The Credit Crunch

It is easy to be amazed by the gross stupidity of bankers, they are it appears utterly dumb the world over. It is an amazing business  model that allows you to totally fuck up not just your own company, and in turn your own economy, but the economy of the whole planet is fucked due to the decision of some half witted bankers to lend money to some ne’er do wells in the belief that they might pay it back.

There are examples of $100,000 loans going to single mums who had been on welfare for 5 years?? It is unbelievable to think that that loan is ever going to be repaid. What is bizarre is that all the banks have insurance to cover their loses in the event of a default. This is the main reason why repossessed property is sold off cheap. The banks don’t actually lose anything, the insurance company is the loser in it all. So why are banks going bust so often…… well it is simple really, it all comes down to confidence.

Some banks didn’t have enough savings invested to lend to their borrowers, so they chose to borrow the additional funds in a series of short term loans. Think of them in the same way as a two year fixed rate mortgage, except they are for six months at a time and for many millions of pounds each. Whilst the market was fluid and confident, these loans could be re financed twice yearly with the best deal available, in much the same way as a mortgage is renegotiated to keep the cheapest deal.

Now however, there is no one to go to in order to re finance the loan, much like the thousands of home owners who want to re mortgage this year when their fixed rate deals end, they will find no one willing to lend the money to them…… which leaves homeowners facing mortgage increases of 35-40% overnight, but even worse, it leaves the banks having to repay a massive debt because it can’t re finance it. This has rendered Northern Rock, The Halifax and now Bradford and Bingley as technically insolvent, even though they have until recently been making millions in profits.

Who knows where this is all going to end.

The US has decided to try a different strategy to 1929 when banks were left to market forces. This time the US government has spent the money trying to protect the country from a possible depression that could last a decade or more. Will this strategy work?….. now that the bankers are off the hook scott free who knows, neither outcome looks particularly pleasant, but if we can all avoid a major depression then it might be money well spent.

Look at the $500 billion spent on Savings and loan in the 1980’s the Government ended up showing a profit out of its investment, so perhaps it will work out.  

The next phase of these mass blood letting is that as house repossessions increase and mortgage costs rise, the 1 million rented second homes in the UK that we bought out of the greed of the last housing boom will become a drain on finances and be dumped back on to the market are bargain prices. That will be enough to kick the floor out from under the housing market and who knows where it will end then?

Hold on tight it looks like its going to be a roller coaster ride for a while.


Leave a Reply

Please log in using one of these methods to post your comment: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

%d bloggers like this: