Following my recent post on the Government’s urging banks to help reckless (sorry, ‘hard-pressed’) borrowers, a reader alerted me to this excellent article from Vince Cable of the Liberal Democrats in The Independent pointing out that banks played their part in pumping up prices:

British banks, in particular, lent too much, too quickly, too carelessly, based largely on the optimistic but irrational belief that house prices can only increase and never fall.

[…] Banks and their executives are rightly excoriated for their cynicism in offloading risk and losses on to the taxpayer while pocketing large profits and bonuses. But they are correct to say that there are willing borrowers as well as reckless lenders. Much of the lending boom has been based on property and the belief that houses are not just our homes but the main source of family wealth: a pension, a bank account and a dwelling rolled into one.

The Government’s emergency package is at least partly designed to stop house prices finding a more sustainable level: a costly and ultimately fruitless objective.

If you’re new here, read my post urging the Government to leave house prices to fall to sensible levels, and see how housing is over-priced, relative to rent.

Not content with lending billions to the banks and bailing out Northern Rock, the UK government has set its sights on homeowners who are struggling to pay their mortgages.

According to the BBC:

Homeowners will have enough support to ensure that their homes are not repossessed, the government says. The comments came after key mortgage industry figures met Chancellor Alistair Darling and Housing Minister Caroline Flint at 11 Downing Street. But ministers did not outline how they would stop people losing their homes.

There are two ways to read this news: cynically, and angrily.
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Remember when Mervyn King, Governor of the Bank of England, was all about applying ‘Moral Hazard’ to the banking system? You know, the idea that some banks had to fail to teach others not to make dodgy lending decisions? You can be sure King remembers making statements on risky lending like this:

“The provision of such liquidity support undermines the efficient pricing of risk by providing ex-post insurance for risky behavior. That encourages excessive risk-taking, and sows the seeds of a future financial crisis.”

Ah well, six months is a very long time in a credit crisis. One winter of discontent later, and Merv the Swerve has done a U-Turn, with the Bank announcing today its much-mooted Bring-and-Buy-a-Bond sale.

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