CLUTCHING AT STRAWS
But such effects are largely a consequence of the current combination of record low interest rates and temporarily lower VAT. They disguise the fact that next year is likely to bring two even bigger threats. The first is that of sovereign default. Almost every major economy has borrowed so much that they may struggle next year to find anyone willing to take on their debt for a reasonable price. This underlines why the Conservatives, should they win the election, will have little choice but to call an emergency Budget to impose austerity measures on the state and safeguard Britain's solvency.
The second concerns the apocalyptic tale of a second financial crisis. While there is much to support the view that the banking system is safer than it was 12 months ago � the Government having pumped hundreds of billions into its foundations to ensure its survival � these emergency buttresses were designed to protect us against the collapse of the American housing bubble. But here in the UK we have our own housing slump to worry about.
The combination of rising interest rates (likely) and unemployment (certain) will push up the number of home owners who default on their mortgages. Indeed, according to research group Fathom Consulting, the number in arrears is likely to outdo the peak of the last housing crash. Some of the Bank of England's own figures indicate that these losses could stretch to as much as �400 billion � four times what the banks have so far raised in emergency capital from the Government.
This is no new worry � it is something the International Monetary Fund warned about in its recent report into the UK � but amid the rising tide of good news, it appears to have been swept under the carpet.
Tucked away in the results from various banks this week, there was a hint of the pain to come. While the investment banking arms of Barclays and HSBC raked in record profits, their domestic arms � and those of Northern Rock and Lloyds (and newly bought HBOS) did rather appallingly. The fact is that they are being haunted by their imprudent lending to UK households and businesses.
Notwithstanding the economic shafts of light in recent weeks, people are still suffering. Every week, tens of thousands more people lose their jobs. As their savings run dry, they struggle to hang onto their homes. Banks, themselves still trying to repair their balance sheets, are less willing to lend, even to those with the ability to pay them back.
Given that this is happening now, with interest rates at half a percentage point, one can hardly bear to imagine how tough it will be when, at some point in the next couple of years, borrowing costs have to rise again. There are two possible outcomes: either the companies will have to be bailed out by their shareholders or the Government, or they will have to make up the difference by charging customers yet more. The credit crunch has many months � or, more likely, years � to run yet.
2. Cable may need to change his tune as Armageddon fades
Lib Dem MP seems to want full vindication of his apocalyptic vision, however unpleasant this ground zero world would be for the rest of us.
By Jeremy Warner
Vince Cable, the Liberal Democrat Treasury spokesman, has had a good war. He saw the credit crunch coming and was one of the first to warn of its catastrophic implications. Yet you sometimes get the impression that he and others of like mind won�t be finally satisfied until the whole City edifice is reduced to rubble and the world conforms fully to their prophecies of economic Armageddon brought about by the recklessness of bankers. Mr Cable was at it again yesterday on the back of the latest humungous write-offs from Lloyds Banking Group. Was it the foolishness of bankers or the supposed folly of the Government�s asset protection scheme that was most the object of his ire? It wasn�t entirely clear.
In any case, he seems to want full vindication of his apocalyptic vision, however unpleasant this ground zero world would be for the rest of us. Mr Cable is an opposition MP whose job it is to criticise the Government for its manifest policy failings. It is also most unlikely that he will ever be Chancellor, so he�s got freedom to say what he likes, however off the wall, without fear of ever having to implement it.
All the same, it is fair to say that things aren�t exactly going his way right now. He�s still living in the world as it was six months ago, when it did indeed look as if the crisis might end very badly indeed, rather than as it is today.
The big banks have not had to be fully nationalised, as Mr Cable suggested they would, and it is ever more apparent that this would in any case be a most unwise course of action, both for taxpayers and the economy.
Yesterday�s statement from Lloyds Banking Group, shocking though the new write-offs are, is further evidence not that the banking crisis is getting worse, but actually that things are on the mend and that the eventual cost to the taxpayer of bailing out the banks is likely to be quite small, if anything at all.
I�m not trying to belittle the wider economic consequences of the banking crisis, which are plainly profound, but the financial crisis itself is now largely over, and I�m sorry if it has proved not quite as cataclysmic as the doomsters had hoped, but there you are. Belated policy action might actually have succeeded in preventing the complete collapse of the banking system at little or no long-term cost to the Exchequer.
Eric Daniels, the Lloyds Banking Group chief executive, insists that his second half bad debts are likely to be �significantly� reduced with further reductions expected next year. The bulk of the commercial property and business write-downs have now been done, and while it is true that retail delinquencies will continue to rise strongly well into next year, they ought to be more than compensated for by improvements in bad debt performance elsewhere.
The reason this is good news for the taxpayer is that it now seems at least possible that the Treasury will escape having to cough up for losses under the asset protection scheme . Lloyds is obliged to meet the first �25bn of any losses insured under the scheme. So far, �only� �10bn has been clocked up. If bad debts are now on a reducing trend, it�s possible this first loss won�t be exceeded. After the very considerable charges being paid in share capital to the Government for use of the scheme, it seems even less likely the taxpayer will be left out of pocket.
In any case, the improvement is such that some in the City now openly question whether it is really in the best interests of Lloyds shareholders for the bank to be signing up to the asset protection scheme. Its costs seem ever more likely to outweigh its benefits. Much better, some say, for Lloyds to deal with the ongoing threat to solvency by using the bounce in its share price to raise fresh equity in the City.
Some will dismiss these musings as naively sanguine. Nobody knows how durable the present recovery in market and business confidence might be. Despite growing signs of a turnaround, the risks of a double-dip recession are high. Even so, Mr Cable may need to adjust his script.
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