they can access when the cost of borrowing from other banks becomes too high.

The Bank did not comment publicly. But it is understood that senior Bank officials believe that UK markets face a further period of mounting problems, in spite of some recent comments suggesting the worst of the liquidity squeeze may be over.

In the aftermath of the rescue of Bear Stearns by JPMorgan Chase, backed by the US Federal Reserve, money markets tightened further on fears that another bank might collapse.

Yesterday, money markets in the US and Europe were signalling renewed fears about the financial strength of banks, with key confidence barometers almost returning to levels that preceded the fate of Bear Stearns.

The concerns are being highlighted by the difference between overnight lending rates set by central banks and three-month Libor, the rate at which banks lend to each other.

This spread, known as the overnight index swap rate, has been rising in the US and remains elevated in Europe, indicating that banks are reluctant to lend to each other.

“Libor is still dysfunctional and, for whatever reason, banks still appear unwilling to lend funds,” said Dominic Konstam, head of interest rate strategy at Credit Suisse.

Meanwhile, there are signs that banks are now taking into account the risks of lending to homebuyers with deposits of only 5 per cent of the purchase price. For these buyers, a small downturn in house prices could tip them into negative equity, leaving lenders with collateral worth less than the outstanding loan if the buyer defaults.

According to the latest Bank of England data, the spread between a two-year fixed-rate mortgage for 75 per cent of the purchase price and a similar loan for 95 per cent of the purchase price is now 0.88 of a percentage point. That is about three times the differential in December. Historically, the two rates were, on average, not more than about a quarter of a percentage point apart.

Separately, Experian, the personal credit rating group, has identified five postal codes in the UK where the average home loan is 90 per cent or more of the median home price and which are most vulnerable to negative equity in a downturn.

Sighthill in Glasgow is most at risk, with average loans totalling nearly 95 per cent of the average house price. One London postal code is at risk: SE18 in Woolwich, where the loan-to-value ratio is more than 91 per cent. Meanwhile, Alliance & Leicester is considering repricing its mortgage deals for the second time in a week following moves by rivals.