A dose of good news finally arrived last Thursday following Wells Fargo’s (NYSE-WFC) Q2 earnings report. A day earlier, State Street Bank (NYSE-STT) also delivered better than expected numbers. And this morning, Bank of America announced their Q2 profit fell less than expected.

The result, of course, is an incredible rally for financials. Heading into Wednesday’s trading, the financials were down more than 55% from their highs last summer. Since financials also represent the largest index weightings for international indices, it’s no wonder foreign markets are also running hard along with Wall Street.

On Wednesday, bank stocks posted their best single-day rally since 1989, gaining more than 17%. More of the same is expected today following J.P. Morgan’s (JPM) numbers.

I’m not sure those numbers are worth uncorking a bottle of champagne.

From where I see it, these results are just forecasting worse things to come. All we’re seeing now is a dead-cat bounce following weeks of relentless financial sector pounding.

The sub-prime debacle has now largely been written off by most American, Canadian and European banks. But what lies ahead is worse. Consumer loans are now coming undone. Banks are witnessing a significant rise in delinquencies, which I expect to rise dramatically as the economy and employment trends worsen over the next several months.

In a bear market, a dead-cat bounce is typical market action following weeks of pervasive selling. More banks will fail this year, more write-downs will occur and the Fed can’t reduce interest rates any further because of the highest inflation in 15 years.

Sell into market strength.

ERIC ROSEMAN, Investment Director

Source: The Calm Before the Next Bank Storm

The Fall of Northern Rock

The book is peppered with confessions of ignorance. He picked up not a single warning signal from the beginning of the debacle to the end. In early 2007, he thought nothing could stop the bank’s “fantastic progress”. When the share price started to fall later in the year, he assumed, along with his colleagues, that the media, jealous of the bank’s previous successes, had “it in” for it.

Walters knew little of the bank’s funding methods and was “blissfully unaware” that the sub-prime crisis in America might threaten Northern Rock – as, indeed, were his bosses, who launched a new discount tracker for buy-to-let investors in August 2007. And even in early September, just before all hell broke loose in Newcastle, he was busy flying off for a holiday in San Francisco with, as he says himself, very little idea of “what was really going on behind the scenes”.

It all seems rather extraordinary given that, although he wasn’t exactly a board director, Walters was head of commercial lending for the Leeds office, and given that even the most junior of financial journalists and analysts across the City had a very good idea of exactly what was going on behind the scenes.

Still, compare it with this week’s debacle – the profits warning and bungled rights issue at Bradford & Bingley (B&B) – and it doesn’t seem so odd after all. It looks like a mixture of total lack of awareness and mild stupidity is par for the course across the UK banking sector. Just like Northern Rock, B&B has clearly spent the last few years in total denial – refusing to accept that the housing market was in a bubble and hence fuelling the fire of its own destruction by providing the credit to keep the bubble growing.

And just like Northern Rock, senior management appeared to be blissfully unaware of the all-too-obvious risks to their business. At the start of this year, even as volumes – the canary in the coal mine to the housing market – collapsed across the country, B&B announced that it was relying on growth in its buy-to-let business to keep things going. Whoops.

But just as delusional as the bankers are those who were still holding B&B shares on Monday when their bad news at last appeared. Who didn’t know about the credit crunch? That buy-to-let in Britain is bust? That falling house prices and rising mortgage rates always lead to arrears and defaults? And who had forgotten that bubbles always end in corruption (B&B also announced on Monday that they’d lost £15m to mortgage fraud)? You might want to check one of them isn’t running your pension fund.

Source: Make Sure You Check Who’s Running Your Funds

But it doesn’t look like Canada will hold its edge for long. If the oil boom fades and the financial market continues to bleed money from structured product losses, then Canada might face a serious economic slowdown.

