We said yesterday that if the Bank of England cut by 1% then it would mean a savage recession, worse since WW2.

Well, they went one better and cut by 1.5%. So it now stands at 3%, down from 4.5%.

What’s our reaction?

This is panic.

It means interest rates are going to fall to 2% (OR LESS) sometime in 2009.

With house prices in freefall (already down 15% this year, with two more months to go) and Capital Ecnonomic forecasting another 20% drop next year……. roughly 40% off peak prices…….. and the banking sector in full retreat,……………… the Bank of England is saying we are close to an economic depression.

Of course it is not saying that in words (and maintaining a stiff upper lip that they are really in control… sure!) but their actions indicate that they are throwing everything bar the kitchen sink at the problem.

Now for the bad news….

a) expect the lenders to act like oil companies when prices of their crude go down… they take their time passing on the costs…… in this case, banks will invoke small print in tracker mortgages and refuse to go below 3% and / or they will up their fees and need for deposits or use the Loan to Value ratios …. and other tricks to ensure they don’t lend sub prime and squeeze what used to be prime… Of course prime is rapidly devaluaing.

b) this is a solvency problem for a lot of big companies, beyond banks… Cutting interest rates implies that this is a problem of liquidity…. Wrong.  The credit crunch will continue, after a few days of false euphoria. The big Private Sector is on strike (in terms of refusing to lend) while the Government is cheapening money and offering hundreds of billions to stave off depression.

Who will win?

My guess is that because we have a craven set of politicians, there is little political pressure that can be put on out of control Wall Street and the City of London.

They (as long as they survive, unlike Lehmans) can make a lot of money out of all this. Imagine buying assets at rock bottom prices?

The Bank of England interest cut is about 12 months too late, in the context of mainstream economics.

Why oh why does not Mervyn King resign?

Some traditional values of falling on one’s sword has seemed to disappeared from parts of the venerable British establishment……