The UK’s mortgage and business lending numbers show how broken our monetary policy is

Yesterday I challenged many of the conventional views on monetary policy and pointed out that at a time when the monetary transmission system is in such distress they are out of date and likely to lead to the wrong conclusions. At that I point I discussed the enormous experiment (doubling the monetary base) being undertaken by the Bank of Japan. Today I wish to take that forwards but this time to peer under the bonnet of the UK monetary system and in particular the way it is interacting with our housing and mortgage markets as all is not well there either in my view.

The official position

We saw this established by the credit conditions survey which was published by the Bank of England this week. As you can see it feels plainly that there is no moral hazard in giving itself a slap on the back whilst blowing its own trumpet!

The availability of secured credit to households was reported to have increased in the three months to beginning-March 2013. And a further increase is expected by lenders over the next three months.

It gave the same view on unsecured credit for households. However even this rose-tinted view of the universe found itself unable to avoid the ongoing problems in business credit.

The overall availability of credit to the corporate sector was reported to have increased in Q1. But that increase was confined to large companies, with small and medium-sized companies reported to have experienced little change in credit availability. Lenders expected overall credit availability to the corporate sector to be little changed in Q2.

Here we have a fundamental problem as you see the large corporate sector which overall is awash with cash can borrow but the smaller businesses which need cash cannot! Indeed the situation is so bad that this is apparently happening.

Lenders reported a significant decrease in demand for credit from small companies in Q1, a slight reduction in credit demand from medium-sized companies…..

So if we go back to the original grand promises when the Funding for Lending Scheme was introduced we see that in terms of the business lending required it is a failure. Actually the worst part is that is resembles a past Japanese failure where its banks also offered loans to those who did not need them as a way of avoiding actually lending. So the Bank of England apparently learnt nothing from the Bank of Japan’s experience and failures.

Accordingly we see that this rhetoric from the Bank of England is much less important for the corporate sector than you might think.

The Funding for Lending Scheme was widely cited as a factor pushing down on bank funding costs and borrowing costs for households and companies.

So if small businesses could get a loan it would be cheaper,thanks for that! Many of them seem to have given up asking.

What about mortgage rates?

We see that mortgage rates have indeed fallen for new business as Novembers 3.72% has fallen to February’s 3.5% on average according to the Bank of England. However before the cheers get too loud existing business is only 0.01% lower at 3.37%. Also if FLS and QE and base rate cuts are “all that” if I may use modern vernacular why is new lending more expensive than existing lending?

Is a rise the new reduction?

Savers the other side of the balance sheet

There is not the same reticence here by banks as interest rates have fallen for existing and new savers. Apparently existing savers can get 2.77% (down from 2.88%) and new ones 2.2% (also lower by 0.11%). Odd is it not that existing savers see falling interest rates but existing mortgagees do not?

Of course the theme that this is a (not very well disguised) bank subsidy receives another tick in its column.

What about the amount of mortgage lending?

Again the rhetoric has been that this is surging. I have challenged this once or twice on twitter as the numbers did not seem to be backing it up and had several mortgage brokers tell me that they had “loads of work”, although somewhat ominously considering the UK’s past history much of it was buy-to let.

One might wonder therefore how and why net seasonally adjusted mortgage lending in January and February was at £1153 million less than half of  2012′s £2413 million for the same period?

If we look forwards then we can get a good guide via the mortgage approvals statistics so if we look at the numbers for the first two months of 2012 we see that there were 106,841 whereas this year there were 105,840. So less not more and February at 51,653 was some 2534 lower than in January. If we move to the amount approved we see that in the first two months of 2012 some £25.16 billion was approved for such purposes and this year £23.92 billion.

Mortgage borrowers are not behaving as “expected”

Even if you ignore the above and believe the official spin at face value you then face a problem with the transmission of your (supposed) gains to the real economy. The plan is that mortgage borrowers will be better off and spend more. Unfortunately for that there is another problem which is that they are reducing their debts.

In the first two months of 2012 total mortgage redemptions/repayments were £23.04 billion whereas this year they were £25.18 billion.

So we see yet another example of people behaving differently from the views held by many economists who seem to learn little and sometimes I have to confess I wonder if some of them actually want to learn.

What about house prices?

Today’s report from the Halifax tells us that they continue to edge higher.

House prices increased by 0.2% in March. This followed a 0.5% rise in February

Prices in the three months to March were 1.1% higher than in the first months of 2012.This was the third consecutive rise in this annual measure.

Although with the official inflation measure at 2.8% I note that in real terms prices are falling.

Also to be fair to the Halifax whilst we do get a bit of sales up by 5% hype (industry figures) they also agree with my mortgage approvals analysis above.


