The 2022-23 Economic Crisis Megathread

[Iormlund]

So this isn't what I meant but a really interesting piece from Helen Thompson - whose book Disorder is really good on where we are in the 21st century. On the conflict facing central bankers and other policy makers between financial stability and inflation:

When finance and oil collide
Central banks are being pulled in opposing directions by energy inflation and market instability.
By Helen Thompson
...

So the moral of the story is we should have invaded Saudi Arabia, not Iraq. We'd be swimming in that sweet, sweet crude now.
 

[Tamas]

Just read this and that is a very weird editorial.

Especially in the context of the Guardian which has for a decade written about low rates helping the financial sector (and it's part of the left's "Financialisation" theory of everything, but now flip around and say raising rates also helps the financial sector? But also it seems like their origin theory of it is the inflation target and not having a dual mandate like the Fed - but I'm not sure dual mandate Fed v BofE have had particularly divergent policies in the last decade or now.

FWIW I think there were more problems with the decade of QE - but the bit that seems missing in the Guardian piece is that I think the BofE (and all other central banks) were setting policy because fiscal policy was not being used the way it should have.

Exactly that editorial only makes sense if you imagine somebody frustrated by the rates on their property portfolio pushing them out of profitability.

[Josquius]

Was QE right in the pandemic?
From what I've heard that was a key error - countries learned from 2008 the best thing to do when markets collapsed was to spend big and early.... But covid was a different kind of collapse where it wasn't just the market breaking but actually less physical stuff being produced and shipped which led to massive inflation.

[Tamas]

Was QE right in the pandemic?
From what I've heard that was a key error - countries learned from 2008 the best thing to do when markets collapsed was to spend big and early.... But covid was a different kind of collapse where it wasn't just the market breaking but actually less physical stuff being produced and shipped which led to massive inflation.

Yeah I understand why they though they needed it, but it should had been scaled back when it was becoming clear the economy was going to be ok.

Still, the bigger problem was the QE of the preceding 10 years. They had to overdose a crack addict (the economy / financial markets) to make sure it doesn't crash down. End result is that it is now crashing from a bigger high.

Also I do wonder if this German politician guy recently (forgot which one, but I think it was German) was indeed right: for more than a decade we could export our inflation to Russia (by their cheap energy) and China (by their cheap workforce). Remove those and the developed world gets very real very fast.

[HisMajestyBOB]

Are all mortgages in UK adjustable rate mortgages?

[Tamas]

Are all mortgages in UK adjustable rate mortgages?

Something like almost 70% of them are 2 year fixed mortgages (total term 20-25 years is average I think), rest are mostly 5 years, if you do 10 years fixed you are already considered a weirdo who refuses to pay mortgage brokers every couple of years.

[HisMajestyBOB]

Huh, interesting. I'm guessing that's the only mortgage product British banks offer?
Here the most common are 15, 20, and 30 year fixed, with the rate fixed for the whole life of the mortgage. There are adjustable rate mortgages (fixed rate for a period, then changes every year based on an index), but they're not common, especially given the historically low interest rates. And even then, the shortest fixed period on those is three years, with five being more common.

[Iormlund]

Here most people "own" their flats and about 80% have adjustable rate mortgages. Fixed rate is a fairly recent phenomenon.
Also housing is the main expense of a family, prices being much higher relative to earnings than in Northern Europe.

[Tamas]

Huh, interesting. I'm guessing that's the only mortgage product British banks offer?
Here the most common are 15, 20, and 30 year fixed, with the rate fixed for the whole life of the mortgage. There are adjustable rate mortgages (fixed rate for a period, then changes every year based on an index), but they're not common, especially given the historically low interest rates. And even then, the shortest fixed period on those is three years, with five being more common.

Yeah it is weird, in Hungary as well full fixed term is the norm.

[Richard Hakluyt]

Last mortgage I had was a bank of England base rate plus 0.5% and that was for the full term. A year or so after I took it out base rates fell to 0.25% 

Ing bank, who gave me the mortgage, have since exited the UK domestic financial scene.

[Legbiter]

The French and German economies grew against expectations at 0.2% and 0.3% respectively in the third quarter. Economists now expect a contraction in the fourth quarter.

I'd assume the next 2 years will be awful in the Eurozone and Britain wrt inflation and economic growth and with lingering effects for a few years after that before growth returns.

[Sheilbh]

Huh, interesting. I'm guessing that's the only mortgage product British banks offer?
Here the most common are 15, 20, and 30 year fixed, with the rate fixed for the whole life of the mortgage. There are adjustable rate mortgages (fixed rate for a period, then changes every year based on an index), but they're not common, especially given the historically low interest rates. And even then, the shortest fixed period on those is three years, with five being more common.

Although you normally re-fix at the end of the initial period. So typically people re-fix their rate every 2-5 years for the life of the mortgage or remortgage.

My understanding is that the US is relatively unique in having fixed rate mortgages for the whole life and relatively easy re-mortgaging/financing (I'd guess becaue of US state involvement in the mortgage market). I think in the rest of the world there's basically a trade off - you have fixed rates mortgages but are locked in/can't re-mortgage for longer (or only in certain conditions); or you have periodic fixed rates and can remortgage earlier/more easily.

It does mean rising rates will have very different impacts in different countries though:

[Tamas]

Although you normally re-fix at the end of the initial period. So typically people re-fix their rate every 2-5 years for the life of the mortgage or remortgage

Sure but that's still a bad idea for a regular household if there's a reasonable chance for the interest rates to rise. I know its a splendid system for mortgage brokers who assure return business, and for banks, but I think the average customer is being taken for a ride.

Having said that, if we buy something a year from now, I'll probably be leaning toward a short fixed term mortgage as likely we will be close to / past the end of the hiking cycle, and nearing the point where rates will need to come back down to due to the economy falling apart.

[Sheilbh]

Sure but that's still a bad idea for a regular household if there's a reasonable chance for the interest rates to rise. I know its a splendid system for mortgage brokers who assure return business, and for banks, but I think the average customer is being taken for a ride.

I'm not sure it's that simple - on average mortgage rates in the UK are about half what they are in the US. Over the term of a mortgage it's not clear that would cost more than the £500 you pay to a mortgage broker ever 2-5 yeares.

Which makes sense - more certainty and a higher price, or more risk and a lower price. It's probably been better for the last decade for UK owners getting the benefit of a very low rate environment rather than having to fully re-mortgage, but is likely to be better for American owners in the next few years.

Although as I say I think the thing that's weird about America is the ease of re-mortgaging plus fixed rates.

Having said that, if we buy something a year from now, I'll probably be leaning toward a short fixed term mortgage as likely we will be close to / past the end of the hiking cycle, and nearing the point where rates will need to come back down to due to the economy falling apart.

Well same - hopefully.

I'm incredibly lucky though. I managed to get all the documents signed - so the mortgage is locked in - on the day before the mini-budget I know some people who were at a similar stage but not quite ready to sign who had their mortgage offer pulled and recalculated with a higher rate.

[Tamas]

Which makes sense - more certainty and a higher price, or more risk and a lower price. It's probably been better for the last decade for UK owners getting the benefit of a very low rate environment rather than having to fully re-mortgage, but is likely to be better for American owners in the next few years.

Sure but now there'll be all kinds of hand-wringing and I wouldn't be surprised to see some kind of a help for people to get out of their risky play once they stop benefiting from it. People shouldn't gamble with their basic living conditions, and shouldn't be bailed out when it goes bad for them.