At last count, total write-downs at Canada’s six largest banks stand at approximately US$11 billion. That’s roughly 5% of the total global sub-prime write-downs to date. Once US$11 billion may have seemed like a large loss, but now it pales in comparison to the US$200 billion banks have written off their books since last summer worldwide. It’s also far less than just Union Bank of Switzerland’s (UBS) cumulative US$38 billion in losses alone.

Canada, however, is not immune to the woes now affecting its largest trading partner, the United States.

Canada Is Already Slowing – Even During a Raging
Bull Market for Raw Materials

If you can look past the bull market in raw materials that has enormously benefited Canadian exports and the Canadian dollar, then you’ll see the country is starting to show strains in lending, housing, and manufacturing.

Indeed, a slowdown has already arrived. Canada’s economy contracted in the first quarter for the first time in five years. The economy slowed mainly because the surging Canadian dollar and weak U.S. auto sales caused a slump in auto manufacturing.

Meanwhile, some Canadian banks can’t escape the relentless wrath of sub-prime and other losses tied to illiquid structured financial products.

First quarter profits at Canada’s largest six chartered banks points to an acceleration of write-downs for Royal Bank of Canada (RBC) and Canadian Imperial Bank of Commerce, or CIBC.

Canada’s biggest six banks logged a first quarter profit of US$2.5 billion in the January to March period, down almost 50% from a year earlier when combined earnings were US$4.7 billion. Most of these losses, however, are tied to CIBC and Bank of Montreal – the hardest hit since 2007.

CIBC Hit the Hardest, While TD Escapes Sub-prime Wrath

Some Canadian banks have fared much better than their peers since the advent of the credit crisis last year. Of these, Toronto-Dominion Bank (TD) has almost escaped without any serious losses at all since last July. Meanwhile, the Bank of Nova Scotia has also easily absorbed modest losses tied to sub-prime and other structured products.

In fact, TD Bank ranks among one of the best-performing major banks in North America in 2008 – up 8% compared to a loss of 14% for the KBW Bank Index in the United States.

Here’s What the Best Performing Bank in North America Looks Like

But the story is altogether different for Canada’s other big banks.

RBC and CIBC now share the dubious distinction of being featured on the “sub-prime hit list.” Both banks are on the global banking sectors’ top 40 list for the largest write-downs and credit losses since the banking sector started hemorrhaging last fall. And Bank of Montreal (BMO) is ranked second only behind CIBC for posting rising losses tied to structured products and other write-downs in Canada. RBC is Canada’s largest bank by stock-market value.

From its all-time high last year, the Bank of Montreal has seen its stock plunge 31%. CIBC, which takes the booby-prize for Canada’s biggest loser in the sub-prime crisis because of its largest U.S. presence, is 33% off its best level.

CIBC has already written off a cumulative US$6.7 billion since the onset of the sub-prime crisis. That number is almost twice the figure posted by Canada’s other five largest banks put together.

Since last fall earnings have eroded and write-downs have accelerated. In short, the U.S. credit crunch that battered the U.S. housing sector has knocked the wind out of the banks’ sails. Everything from consumer and corporate lending to mortgages has been adversely affected as Canada finally begins to feel the impact of an American slowdown or recession. Over 85% of Canada’s trade is with the United States – the two largest trading partners in the world measured by the volume of goods and services.

But the news isn’t all gloomy. Dividends were largely unchanged over the first quarter while Bank of Nova Scotia actually raised its payout.

In addition to sub-prime losses, many banks were also hit by exposure in asset-backed commercial paper or ABCP. Other smaller lenders and brokers, including Canaccord Capital, saw losses in the hundreds of millions tied to illiquid short-term commercial paper.

Canada Now Slowing But Will Avoid Recession

The Canadian economy is now slowing in 2008. Stripping away booming oil and gas exports, the country’s merchandise trade balance is now in deficit. Without commodity exports, Canada would probably be in an economic recession.