We see in the numbers above that the conventional economic theory being applied to the UK economy by the Bank of England is not working. In my view they are conventional even when they think they are being unconventional! If we look at why then our mortgage and housing markets give us a guide.

1. The supposed rise in volumes is in fact a fall and even worse looks likely to fall further if mortgage approvals are any guide.

2. The supposed fall in mortgage rates still leaves new mortgage rates above existing ones.

3. Even if this was working then we have changed and rather than wanting to spend any such gains as conventional analysis would assume we now reduce our debts.

So even if things were going as hoped it might not work anyway. Oh dear!

Also on the other side of the balance sheet we see that savers have been punished and are poorer and are therefore likely to spend less. Indeed the new “human credit crunch psychology” I have been advancing in recent weeks may also make them want to save more as they face an uncertain world full of fears.

If that was not a long enough list of challenges and problems we also see that our businesses cannot get the funding they want and need.

There is only one winner here and it is our banks as we revise Abraham Lincoln’s speech.

Government of the banks,by the banks,for the banks

When,when,when will we ever learn?

This not from the UK (thankfully as we have our own problems) but from the United States and I will let the Washington Post take up the story.

The Obama administration is engaged in a broad push to make more home loans available to people with weaker credit, an effort that officials say will help power the economic recovery

What could go wrong? (Google the sub-prime collapse if you are unsure)

This entry was posted in Banks, Economy, General Economics, House Prices, Quantitative Easing and Extraordinary Monetary Measures, Stagflation, UK economy and tagged , , , , , . Bookmark the permalink.
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  • Joe

    Great analysis as ever Shaun.
    So, four-five years on and we’re no closer to a ‘classic’ recovery – when is it going to be clear to those in charge that we’re not going to get one this time? Going by the last quote, they’re resorting to deliberately creating artificial bubbles, and as you point out, even if they work, they’re simply going to burst!
    The poor wretched can has been kicked and kicked, how much further can it go? Added to that, each time we catch up to it, it’s bigger than before!

    Of course, with the likes of the Ponzi scheme of pensions (pay for today’s pensions with today’s tax receipts), there’s not much choice in assumed direction. If we don’t keep growing, then we can’t afford tomorrow’s bills!

  • Andy Zarse

    Hi Shaun, was the Washington Post correspondent called Punxsutawney Phil by any chance?

    There’s little to argue with in your UK analysis so far as I can see. Add this to the failure of official policy to ‘rebalance’ the economy, the lack of reform at the banks, more regulatory failure and the pound’s devaluation by 25%, we see there has been virtually no growth and it’s a pretty poor state of affairs all round. No wonder the stock market is up so far this year!

  • MickC

    Your analysis is spot on.
    The property market is broken because no-one can afford mortgages. No amount of industry hype can avoid that simple fact.
    The high end London market does not depend on the “ordinary” buyer-and so will continue upwards.

  • Nemesisforpredators

    Dear Shaun,
    you conclude revising Abraham Lincoln :
    “Government of the banks,by the banks,for the banks”

    I would add quoting Andrew Jackson in 1834 :
    “…you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the Bank. … You are a den of vipers and thieves.”

    Presumably, between the lines, these include their revolving doors with politicians and big business, their bonus and salary thievery and their hidden offshore activities currently being exposed ?

    Does that mean you at last actually agree that all this has been long-term planning (some would call it a “plot”) of the banks by the banks for the banks? As you conclude also : When,when,when will we ever learn?

    Thank you for your courageous, transparent and explicit analyses. I hope you have a good bodyguard.

  • Anonymous

    BBC’s Peston complaining of HBOS banker bashing getting short shrift from public comments. RBS action groups (ESI/NCB pension trustees) commencing legal action are these straws in the wind ?
    With 2015 election looming will HMG start to yield to public pressure over the banksters – we can live in hope!

  • Justathought

    Hi Shaun,

    Spot on as usual,

    The internet is probably the best available invention that one can have access to, (when the wheat from the chaff is separated) we are left we extraordinary gifted observers such as yourself and we learn more than one could have imagined. On behalf of the group of people that I interconnect with and myself thank you for your insights.

    From a financial crisis passing by an economic crisis mixed with political crisis moving toward a “moral” crisis and soon an energy crisis, we might consider that we are heading toward “la totale” (the whole or the full one). We might still have a couple of years to prepare and organise ourselves however after 2015/16 all hell might break loose.

    Better prepare than feel sorry while expecting to be wrong…

    To quote Benjamin Franklin: “Those who give up their liberty for more security neither deserve neither liberty nor security”.

