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The market seizure caused by the near-collapse of Bear Stearns, America's fifth-largest investment bank, forced Bank of England governor Mervyn King to announce the special liquidity scheme on April 21.

It was intended to encourage banks and building societies to lend to each other, which they had been reluctant to do as a result of the run on Northern Rock a year ago. The problem was that big financial groups had lost their ability to raise funds by packaging up mortgages into bonds.

These became toxic in the US sub-prime mortgage crisis that started last summer and forced Northern Rock to its knees.

Through the SLS, banks and building societies were able to swap mortgage-backed bonds and other unwanted assets for attractive government paper (nine-month Treasury bills). The idea was to inject more liquidity into financial markets and encourage banks to do business with each other.

Read the full article at Guardian property news

Labels: Bank of England, bear sterns, Mervyn King, northern rock, US sub prime mortgage crisis

The Bank of England governor, Mervyn King, yesterday warned the government not to try to artificially support the mortgage market as that could further prolong the year-long credit crunch. He also held out little immediate prospect of interest rate cuts to boost the flagging economy.

Appearing before parliament's cross-party Treasury committee, King said the Bank did not have the resources to underpin lending across the entire financial system and thereby boost mortgage lending.

The Treasury has commissioned Sir James Crosby to report on steps that could be taken to encourage more mortgage lending which could help prevent house prices from tumbling further.

King said there were only two choices for the government - either to let the Bank's special liquidity scheme (SLS) help the financial system gradually return to health, or to fund the mortgage market through a state-run bank.

Article continues at Guardian Online.

Labels: Bank of England, Mervyn King, Mortgage rates, property prices, uk housing

Plenty has happened since the Bank of England last cut interest rates in April. Inflation has risen to 3.8% - almost double the government's 2% target - requiring the Bank's governor, Mervyn King, to write an explanatory letter to chancellor Alistair Darling. At the same time, the economy has weakened rapidly – today's news from the Halifax of an 11% drop in house prices over the past year is merely the latest evidence of a deflating property bubble.

Official figures suggest Britain continued to expand - if weakly - in the second quarter of the year, but all the signs are that the second half of the year will see the economy slide into its first recession in more than a decade and a half.

Against that backdrop, it was hardly surprising that the Bank's monetary policy committee left interest rates on hold today.

Article continues at Guardian news

Labels: Alistair Darling, Bank of England, chancellor, Halifax, Mervyn King, UK Interest rates, UK recession

RECENT DAYS have witnessed some extraordinary developments, most of them from the Bank of England. Time was when months would go by without a peep from the Old Lady. Now it has become a news-generating machine that Max Clifford would be proud of.

Development one was Mervyn King’s attack on the City’s reward culture, which many will applaud, though some would say a bit of performance-related incentive is a good thing. The governor’s salary of just under £282,000 — small in relation to many City salaries though with a pension pot of nearly £4m — rises 2% a year, come what may. That gives him an incentive to keep inflation on target but doesn’t reward or punish him beyond that.

Development two was a speech by David “Danny” Blanchflower, one of King’s colleagues on the Bank’s monetary policy committee (MPC). This was, it is safe to say, the most doom-laden speech ever from a UK policymaker, warning that Britain was likely to follow America into recession (whether the US is in recession is still open for debate after first-quarter numbers showed growth), that a fall in house prices of a third in two to three years “does not seem implausible” and the risk of something “horrible” arising from the credit crunch was significant.

Compared with the coded language normally adopted by anybody with anything to do with the Bank, this was a revelation. Blanchflower spends half his time in America and that may explain his gloom, but even there central bankers are a bit more guarded in their language. I am surprised this one got past the censors.

“Developments in the UK are starting to look eerily similar to those in the US six months or so ago,” he said. “There has been no decoupling of the two economies: contagion is in the air. The US sneezed and the UK is rapidly catching its cold.” I’ll return to that.

Development three, hard on the heels of this blood-curdling warning, was the apparent declaration from the Bank that the credit crisis was over and that banks should come out of their shells and start lending again.

This was not quite what its financial stability report was saying: that some gloom in financial markets may have been overdone, in that the scale of losses assumed in US sub-prime assets, a 40% default, looks too pessimistic. Financial markets are assuming many such assets are worth nothing, while on conservative assumptions, and allowing for further falls in American house prices, they are worth something.

Article continues at TimesOnline

Labels: Bank of England, House market, Mervyn King, property boom