First quarter GDP data confirm this trend. Manufacturing belts in Ontario and Quebec continue to suffer from a soaring Canadian dollar, up over 50% since 2002 versus the U.S. dollar while the unemployment rate is rising, housing is showing signs of slowing and commercial bank lending is gradually contracting.

The Canadian economy should escape a serious slowdown this year. The country’s trade balance and budget surpluses are indeed shrinking amid a slowing global economy but remain well managed compared to most industrialized economies.

Canada’s housing market is also in far better shape than America’s. That’s mostly because “zero-money down” was never a part of the country’s housing culture. But a continued strengthening of the Canadian dollar and more losses tied to structured investment products could tilt the nation into recession if combined with a significant decline in crude oil and gas prices.

ERIC ROSEMAN, Investment Director

Source: Even Commodity Rich Canada Is Not Immune to This Global Slowdown

It seems the Federal Reserve and other global central banks have successfully tempered the credit crisis since mid-March. The Fed’s effective bailout of the now defunct Bear Stearns created a floor under the sub-prime wreckage.

The good news is that a host of high-risk credit indices have posted big rallies over the last eight weeks. That includes a blizzard of new fixed-income issues as companies return en masse to fund their operations.

But don’t get too excited…The debt crisis is far from over.

LIBOR Rates Barely Budge Lower

While several indicators have improved recently, other important sources of funding remain under pressure. This tells me the sub-prime crisis is now spreading from the mortgage-backed securitization market to consumer installment debt.

Also, inter-bank lending rates have yet to fully recover from their pre-July 2007 levels while bank credit is contracting, not expanding – an ominous sign as the United States struggles to escape a slowdown.

Three-month London Inter-Bank Borrowing Rates (LIBOR) has barely budged since the Fed rescued Bear Stearns. The majority of financial institutions continues to hoard cash and refuses to trust overnight lending facilities.

The Main Sub-Prime Fear Factor:
Overnight Lending Rates Barely Move

While it’s safe to assume that some areas of the credit markets have not stabilized, other areas of the credit markets have indeed started to breathe easier. Among those normalizing this spring is the sub-prime market.

Sub-prime is Finally Tamed

According to Fitch, the international credit-rating agency, banks have probably written off approximately 80% of their bad loans through mid-May.

It’s not over for every bank. Some banks, including Switzerland’s Union Bank of Switzerland (UBS) continue to surprise the markets on a weekly basis with a host of spectacular losses tied to real estate, sub-prime, leveraged loans, and auction rate securities.

But for the most part, however, the sub-prime crisis is past its inflection point. What matters now is how and when other credit indicators normalize.

As of yesterday, the sub-prime crisis has resulted in approximately US$200 billion worth of write-downs for global banks. The lion’s share of those losses came from UBS and others in the United States and the United Kingdom.

For the most part, Asia and Latin America have escaped the crisis. Their banks remain highly liquid compared to their peers in North America and parts of Western Europe.

The securitization model (aka rolling sub-prime mortgages into securities and selling them) is still alive and kicking overseas, but it was NOT a primary investment source for Asian and Latin banks. Therefore these savvy banks avoided most toxic sub-prime products like collateralized debt obligations or CDOs.

Credit Spreads Narrow

As I continue to track the normalization of credit markets, I’m encouraged by the narrowing credit spreads across several markets – a bullish development.

One key indicator I follow – the spread between three-month Treasury bills and the three-month LIBOR – has narrowed considerably since March to 0.85% from 1.83% back in early April.

That tells me that the “safe haven” trade on short-term Treasury bills since the sub-prime crisis first erupted last summer is reversing. It also means that risk is gradually returning to the credit markets. Prior to mid-April, three-month T-bills plunged way below the Federal Funds rate to a low of 0.81% – severely overbought as investors scrambled for safety.

Another bullish indicator now flashing green is the yield spread between 30-year municipal bonds and 30-year Treasury bonds.

