Bank of England: Armageddon Scenarios?

Earlier in February, our beloved Chancellor of the Exchequer, addressing the 'Engineering Employers Federation' (do we still have Engineering Employers?), came out with the following gem: "We do not yet know the full effects of what has happened in the financial markets.  But we do know that there are good reasons to believe that we will get through this difficult time provided we do what is right for the country.  We have good reasons to be confident."

"Whoops", I thought, "time to start worrying".  He then made a statement which appears to confirm that this man occupies a parallel universe: "While many US mortgages were sold at hugely discounted rates, leaving people unable to meet repayments when rates increased, lenders in the UK have been more responsible in taking account of an individual's ability to pay.  And demand for housing outstrips supply."  Compare that statement with one or two salient facts:

• in 2007, nearly 20% of all new UK mortgages were written on a 'sub-prime' basis
• in 2007, mortgage loans amounted to 125% of disposable income in the UK, compared to 103% in the US
• another 'magic 125%' figure was the loan-to-value percentages advanced by many lenders, until reality dawned earlier this month
• forcible evictions of defaulting homeowners jumped 21% from 2006 to 2007, and the figure is expected to jump by another 50% in 2008
• currently, the business and finance sector accounts for 28% of the UK's total GDP - which means that our economy is heavily dependent upon the very sector which is reeling from a credit crisis where, so far, we have probably only seen the tip of the iceberg
• and it's not just the economy as a whole, but British Government plc which ought to have concerns:  gold reserves largely spent (against, incidentally, advice from the experts), in hock to the hilt, and very heavily dependent upon the financial sector for tax revenues - consider the following chart:

 It is the proximity of Alistair Darling's soothing, emollient words to the speech delivered by Bank of England Deputy Governor, Rachel Lomax, on 26/02/08 that raises cause for concern.  You can download the entire speech by permalinking this article, and clicking the link in the left hand column.  Whether you believe that Lomax is more accurate (independent of government spin?) is almost immaterial: both scenarios cannot be true, and what we believe about the potential outcomes of each scenario should influence and underpin our strategies for client-care - shouldn't it?