KEY POINTS:
Mervyn King, Governor of the Bank of England, yesterday gave a stark warning that the financial excesses of recent years will lead to misery for homeowners.
In his gloomiest assessment to date of the prospects for British homeowners, King said the recent financial "party" of cheap credit and
excessive risk-taking has left a situation where "when the party ends, some innocent bystanders may lose their homes altogether."
King's gloomy comments are unlikely to be welcomed by ministers. The credit crisis, King suggested, "is not yet over".
He said: "We are passing through the most prolonged period of financial turmoil that most of us can remember. Whether, as the IMF has argued, it is the worst period of financial stress since the 1930s is too early to judge."
The Governor said "a wide range of financial institutions, including investment banks, monoline insurers, even hedge funds, have the potential to cause significant damage to the rest of the economy."
King's speech to the British Bankers Association also included detail of how he believes financial regulation and supervision can be improved, promising to make financial stability a key priority in his second term of office.
He announced that the Special Liquidity Scheme, by which the banks can exchange mortgage-backed securities for more marketable government securities, will be put on a more permanent basis.
"We intend to learn from the experience of the scheme to put in place a liquidity facility that works in all seasons - 'normal' and 'stressed'," he said. "Any such facility will need to meet two challenges: it will need the right pricing structure and it will need to overcome the 'stigma' problem."
The Governor also welcomed the proposal by Alistair Darling, the Chancellor, for the launch of a Financial Stability Committee, which could be set up to advise the bank on matters relating to the markets.
King's words echoed those of Darling, who said: "We should learn from the example of the Monetary Policy Committee, and take a similar approach to financial stability, bringing in outside expertise to advise the Governor and the appropriate Deputy Governor."
While many analysts have interpreted Darling's proposals, made unexpectedly in the House of Commons, as a sleight on King's handling of financial stability, the Governor said: "In monetary policy we now have a framework which makes the commitment to low inflation credible ... we need now to develop an equally strong framework for financial stability."
One question yet to be resolved is the issue of who will succeed Rachel Lomax when she retires at the end of this month as deputy governor for monetary policy.
Tensions have arisen between the Bank and the Treasury over whether Lomax should be succeeded by the bank's chief economist, Charles Bean, as the Governor prefers. Darling is thought to prefer an alternative figure, who could bring more markets experience to the bank's ruling triumvirate, such as Paul Tucker, the bank's director for markets.
George Osborne, the Tories' shadow chancellor, said he welcomed the bank's proposals. The bank's figures on mortgage rates, released yesterday, showed the cost of the average two-year fixed rate mortgage deal rose from 6.06 per cent in April to 6.27 per cent in May, the highest level since 2000.
- INDEPENDENT