Prior to mid-March, the yield differential between 30-year municipal bonds and long-term T-bonds ballooned to their highest in history as investors fled municipal debt. The average yield on high quality municipal bonds has plummeted 70 basis points (0.70%) after reaching a peak on February 29.

Earlier last winter, as yields soared, savvy investors like Bill Gross of PIMCO and venture capital investor, Wilbur Ross, scooped-up those fat yields. In hindsight, that was a great speculation as yields have plunged versus T-bonds.

Also, some mortgage and financial companies, including non-financial issuers, are successfully raising capital again since April. Though financing remains much more expensive compared to 12 months ago, it’s nevertheless a positive development for global capital markets.

Beware of High-Risk Debt Markets

High-yield bond indexes and preferred securities have also rallied since late March.

Preferred securities, which provide stock and income-like features, have also rallied. But financial service companies that most issue these preferred securities and write-downs are far from done. I would avoid preferred securities and those juicy, but dangerous yields.

The same is true for high-yield bonds and other busted credits, including sub-prime securities as the economy continues to slow.

High-yield or junk bond defaults remain historically low at just below 2% of all outstanding issues. Previous recessions have seen defaults surge almost three times this level.

In my view, the recent rally is nothing more than a dead-cat bounce. More junk bonds will default over the next 6-12 months.

The Next Credit Crisis: Consumer Installment Debt

I’m still highly dubious that credit markets have bottomed. Sub-prime is now largely history. But other segments of the credit spectrum that have a far more profound impact on the American consumer are just beginning to unravel.

The consumer is now threatened by a liquidity crisis. Housing values continue to heavily contract and revolving credit installment debt is becoming harder to secure.

The culprit is less the write-downs themselves and more the virtual “shutdown” in the securitization market. At its height, the securitization market provided 66% of household borrowings in the first quarter of 2007. Without this market, consumer credit losses may be far worse than currently estimated.

Auto loans, personal loans, mortgage loans, and other segments of installment debt are still contracting. Auto loans are especially vulnerable with defaults recently hitting a 10-year high of 3.4% in March. And more Americans are dropping their house keys to their local lenders as housing values continue to plunge below the cost of their mortgages.

Consumer deflation has arrived at the absolute worst time as savings rates are barely positive. Soaring energy and food prices, declining home values, surging auto delinquency loans and gradually rising unemployment depict a growing liquidity crisis now underway for the consumer. Also, most, if not all, installment debt is structured to finance domestic consumption. It’s not a pretty picture.

Stay defensive and avoid most debt markets, except high quality short-term Treasuries and investment-grade bonds. The consumer credit bear-market is underway.

ERIC ROSEMAN, Investment Director

EDITOR’S NOTE: As of today, our Sovereign Society research team is working on a special report to give you the information you need to protect yourself from this second coming of sub-prime – when it hits the real economy – including your personal credit report. Please look for this special report coming to your email inbox this weekendSource: Is Sub-Prime Finally Over? Yes and No

Source: Is Sub-Prime Finally Over? Yes and No

Every business is affected by oil. As long as crude oil remains above US$80-$85 per barrel, I’m staying defensive in stocks. The market is slowly beginning to discount another difficult period ahead for corporate earnings.

With oil prices soaring nearly 40% in just three months, companies are going to start revising their expectations for the next 3-6 months just because input costs are squeezing margins. There is just no way earnings are going to boom in the midst of surging energy costs.

If companies are being squeezed by high oil, what about the consumer? Will the American consumer come to the rescue and support a flagging economy?

The government’s US$100 billion fiscal stimulus package is now hitting American households this month. But I’ve got to wonder what an average US$1,000 check will do to boost spending? With gas prices quickly approaching US$4 per gallon and food costs sharply higher over the last 12 months, any boost in discretionary spending will largely be directed towards energy and food, not a new car or a vacation.

