How tragic that “it’s required financial calamity to bring about an outbreak of common sense”, said Robert Peston on BBC.co.uk. The Financial Services Authority (FSA) this week published a “chunky” set of proposals for beefing up financial regulation and thus preventing a repeat of the global banking crisis.
Much of it represents a return to low-risk banking. The FSA suggests banks greatly increase their capital and liquidity levels and go back to tucking away capital for a rainy day in the good times, for instance. It also said that bankers’ pay needs revamping. The report also proposes a new European independent authority with regulatory powers.
Unemployment past two million
Still, there’s plenty of time to finalise the details of banking regulation in order to prevent the next boom getting out of control. For the foreseeable future we’ll be dealing with the slump resulting from the end of the last one. This week’s unemployment figures were “horrendous”, said George Buckley of UBS. The claimant count posted the biggest monthly jump since records began in 1971 and the overall jobless tally hurtled through two million. It’ll get worse soon as the labour market lags changes in GDP by six months or so, said Buckley. It was only late last year that GDP began to fall off a cliff.
Repossessions jumped 68% last year and mortgage approvals were at a record low in January. Numis Securities has warned that house prices could fall by up to another 55% if the market overshoots on the downside, as in the early 1990s.
A long way to go
That would be grim news for consumer spending, which accounts for around two-thirds of the economy. According to Citigroup’s Michael Saunders, British household wealth suffered its biggest drop for 40 years last year as house and equity prices shrank. So not only are people feeling poorer, but they can’t withdraw equity from their houses, which implies “further marked weakness” in consumption, said Saunders.
How marked? Consider that households saved just 2% of their incomes last year, while UK household debt as a percentage of disposable income exceeded 175%, compared to around 130% in America. So retrenchment will take time. Now factor in the overall stock of private-sector debt and how long it took previous credit bubbles to unwind, said Edward Chancellor in the FT, and Britain may be paying down debt until the middle of the next decade. That implies “below average and fitful growth” once recession ends.