Bankers are jumping for joy, but they don't live in the real world
Whatever is going on in the stockmarket bears little resemblance to ordinary people's experience, says Jeff Randall.
Had the proverbial Martian landed among us this week, somewhere near London's financial district, his antennae would have been twitching with positive vibrations. Britain's banks have been reporting their half-year results and – glory be! – they were presented as a clear sign that good times are just around the corner. [But . . . as he says later . . .only if you didn’t read them properly! -cs] Yes, the upturn is on its way.
But as Mr Martian begins to look beyond the weird world of bank bosses and their public-relations sophistry, he quickly becomes befuddled. He doesn't understand Planet Earth and neither, it seems, do many of the Square Mile's cheerleaders. In the real economy, where millions of consumers are being stretched on the rack of over-indebtedness and rising unemployment, the credit crunch's impact is not only still hurting – it's getting worse.
For, unlike the banks, most people who have made poor decisions about borrowing and spending cannot "write down" their losses and move on to the next whirligig of self-indulgence. They are stuck with obligations – credit cards, personal loans and mortgages – unless they decide to go bust and abandon their homes. Even then, not all of the pain goes away; it simply shifts to a new phase of discomfort, as any bankrupt will tell you.
So, while investment bankers were enjoying a knees-up at the doubling of Barclays Capital's profits to more than £1 billion, the party hats were kept tucked away in the bit of the bank that deals with ordinary folk. Profits at Barclays' retail division fell by 61 per cent, while the cost of defaults at Barclaycard shot up by 92 per cent to £915 million. For a bank that prides itself on responsible (and profitable) lending, this was a shocker. It indicates high levels of customer distress.
Over at Northern Wreck, there was no hiding behind fancy numbers from derivatives dealers. This broken bank owes the taxpayer more than £10 billion, and on current form we should not expect swift repayment. Underneath £724 million of losses was compelling evidence that Gordon Brown and Alistair Darling were sucking up their own exhaust when they told us that the state's bail-out of the Rock was secured on a "good quality" mortgage book. [Eh? ‘good quality’? -cs] In fact, the bank is sitting on one of the most vulnerable mortgage portfolios of any mainstream lender.
With many Rock customers having taken out 125 per cent loans at the top of the market, 39 per cent of them are in negative equity, ie their debts are greater than the value of their properties. At Lloyds Banking Group, the picture is not quite so dark: "only" 20 per cent of its residential mortgage customers are underwater.
As long as these borrowers are able to service their interest payments, they can live with the psychological damage of having paid a silly price at the worst possible time. But, as the cancer of joblessness creeps across Britain's body economic, many will fail to keep up.
About four cent of the Rock's mortgage loans are more than three months in arrears. Other banks harbour similar problems. The Council of Mortgage Lenders forecasts that 360,000 households will be significantly behind with their repayments by the end of the year.
Not all will topple into the abyss. Since the last property crash, in the early 1990s, banks have developed more sympathetic methods for dealing with delinquent borrowers. Debts can be restructured over longer time periods and, in some cases, repayment "holidays" are allowed.
Even so, for many this only defers the horrors of repossession and eviction. This year, between 50,000 and 75,000 homeowners are expected to be chucked out. For them, "recovery" – the term used by bailiffs in search of assets pledged against unpaid loans – has a much bleaker meaning.
It is said that if you torture the statistics long enough, they will confess to anything. In the case of the stockmarket, the thumbscrews are on the main indices to tell us that next year will bring economic revival. The theory is that share prices move 12-18 months ahead of the events they are anticipating. Thus the 1,200-point rise (33 per cent) in the FTSE-100 over the past six months is a sure sign that happy days will soon be here again.
That may be true for clever hedge-fund managers, but for those of us who would not know a contract for difference from a hole in the wall, history teaches a more sober lesson. In the Thatcher recession of the 1980s, when unemployment rose from 5.3 per cent of the working population in 1979 to 11.9 per cent (3.3 million people) in 1984, the London stockmarket did not merely rise in every one of those years, it jumped for joy: 4.3 per cent up in 1979, 27.1 per cent in 1980, 7.2 per cent in 1981, 22.1 per cent in 1982, 23.1 per cent in 1983 and 26.0 per cent in 1984.
This, I'm afraid, is the pachyderm in the parlour. Over those six years, while unemployment was more than doubling, the stockmarket followed suit – and with good reason. The massive shakeout of labour enabled management to restructure businesses and slash costs. Profitability was restored at many companies that had been dismissed by investors as industrial dodos. I suspect we may be about to experience something similar.
Asked about his bank's forecast for unemployment, Eric Daniels, the chief executive of Lloyds TSB, said that it would peak in mid-2010 at a level in line with Britain's previous recession (1990-92). If he is right, it means that 10.7 per cent of the workforce will be idle, about 3.4 million people. [That’;s about 1 million more than now -cs]
This perhaps explains why the Bank of England shocked the City yesterday with its decision to carry on printing money. It appears not to share this week's outburst of airy optimism. In technical terms, the worst of the recession may be over (though I would not bet on it). But measured by the only yardsticks that count with the vast majority of voters – job security and weekly wages – renewed prosperity will be a cruel mirage.
With dole queues lengthening, the recent uptick in the housing market is unlikely to harden into a surge. As Professor David Blanchflower pointed out in The Sunday Telegraph last week, between 1989 and 1995, a six-year period of declining house prices, there were 23 months of increases and 48 months of decreases, while three were flat.
With real wages under pressure, and the burden of historical debts only ameliorated by low interest rates, but not removed, too many British consumers remain hopelessly over-leveraged. Spraying them with yet more cheap money merely delays their day of reckoning. Even a Martian knows that.
Record 33,073 declared insolvent
A record number of people in England and Wales have been declared insolvent during the second quarter of the year.
A total of 33,073 people went insolvent during the three months to the end of June, the highest level since records began in 1960, the Insolvency Service said.
The figure represented a 9% jump on the previous quarter and was 27% higher than a year earlier, as the combination of the economic downturn and the credit crunch continued to take its toll on people's finances.