The sub-prime crisis is now largely history. That’s the good news. The bad news is that a new wave of write-downs lies ahead in the consumer installment debt sector. We’re also approaching a storm for earnings expectations amid high oil prices, a protracted bear market in housing and a contraction in bank credit.

ERIC ROSEMAN, Investment Director

Source: Why I’m ‘Still’ Bearish on Stocks

Overnight, gold has slipped slightly lower in the overseas markets.

Platinum fell below $2040 at the New York open, but caught fire from there, moving steadily higher until a slight easing during the Globex, and ending at $2105/oz., up $18. Overnight, platinum has fallen sharply.

Silver enjoyed a steeper rise than gold’s, leaping from a low of $16.70 at the open to nearly $17.30 at noon, before it too slipped in the afternoon hours to close at $17.13, up 34 cents. Overnight, silver has been flat to slightly lower.
(Click here for charts)

A lackluster day for gold was somewhat compensated for by the positive action in platinum and solid strength in silver.

Gold was supported by a falling dollar but undermined by a step back in the crude price juggernaut.

“Gold is watching while the dollar weakens … and is battling to find direction,” wrote Julian Phillips, of GoldForecaster.com, as he expressed disappointment that the market has not responded more strongly to recent record oil prices and to Monday’s skidding dollar.

Additionally, Phillips added, “We are headed into the quiet season for gold [May to the end of August] but at any moment, reports of another systemic fracture in the financial system could liven it up as happened last year when the sub-prime crisis emerged from the shadows.”

“Many of the factors that have supported the bull market for the precious metals remain in place,” say analysts from Natixis Commodity Markets Ltd.

“Inflationary pressures associated in part with the dramatic rise in commodity prices are continuing; uncertainty in the financial markets as the sub-prime crisis continues to unravel remains an issue … [and there is] increasing acceptance of commodities as an asset class,” they said.

Nevertheless, “these positive fundamentals do not necessarily justify a straight progression for precious metals prices,” the Natixis analysts said, adding that they expect prices for gold to average $875 in 2008.

Under that scenario, gold may already have peaked for the year. We doubt that.

This week the markets face an even sterner test with the release of a swathe of important first line economic data in the United States including the all important first estimate of that country’s real GDP, coupled with base rate decisions from the Federal Reserve and the Bank of Japan.

Ahead of what could prove a momentous week we think it pretty safe to say that, when the dust has settled, it won’t be the Bank of Japan that everybody’s talking about!

We have, for some time, argued that the US economy is already in recession and that it probably entered recession in December of last year. We will know whether we’re right or not on Wednesday at 13.30pm BST!

Crunch time for US real gross domestic product has arrived

In a moment of heroic (and possibly mis-placed) optimism we forecast that US GDP will increase by 1.2% over 2008, having grown by 2.2% in 2007 and 3.3% in 2006. If the US economy is to get anywhere near our number a huge weight of expectation must be placed on the country’s export sector. Certainly there are some grounds for guarded optimism. Net external demand is indeed likely to be the major driver of activity over the year and Q1 2008 has already been characterised by a marked improvement in the country’s underlying trade deficit. That said, we accept that this improvement has been offset in part by the higher price of imported oil.

Elsewhere, the fall-out from the credit crunch continues, a litany of downbeat economic data weighing on consumer confidence and expenditure. In its recent assessment the International Monetary Fund broke free from its guarded reputation to indicate that, in its view, the potential losses emanating from the sub-prime crisis and ensuing near-collapse in the US financial system could cost nearly $1,000bn.

Although a number of this magnitude looks big it is, in fact, quite small in relation to its share of GDP, particularly in the context of earlier financial crises and the fact that the pain is being shared between the US and Europe.