  • forbin

    I’ve often quoted the line

    Government of the people by the banks for the banks

    and yes, I believe them and the people who support them – to be vipers and thieves ! apt I think

    I guess we can always for ourselves see events that mark out the change – from the large concrete blocks out side our representative parliament to keep ” bombers” away but really were to keep protesters away from their poor ears – to the Great Gormless Brown ” saving the world” ( meaning banks- aren’t they the world? ) – to renaming the poor as “precariat” ( winscale to sellarfield )

    I believe the late George Carlin hit the nail on the head – you can choose what type of coffee you can have or what colour your shirt is – but the real important decisions are not yours to make

    so I eat my popcorn and watch – I wasn’t lucky enough to get the USA front seat in this freak show but I’ll watch from the Stalls …..


  • forbin

    becareful of WHOs government pensions you are talking about

    Local government is fully funded ( possibly now all in QE funny money ) not from taxation

    Westminster Pensions maybe , and my so called pension – the State one – yes thats taxation based

    Watch out for a Post Office type of raid on Local Gov. pensions in the future – where there’s gold…..


  • JW

    Hi Shaun

    Its a ‘demand’ problem. With squeeze on real income levels demand for small/medium business ‘products’ falls, deleverage rather than remortgage. As remarked before, psychology of consumers no longer supports ‘conventional’ economics, the model is broke.

    Return to feudalism as you forecast.

  • JW

    Hi Shaun

    Two very illustrative reports on ZH today re the US ‘employment’ figures. My guess is the pattern so clearly shown here is replicated in the UK and elsewhere, which goes a long way to demonstrate the underlying reasons for lack of demand along with real income falls for those in work.

  • Nemesisforpredators

    Dear Forbin,

    Your position : “but the real important decisions are not yours to make” is the very root of our problem. It is a suicidal abdication by the people, like lemmings, from their own collective wellbeing. This is due to individual selfishness resulting in several generations’ abandonment of our rich heritage, seduced by love of money.

    Another quote : “The wicked will be turned into hell, all the nations that forget God. For the needy will not always be forgotten, nor the hope of the afflicted ever perish”. Proverbs 9:17-18

  • Anonymous

    Hi Joe

    Thank you. Actually my contention is that those in charge whether wittingly or unwittingly are taking us further away from a “classic recovery” as mechanisms like a fall in house prices are blocked. I have been involved in a twitter exchange over the past 24 hours with Adam Posen who used to be on the MPC and breathtakingly he argues this.

    “With the right multiplier on fiscal, as I did in real time, and allows for euroarea, UK GDP forecast right”

    Why breathtakingly? Well there are several posts from me pointing out his mistakes which I summarised in this tweet to him.

    “Your time at the BOE MPC was littered with you making incorrect inflation forecasts Adam.”
    In a way there you have it, however much events prove them wrong some people are capable of reinventing them in their own minds and concluding that they were right….

  • Anonymous

    Hi Forbin
    Before I became Notayesmaneconomics I had a spell where I tried to mount a campaign against MPs pensions. You see they voted themselves a substantial increase a decade ago which was relatively obscure unless one understood the minutae. Sound familiar? Anyway in return for this they paid what I argued was a pittance rather than something approaching the true value.

    I didn’t know how near I was did I?

    Anyway after arguing with the Leader of the House who was then Harriet Harman on the subject I spotted a couple of years later that £30 million had gone into the MPs scheme because it was “underfunded”

    A shameful event but my point is I doubt whether that scheme will be allowed to be underfunded for any length of time!

  • Anonymous

    Hi Mickc
    Our political class ( I do not think which party is in power matters much here) has decided that they will resist house price falls. Apparently keeping house prices as high as possible makes them “affordable” or rather with all their schemes they try to claim that.
    But what we need is house price falls which whilst unpleasant for house owners will start to make the market more affordable for buyers and kickstart things. Thats one of the ways economic recoveries start and why we have not had one….

  • Anonymous

    Hi Nemesis

    I like this line “You are a den of vipers and thieves.” It is true nearly two centuries later.

  • Anonymous

    Hi Chris

    I did see the Robert Peston article and found his arguments to be simply shameful. I do recall that he has consistently operated in such a manner about James Crosby and wonder if the fact that the man Peston wrote a fawning and admiring biography of ( Brown’s Britain) praised and enobled Crosby is the cause of this. Even worse of course one of the banking arch-criminals Crosby was put on the board of the Financial Services Authority.

    So I conclude that these are traces that Robert Peston prefers not to be kicked over and therefore he prefers justice not to be done!

    Just to be clear these are factual rather than political points as my effort to keep politics out here here goes on….

