Wonga looks like it has itself run out of wonga, and is about to go bust. It will probably not be the last of the usurious lenders to go bust, as they face a double whammy, as with the financial crisis of 2008, whereby they face increased borrowing costs of their own, and at the same time rising defaults, or what amounts to a similar thing, a rising level of compensation claims levied against them by ambulance chasing solicitors, and specialist claims companies, acting on behalf of borrowers. The demise of Wonga is just part of a set of conditions that have considerable similarities to the collapse of Northern Rock, the onset of the credit crunch, and the outbreak of the financial meltdown of 2008. For example, in both the US and UK, there has been a sharp slow down in the sales of houses, partly as a reflection of the fact that house prices are grotesquely inflated, and partly as a consequence that interest conditions for mortgages are starting to tighten.
In the UK, house prices in the most expensive parts of London are already down by around 25-30%, and demand for houses across the country has stagnated. Many estate agents in London have seen their share prices tank, as the housing market stagnates and contracts. And, now Countrywide, one of the largest chains of estate agents in Britain, has been forced to raise cash.
The irony with Wonga is that the ambulance chasing solicitors and specialist claims companies that are now going after it, as their feeding frenzy for PPI claims draws to an end, is part of that same money for nothing, gambling culture that fed the speculative gains in financial assets and property over the last thirty years, which astronomically inflated house prices, along with stock and bond prices, and which encouraged reckless lending and borrowing practices, based on the mirage of rising asset prices as collateral, and simultaneously fuelling that very illusory rise in those asset prices.
Wonga, like Northern Rock, and like many of the financial institutions that went bust in 2008, does not obtain funds from savers. A small amount of its capital comes from its own shareholders, and bondholders, but the majority comes from borrowing in the money market. As in 2007/8, as interest rates rise, the cost of that borrowing rises. That together with the fact that it is now facing these rising compensation claims has thrown it into a loss. The question will be how many other financial institutions that it has itself borrowed from, might be taken down with it? Indeed, as other usurious lenders go the same way, what effect will that have on other financial institutions?
The problems faced by Countrywide illustrate the stagnation in the housing market. According to Rightmove, asking prices for houses fell by 2.3% in August. US existing home sales have fallen for – four months in a row. US new home sales are also faltering, again hit by astronomical prices, and steadily rising interest rates.
In the US house prices fell by up to 60% in 2008, before the Federal Reserve slashed its official interest rates, and Obama's government introduced the Troubled Assets Rescue Programme (TARP) which enabled it to bail out the banks, and mortgages, as homeowners began to simply walk away from properties whose price had fallen to a fraction of what they owed on it. US house prices, however, fell more, than in Britain, where they dropped by around 20% in 2008, before the slashing of interest rates, and introduction of various government scams such as Help To Buy, and tax subsidies for Buy To Let landlords pushed them back up again. US house prices probably need to fall by around 40% to get back to long-term sustainable levels, whereas UK house prices need to fall by around 75-80% to get to that level. In Europe, house prices in Spain, Portugal, Ireland and Greece, as in the US, fell by around 60%. Most of them have not recovered their previous levels, but they too probably need still to fall by around 30% to get to a long term sustainable level.
The astronomical prices of property are just another manifestation of the hyperinflation of all assets, that has resulted from speculation, initially driven by low and falling interest rates in the late 1980's, and 90's, further encouraged by the scrapping of credit controls and financial regulations by Thatcher and Reagan, and then further hyperinflated, each time they threatened to crash by global central banks, keen to protect the fictitious wealth of the top 0.01%. On the basis of Robert Schiller's CASE index of cyclically adjusted price earnings, the US Dow Jones Index is as overpriced today as it was in 2007, 2000, and 1929. But, the Dow is not unusual. That level of overpricing is common to all global stock markets, and if anything bond markets are even more overvalued than stock markets, having been given protection from price falls by QE.
The only thing that differs today from 2007/8 is that the level of private debt is much, greater, asset prices have been inflated to an even greater degree, official interest rates have already been reduced to near zero – in 2007 they were around 5.25% for the Fed Funds Rate, and the US Federal Reserve has inflated its balance sheet by about $4 trillion as a result of QE. In other words, the scope for remedial action has been severely reduced, whilst the scale of the bubbles, and of the debt likely to default has risen substantially. The Dow Jones peaked in October 2007, at just over 14,000. Today, the Dow stands at over 26,000, nearly double its level at the height of the previous bubble.
In Britain, the tax subsidies given to buy to let landlords are being removed, so that many of them are now making losses, and those losses will increase as mortgage rates continue to rise, whilst the existing tax subsidies are removed. The number of buy to let mortgages is falling as more landlords begin to sell properties than are taking out mortgages for new additional lets. The only thing keeping them holding on to rental properties, as losses rise, is the prospect of capital gains, from rising property prices, but as house prices start to sink, that incentive becomes a disincentive. When they come to sell, these landlords will all rush for the door at the same time, and with housing demand already stagnant, the result will be a sharp crash in house prices.
Its only massive levels of QE, and intensive state intervention to prop up asset prices, even at the expense of doing massive damage to the real economy, that has prevented that from happening already.
Harold Wilson opposed the introduction of Premium Bonds, because he saw it as encouraging gambling rather than real wealth creation. In the 1980's, Thatcher took the exact opposite view. With the Right To Buy programme, offering massive discounts up to 60%, she encouraged the view that it was possible to get rich on the back of gambling and speculation on asset prices. That view was reinforced with the privatisation programme that sold off nationalised assets at prices that guaranteed that speculators who bought the shares would make a sizeable capital gain, often within a matter of weeks, or even days. The gambling culture was further encouraged when credit controls were scrapped, and financial regulations abolished in the late 1980's, by Thatcher in the UK and Reagan in the US. It set in place, the massive asset price bubbles of the 1980's and 90's, and each time they burst, such as in 1987, 1994, 2000, and 2008, the state and central bank was there to blow them up again conveying the message that it was safe to gamble on asset prices rising, because whenever they fell the state would be there to reflate them.
This gambling mentality and culture was also encouraged by John Major who introduced the National Lottery, and by Tony Blair who not only extended it, but who also promoted the idea of super casinos, and extension of gambling, now supplemented by a huge online gambling industry, often going side by side with the provision of loans to susceptible individuals to engage in such gambling, by the usurious lenders like Wonga. In the 1970's and 80's, we started to see legal action against the big tobacco companies by people who had suffered ill health from smoking. Today, gambling is likewise recognised as an addiction, just as smoking was in the past. The various specialist claims companies, facing the drying up of PPI claims have an obvious new target, not just in the payday lenders, but also in all those betting companies, slots providers, bingo companies etc. that have led at least tens of thousands into a serious gambling addiction, resulting in serious damage to their finances, their health and other aspects of their lives.
It is reminiscent of the last days of a decadent Roman Empire, in which various forms of debauchery all contend to bring about its demise.
No comments:
Post a Comment