Recession turns logic upside down
Spot the flaw in Bradford & Bingley’s new pricing policy. No, not the repriced rights issue but the bank’s new rates for lending.
It is raising its mortgage rates on buy-to-let loans - where B&B was market leader - by more than 50 basis points, even though there is still hope the Bank of England will bring market rates down. The increase is because of arrears on the company’s loans.
The increase thus reflects the higher risk involved with such loans and should ensure the interest revenue from those still servicing their loans covers the bank’s cost of borrowing, effectively subsidising those borrowers in default.
But if arrears are caused by an inability to pay - with buy-to-let, a rental income that fails to cover the interest costs - lifting the mortgage rate will mean more borrowers are unable to pay.
Will the bank then lift its rates again to cover for these extra non-payers? And if that results in yet more defaults, will it raise them further? The more B&B tries to solve its arrears problem, the worse it makes them.
Recessions - or the threat of them - bring out such anomalies. On a macro scale the Bank of England is battling to keep down inflation but its main tool for doing that is to keep interest rates high - even increasing them. It does that despite the fact that high rates increase the price of consumers’ main item of expenditure - their mortgage.
So the Bank’s method of cutting the inflation rate is to increase it.
Perhaps this makes it easier for government to tell workers the best way to counter inflation is to accept pay rises that fail to keep pace with prices. Is economic theory the first casualty of a slowdown?