  • Nemesisforpredators

    And furthermore, if it has all been a long-term “plot” by the establishment in the pay of the banks for the banks, should we not wake up and realize that it amounts to a monstrous collective betrayal of the public trust? A deliberate cold-blooded destruction of democracy?
    Otherwise known as a coup-d’état?
    What else would it take to wake us up? The total collapse of the world financial system? We are actually in the process of bringing that total collapse upon ourselves and betrayal of our children by our collective selfishness and blind indifference.
    And cowardice. After all our ancestors and parents sacrificed to give us peace and liberty – shame, shame on us all.

  • JW

    Hi Shaun
    Yes but you know what would happen with a sizeable house price correction, banks and a lot of the non-banking financial sector would have to fess up to its bad debts. Could the UK do what the US did in 2009/10? If not there would be a financial melt down. Maybe no bad thing, but civil strife could result. And the US experience does not demonstrate that the house price falls stimulate the economy, as the psychological effect on the majority is for them to react negatively to the apparent fall in household wealth. Unless real incomes , and real jobs are created simultaneously , it could be a lot more pain for no reward. I do not support our ‘zombie’ state , but the alternatives are not easy to find. The logic of our ‘western’ position of continuing decline in face of globalisation, demographics and robotics is not easy to deal with.

  • Anonymous

    Hi JW

    That US employment report had elements of deja vu did it not? As we have discussed many times there are some signs of improvement but far fewer than the mainstream media would have you believe.

    I spotted some numbers which put the US participation rate back to what was until the credit crunch regarded as normal and they calculated US unemployment at 11%! Ooops…

    For those who have not followed this debate unemployment numbers are not as clear cut as you might think and one particular feature has been the way in the US that the participation rate has fallen which flatters the numbers by up to 3.4%. As you can see 7.6% or 11% is very different…

  • Anonymous

    Hi Nemesis
    You last sentence is very reminiscent of what I said to a friend of mine who has plans for dealing with some of the corruption in Ghana!

  • Nemesisforpredators

    I never said it was limited to the UK. After the recent and ongoing exposures of bankster and politicians’ behaviour the condition is clearly worldwide. What unites them is love of money. And it equally divides us. So we have invited these monsters to divide and rule us. The new home-grown self-inflicted colonialism. A lovely poisoned inheritance for our children. We should be repenting in sackcloth and ashes. Instead we’re sticking our stupid heads deeper in the sand.

  • forbin

    JW – indeed this is the fear that drives them! The banks are indeed broke – have not been fixed and at this rate – never fixed

    I think you’re right in thinking that the TPTB don’t know what to do – what can the priests do when their god deserts them?

    change religion ? think they might be wrong ? heh! fat chance

    we’ve had the latest wheeze with Cyprus banks – that tax levy – didn’t go down too well

    the Iceland expirement seems to working well but you can’t apply that to any country in the Euro Zone

    you have to leave it first – and theres no way any one is going to get out of the Euro alive!



  • Justathought

    Hi JW,

    Doctor Albert Barlett demonstrated long ago where we are heading…

  • forbin

    mandatory for all politicos that go on about growth – indeed anyone who talks endless growth

    well they have too

    their answers don’t work otherwise – then where would we be ?


    Ps: can we really have steady state economics?

  • JW

    Hi Justathought
    Yes I saw these sometime ago. Gratifying that it was a Physicist that spelled out an ‘obvious’ truth.

    Re Forbin’s question below, I don’t think ‘steady state’ anything is possible ( again as a physicist speaking). No growth leads to decline, entropy works everywhere on everything. Entropy applied to human society would imply a quickening pace towards Shaun’s ‘Dune’ world of a small elite with maximum information and a declining mass denied information. Its possible to see modern technology including something like the internet as promoting this situation rather than as some have hoped, broadening the information base. The majority don’t want to ‘know’ what they don’t want to know.

  • Justathought

    Hi Forbin,

    History teaches us that after, the black plague which wiped out an estimated third of the European population sprung the “Renaissance”… roots from our western modern societies…

    The “crisis” we are passing through is only the symptom of the underlying cause…overpopulation within our western civilisation…

    To quote Dr. Albert Barlett:” You cannot sustain population growth and you cannot sustain growth in the rate of consumption of resources in a finite resourced world….it is not debatable!

    So optimistic…you bet I am! Maybe not in my life time but my children and grandchildren will have a brand new world model to create and enjoy!

  • Noo 2 Economics

    “you have to leave it first – and theres no way any one is going to get out of the Euro alive!” and that gives me an idea for a
    musical suggestion for the PIIGS – Five to One by the Doors:

    Five to one, baby
    One in five
    No one here gets out alive, now

    Delivered by the European Commission and the ECB!