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BOE Has 'Slim' Chance of Helping Loans, Goodhart Says
Bloomberg
23 Aprile 2008
Bank of England Governor Mervyn King's offer to swap bonds for mortgage securities won't fulfill the government's promise to help homebuyers, former policy maker Charles Goodhart said.
"The likelihood of getting the mortgage market going again is slim,'' said Goodhart, a founding member of the Monetary Policy Committee and now a professor at the London School of Economics, in a telephone interview yesterday.
"This just prevents things from getting worse. It's a backstop.''
King, backed by Prime Minister Gordon Brown, is encouraging lenders to pass on the Bank of England's interest-rate cuts and thaw a mortgage market that's frozen up over the past month.
Failure will exacerbate the worst housing downturn since 1992 and risk pushing the economy into a recession.
The Bank of England said yesterday it will exchange about 50 billion pounds ($100 billion) of government bonds for mortgage securities, mimicking a swap of $200 billion worth of securities by the U.S. Federal Reserve last month. Brown, whose popularity fell the most on record in a newspaper poll published April 13, said "we will make sure there is enough liquidity in the economy to make sure people can buy their own houses.''
While Goodhart says the Bank of England's plan doesn't back up that guarantee, it may do enough to take the sting out of any economic slowdown.
Possible Recession
"The credit crunch will still hit the economy, but it might have hurt more if it weren't for these measures,'' said Goodhart, 71, who served on the MPC from 1997 to 2000. "The measures prevent the risk of a possible recession becoming a depression.''
Goodhart is the author of "Goodhart's Law,'' which holds that targeting monetary aggregates as a surrogate for inflation is futile.
U.K. Chancellor of the Exchequer Alistair Darling will meet mortgage executives at 3 p.m. today in London and so far there are few signs of a coordinated effort to slash lending rates. While Abbey National, Britain's second-largest mortgage lender, said yesterday it's reducing rates on some adjustable loans, it also raised them for borrowers who make deposits of less than 10 percent.
Northern Rock Plc, the mortgage lender nationalized this year, cut its rates for home loans by 0.1 percentage points.
Trend Reversal
"The improved liquidity is unlikely to reverse the trend to higher mortgage costs we have seen in recent weeks,'' said Michael Coogan, director general of the Council for Mortgage Lenders, in an e-mailed note yesterday.
"The recent trend of mortgage products being removed and mortgage prices increasing for new customers will be affected more by how Libor responds.''
The cost of borrowing pounds for three months was little changed after the Bank of England's announcement yesterday. The rate at which commercial banks lend pounds to each other, or Libor, fell less than 0.01 percentage point to 5.89 percent. That compares with the Bank of England's key rate of 5 percent.
The Bank of England's move is its biggest step so far to avert a credit crisis that led to the run on Northern Rock in September and ended the U.K.'s decade-long housing boom. Some former policy makers said the proposal's terms may dissuade many lenders from taking the central bank up on its offer.
"It's priced quite aggressively,'' said Willem Buiter, who served on the bank's rate-setting committee from 1997 to 2000, in an interview with Bloomberg Television. The discounts "will not greatly incentivize the banks to engage in another bout of reckless lending.''
Under the terms of the plan, banks will have to pay a borrowing fee to participate in the plan, and the value of the securities they receive will be less than that of the mortgage- backed bonds they hand over to the Bank of England.
Unattractive Rates
"Banks will give their best assets, at unattractive rates and keep all the risk,'' said Ben Ashby, a credit strategist at JPMorgan Chase & Co. in London. "It's not exactly a compelling trade unless you're fairly desperate.''
U.K. banks will probably cut mortgages by half this year, eclipsing 1992's drop as the worst year ever, according to the CML. British home prices may drop 15 percent over the next two years, Morgan Stanley estimates.
British banks are reluctant to lend to each other as the U.S.
subprime slump hurts earnings. Royal Bank of Scotland Group Plc, the U.K.'s second-largest bank, said today it will sell 12 billion pounds of new shares to investors to boost capital. The world's biggest banks have recorded $288 billion in asset writedowns and credit losses since the beginning of 2007 following the collapse of the U.S. subprime mortgage market.
Goodhart, who sat on the MPC with King for three years, rejected concerns that the Bank of England is letting financial institutions off the hook. While King argued in September that helping cash-strapped banks "sows the seeds'' for future crises, Goodhart said he now doesn't have any option but to avert a market meltdown.
"When you're in a crisis, you deal with the crisis,'' said Goodhart. ``Moral hazard comes when times are easier.''
By Brian Swint and Jon Menon
Source > Bloombreg
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