The real problem is that it is likely to take months and possibly, if the pessimists are right, years to unwind the mess created as a result of the build-up of speculative excesses over the past five years. As the highly regarded economist Mr Roger Bootle has observed “the umpteen billions of dollars which have been magicked out of nowhere must return from whence they came”. In a week in which the Bank of England followed the Federal reserve’s suit and announced its unprecedented “special liquidity scheme” and the Royal Bank of Scotland unveiled a £12bn rights issue, the largest ever by some margin, it is entirely obvious that the financial sector is struggling to squeeze the genii back into the jar and that in so doing there will be pain for everybody.

Although the Federal Reserve is now entirely focused on avoiding a prolonged recession in the United States, activating measures enacted at the time of the Great Depression in the 1930’s and cutting base rates aggressively, to just 2.25% from a peak of 5.25% as recently as last autumn, there comes a point at which monetary policy makers have to step back and see what the impact of their actions is.

Admittedly, we are pretty convinced that the Fed doesn’t think that it can afford that luxury just yet. On the same day that observers get to see the first estimate of US economic output growth, the Fed’s Open Markets Committee pronounces on base rates at the end of its two-day meeting. According to consensus estimates the financial markets think that sufficient scope exists from the data released so far for a further 0.25% point reduction in the Funds rate, to just 2.0%!

On the basis that it can take between six and twelve months for a base rate reduction to feed its way into the real economy we might expect the first positive manifestations of last September’s initial cut to at least provide partial support in tandem with a swathe of tax rebates to be issued over the coming few weeks.

That base rate reductions are not having the desired effect already is in large part down to the freezing up in the inter-bank market and continued high inter-bank rates. That these rates have barely moved, despite aggressive action on the part of the authorities goes a long way towards illustrating how grave the prevailing situation is and how, if conditions don’t start to improve soon, even more aggressive action might be required.

Given that Dr Bernanke has spent a life time studying how to avoid an all-out deflationary spiral, that he has written on the subject and spoken formally on the subject and is now in a position to actually do something about it, how far can we be from letting the printing presses roll?

Trade weighted dollar falls as US headline inflation spikes

This might seem an unusual position to hold with inflationary indicators flashing red and the dollar in virtual free-fall against almost every major currency except sterling, however, we continue to argue that inflation is a lagging indicator and that recession, coupled with the rise in unproductive spare capacity that it will inevitably bring, should act as a powerful disinflationary force as the year progresses.

Again, far from bravely, we forecast headline US consumer price inflation of 3.3% over 2008 (against 2.9% in 2007), however, the impact of the above, coupled with plunging private sector payrolls (non-farm payrolls have never fallen by a monthly average of c100,000, as they did over Q1 2008 in any period other than recession), the continued slow motion train wreck in the residential property market (residential investment is currently falling at an annualised 25% rate, taking more than 1% point off overall GDP) and a sharp rise in petrol prices at the pumps are all serving to bear down on
consumer demand. For these reasons we expect to see US headline inflation fall back to c1.6% in 2009.

At this point it might be worth speculating what might happen if we were wrong and inflation did rise sharply, possibly in response to drastic action on the part of the Fed to head off a debt-deflationary spiral. Critically, Dr Bernanke and his coterie at the Federal Reserve squat toad-like on control of the supply of dollar bills. He has consistently maintained that he would do whatever it takes to maintain and preserve the US financial system. He will have seen warning lights flashing across the system ahead of the tumultuous decision to allow Bear Sterns to fall into the arms of JP
Morgan and the concurrent decision to extend the Fed’s facilities beyond the traditional banks. He will know that when crises occur the action required to head them off must be immediate and the amounts involved substantial.

A massive amount of paper would be required to reflate the US economy and in so doing the dollar would be compromised. Despite the US administration’s attempted assertions to the contrary (inevitable in an election year) we suspect that dollar weakness is absolutely part of Dr Bernanke’s agenda. Not a precipitous collapse in the currency but a gradual and steady reduction in value, manifest in both the exchange rate and the inflation rate.

With enough leverage around to sink a battleship it does make practical sense to carry out part of the deleveraging process through
the currency. The most important point is that all this will only help highly indebted households as long as interest rates stay below the rate of inflation (as Britain discovered in the 1970’s).

