Column Is the global recovery here?

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: entirely the senior, highly rated, tranches. Yet even they faced a liquidity crisis. Mortgage lending as a whole, not just subprime, has collapsed as finance institutions try to hoard liquidity and raise capital.

In the UK, the number of mortgages approved for house purchase fell to the lowest recorded by Bank of England since it began collecting mortgage information 15 years ago. Mortgage lending is now 70% below the peak registered in November 2006. And as the global economy slows, lending outside of the housing market will come under pressure.

Moreover, while it is true that the authorities in the US and Europe are extending tremendous support to banks, it is noteworthy that the rescue of financial institutions like Northern Rock, Bear Sterns, Fannie Mae and Freddie Mac has not extended to a rescue of shareholders, who have ended up nursing dotcom-like losses. Fannie Mae’s stock is down 80% year-to-date.

Markets are forward looking and so bank stocks will recover before the cycle of write-downs is complete. But it is hard to see how banks in particular and stocks more generally can be on the verge of a lasting recovery yet. Banks do hold some seriously undervalued assets, and in time, valuations will revive. The 60% drop in bank share prices since the beginning of the year is based on an excessively pessimistic view of the quality of their balance sheet once liquidity issues pass. But maybe these valuations are a reflection of the new world of banking.

Banks own discredited business lines. Past bumper revenues from securitisation and mortgage businesses will not be easily replaced and it will take time to find new business models. Clearly this is a general view and there are exceptions, of which HSBC, Goldman Sachs and ICICI come immediately to mind, though even “good” institutions will be affected by the coming regulatory backlash that is likely to raise their cost base and that of the economy as a whole. Finally, in taking a more pessimistic view of the speed and sustainability of any early recovery in economic expectations I side with JM Keynes in thinking that monetary policy is not very effective when the animal sprits are deflated. We should not place great hope in the interest rate reductions that have been made possible by a drop in oil prices back to the levels of a few months ago.