Except in the financial pages there has been little reporting of a problem that one senior banker described over the weekend as "the most serious in over 20 years" that has been unfolding over the summer. Simply put, banks that lend to mortgage borrowers with bad credit risk have been bundling their bad loans along with good loans and selling them to other banks in investment bonds that could turn out to be no good; but the risk is hidden.
Suspicion has gone round the banking community and now banks have stopped lending money to each other because of worries about the possibility that a bank somewhere might go bust; and because they won't lend money to each other (or are pricing in higher costs to do so) the actual costs of wholesale money are rising. And what that means is that the Bank of England have lost control over interest rates - the inter-bank lending rate is already 1% higher than the Base Rate.
So there could be a severe credit crunch this winter, with many banks simply not being able to get hold of enough money to lend out. That means credit won't be extended; credit card debts may not be renewed or have limits cut, Mortgages could become much harder to get, and 'top up' loans may not be there for those in difficulty. If the shortage continues eventually banks start clawing back money they have already lent by bankrupting businesses and repossessing homes. This is exactly the kind of credit crunch that happened in 1973 and again in 1985.
When those on the bottom find that even not paying your mortgage is no problem (easy, just re-mortgage the arrears) it gives everyone -even those higher up the scale- huge confidence to over borrow because it has become almost impossible to lose your home.
The net effect is usually inflation, leading to a currency problem leading to a recession, leading to a rebalancing of the supply of money. This time rising inflation has been masked by a flood of cheap imported goods, immigration keeping workers wages low and Gordon changing the measure; all of which are ‘one-off’ jokers that have been played out; unless Gordon has another one carefully hidden which none of us have thought of the hangover from this ten year binge could be very big indeed.
Nobody believes that in a free market you can eliminate ‘boom and bust’ -it is human nature (greed and fear). So there must come a bust eventually; and the longer and bigger the boom- the deeper and bigger the bust.I am exceptionally gloomy about the prospects for our economy next year, all the signs are there that we may be in for a very rough ride indeed.