The bottom line is, therefore, that we expect US authorities to oblige and base rates to continue falling, possibly back to as low as 1% point, irrespective of the near-term cost in terms of inflation. In such circumstances investors are unlikely to want to hold cash, they are likely to want index-linked gilt edged and they may start adding risk to equity portfolios, with some trepidation, on the basis that radical action will, ultimately, pave the way to salvation.

Aggressive rate cuts from the Federal Reserve. How many left?

By Jeremy Batstone-Carr, Director of Private Client Research at Charles Stanley

http://www.moneyweek.com/file/46098/crunch-time-for-the-us-economy.html

And quite frankly, I can’t blame them. After all, the S&P 500 dropped five straight months from November through March. That’s only happened seven times in the last 40 years. Not to mention consumer confidence just dropped to a 26-year low.

So when will this all end? Unfortunately, the hard truth is we’re smack dab in the middle of what Eric Roseman is calling “the world’s worst financial crisis since the 1930s.” And it doesn’t show any signs of letting up anytime soon.

But there is hope. There are still a few alternative investment strategies out there that can prepare you for the next market hiccup (or major gag).

You just have to look far beyond the mainstream markets – out there on the fringes where the sub-prime crisis, massive inflation, a falling dollar and banking failures are nothing more than a mild annoyance.

In this month’s issue of The Sovereign Individual, we’re introducing several of these strategies, including our lead story from Geoff Anandappa. This collectibles expert has created a fund that guarantees you’ll receive a 25% return after five years, while securing unlimited upside. Best of all, this investment is completely uncorrelated with the stock markets. Read on for a free excerpt…

Until Next Issue…

Cheers,
Kathlyn Von Rohr
Managing Editor
The Sovereign Society

P.S. Also in this month’s issue, find out how to build your own “anti-crisis portfolio” that contains seven different strategies to beat the sub-prime credit crunch. Plus, find another way to thumb your nose at the IRS – legally. It’s all in this month’s 16-page issue of our members-only newsletter. Sign up right now for a subscription, absolutely risk-free, and you’ll also gain access to our entire Sovereign Society portfolio – filled with 21 best buys this month!. Click here for more details.

Every photo of Darling in this morning’s papers showed him sporting a fierce expression that let the world know that brooking opposition was not one of the Chancellor’s agenda. I suspect, though, that in private he’ll get down on the carpet and simply beg for lower rates. Got to be worth a try…

The stakes are high on this one. It’s not just about propping up the over-inflated housing market. The longer rates stay significantly above the Bank of England base rate, the more impotent the Bank and the government look.

They tried a rate cut — that didn’t work. In fact, Halifax put their lending rates up the next day.

Yesterday they announced a measure which will allow banks to swap mortgage-backed assets for government bonds. Will that work?

“The terms of the Bank of England facility are pretty rubbish,” says an investment banker friend. “I doubt many banks will use it; you can get better terms privately through the Repo market. I think it’s just a fig leaf to cover the Bank’s total inaction on the sub-prime crisis.”

So it’s doubtful whether this latest stunt will cut the mustard. Now Darling’s been reduced to making snarling speeches in Parliament about how we taxpayers are “entitled to expect” lower rates in return for these government-backed loans.

Well, Abbey’s not listening. It’s withdrawn all its buy-to-let mortgages, and today announced a rise in the cost of fixed-rate deals by up to 0.61 percentage points.

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“Don’t count on it,” says Frank. “Other high street banks are likely to do the same thing. The whole sector could move lower before the end of the cycle.”

The banks are likely to heed King’s request. They’ve got little choice — they need the cash. But they’ll do so because it’s in their own interest, not for “the good of the economy”.

That’s why Darling’s pleas are a waste of breath. After all, when was the last time your bank did something for you out of the goodness of its heart?