Sub prime risks for the UK

We tend to think of the sub-prime mortgage crisis as being largely concentrated in the United States. But there is a growing body of evidence that some parts of the UK are also heavily exposed to the risks of a sub-prime crisis. The Financial Times today carries an interactive map which highlights those towns and cities thought to be most at threat from a rise in housing repossessions. According to research from FitchRatings, mortgages made to subprime borrowers – home owners with a shaky credit history – account for 10 to 11 per cent of all private homes in six UK towns - namely Newport, Wales; Cleveland, Teesside; Wolverhampton; Cardiff; Manchester; and Galashiels, Scotland.

Revision: Bonds

This two page revision note is aimed at A2 economists and provides a bried overview of the bond market and a look at what has been happening to bond yields in the UK over the last twenty years or so.

Chart of the Day: Consumer Credit

Interest rates on unsecured credit are up to five times the base rate of interest set by the Bank of England. And consumer confidence is dipping sharply as the economy heads into a slowdown. But that doesnt seem to be stopping UK consumers from piling on the debt onto their credit cards. New figures show that personal borrowing in Britain soared by its highest amount in more than five years in the year to February 2008. The level of new consumer credit surged by nearly £2.4 billion in February with unsecured borrowing growing by £1.6 billion. An act of irrational desperation? Or an inevitable and necessary move when other supplies of credit dry up? Re-mortgaging is become more expensive and less easy to arrange forcing consumers who want to live on the never-never to find fresh sources of funds. It seems crazy to me that people are prepared to do this, why not rein in spending at this time and save some more for the tougher times ahead? Perhaps most people dont expect a recession - or dont think that it will hit them directly?

PowerPoint chart
Consumer_Credit.ppt

Chart of the Day: Global Hedge Fund Investments

Love them or loathe them, hedge funds seem to have an aura and gravitas in financial markets, a mystique and attraction that perhaps go well beyond what they deserve. Perhaps this is because many funds have been spectacularly successful attracting enormous interest in the financial media. However, they still remain largely out of reach of the smaller investor as hedge funds are unregulated and not for the feint-hearted.

Despite the failure of several high profile hedge funds in recent months and forecasts that the boom for hedge fund activity is drawing to a close, the scale and scope of hedge funds is staggering, over $1.3 trillion has been invested in thousands of funds across the world; to put this into context there is a global investment ‘universe’ estimated to be worth $50 trillion, including currencies, bonds and equities. So more than one in every fifty dollars is now invested through a hedge fund. So-called ‘sophisticated investors’ entrust their capital to these funds, the money is pooled together and invested by the fund’s chief investment officers.

Mind Map: Credit Crunch

Our A2 macro group mind-mapped the Credit Crunch in a lesson on Friday, a text summary appears below and the original map is also available as a pdf file.

Economics: Sunday Paper Selection

David Smith looks at the performance of the UK economy over the last fifteen years referencing a work published alongside the Budget Report last week: Resilience in the UK and other OECD economies

Jeff Randall writing in the Telegraph argues that “the unwinding of the Great Debt Delusion still has a long way to go and many more victims to claim.”

Will Hutton on a a deluded Wall Street threatens the world economy

The Mail on Sunday has a stunning aerial photo of Heathrow Terminal 5 - superb for using when teaching economies of scale and the law of increased dimensions!

Bear Stearns - The Tip of an Iceberg?

A couple of days ago one of my colleagues on the teaching staff came up to me and said that he was surprised to find so few people as worried as he was about the financial crises known as the credit crunch. He was spot on. Barely a day goes by without the Financial Times or the Wall Street Journal headlining news of the latest hedge fund collapse, bad debt write-off, profit warning from the real economy or rumours of a deeper and much broader contagion of disease ridden debt floating around the financial system. I was hinting to my economics class last week that things are likely to get worse - perhaps much worse - than the markets are predicting. Financial bubbles do not, as a general rule, deflate gently. Bubbles burst, and sometimes with frightening rapidity and force once euphoria has given way to doubt and panic. The massive injections of liquidity by the main central banks and the deep cuts in nominal interest rates are testimony to the seriousness of the credit crunch. They may not be enough.

Signs of a negative “wealth effect” for the USA?

One of the big recession risks facing the US economy is that a sharp decline in the net wealth of millions of US households will cut deep into consumer confidence and a willingness and ability to spend on big ticket items. The so called ”wealth effect” can be very powerful either when asset prices are surging ahead as they have for most of the last ten years. Or when the wealth effect goes into reverse and people find that the value of the property, shares and other financial assets are in freefall. The negative wealth effect was a noticeable feature of the last economic recession in the UK in the main due to the steep fall in nominal and real house prices.

Today the Federal Reserve Bank published their regular ‘flow of funds’ figures - and inside them was the news that US families are getting poorer for the first time in more than five years. Asset prices are falling and levels of debt are rising - the result a cut in household net worth and a rise in the stress barometer.