Real incomes in Britain have fallen for the first time in 30 years. Expect a cascade of demands from columnists and bloggers around the country that the government do something. But what? The only way for this sorry state of affairs to change is for nominal wages to rise a lot or for inflation to fall a lot. But it is hard to see how the state can make either happen in the short term. George Osborne has to carry on with his Plan A of deficit cutting – he may even have to step things up, so it is hard to see wages jumping anytime soon.
And inflation? We’re stuck with it. I suspect those arguing for a fast rise in rates as some kind of symbol of intent don’t get just how fragile our housing market, and by extension our banking system, still is. Earlier this week I wrote about the state of the US banks. They’ve recently been allowed to start paying dividends again. But as MoneyWeek regular James Ferguson points out, they probably shouldn’t have been – they’re still hovering on the edge of solvency. How does he know? Because he can see them “evergreening”.
After the average credit crisis, banks need to get their capital adequacy ratios back in order. But they can’t get rid of their low-quality loans (they need to keep rolling them over, so no defaults turn up) so they end up cutting their good loans instead. This looks counter-intuitive (bank in trouble re-allocates its business away from good quality assets towards lower-quality assets), but it makes sense for the banks: it buys them time to run down the bad loans and hopefully to earn their way out of trouble over a cycle. That’s exactly what’s happening in America. The lowest risk category of loans (commercial loans) has shrunk by 20%. The highest risk (residential mortgages) has shrunk the least. James considers this evidence of “ongoing solvency issues”. Which it probably is.
But here’s the bad news. I’ve cajoled James to hand over his work on the subject for Britain. Guess what? We are evergreening too. There is one category of lending a bank can’t really control: consumer loans. By the time you know the loan is in trouble, it’s too late. These are down about 16% from the peak. Corporate loans have also fallen a lot, again by 16%-17%. That seems odd, given corporations are the only strong balance-sheet borrowers out there, and that the loss rate is just 2.4%. So the good ones and those that can’t be controlled are down a lot.
And the kind of loans you’d think banks would really like to ditch? Down much less. Commercial mortgages are down 6%; residential ones are up. What does it mean? Back to James: it is “evidence of ongoing solvency issues”. Our financial crisis is no more over than America’s is.