Thread: Living A Digital Existence

Living A Digital Existence

Week 3

Hello and welcome once again to another edition of Living A Digital Existence. This week's topic of conversation is the current "Credit Crunch" which I'm sure you will all agree, isn't a great deal of fun. For those of you who haven't watched the news and don't know much about it (I know some of you do know rather a lot, Nimrod and me have had arguments in the past ), hopefully this may inform you a little bit, and of course this is my own take on what caused it, and who is to blame.

Crunch Time for the Financial World

In the beginning...

In short, the cause of the current financial crisis is greed. It all started with the sub-prime mortgage’s, where American mortgage lenders gave mortgage’s to people who in reality were never going to be able to make the payments. The reason for this, was, that in the short run, these salesmen would make vast profits through sales bonuses. For every mortgage they sold, they got a bonus, and so all they wanted to do was sell as many as possible and collect their big fat pay check, not even considering your average Joe, who was always bound to suffer the consequences in the long term.

To make these mortgages more profitable, the mortgage providers would “bundle” these mortgage’s into consolidation packages, which would then be sold onto other financial institutions for a profit. These mortgage providers weren’t stupid however, and gave these consolidation packages long, complicated, professional sounding names, however, what they really should have been called was the redneck, hillbilly fund, as in truth, this is exactly what they were, and then maybe, we might not be in this situation. The idea behind selling these packages to other financial institutions was that due to the high risk of these sub-prime mortgages, if more institutions bought up the packages, the risk of them would be spread out, however all they managed to achieve was that the financial problem spread, not the risk.

As I said previously, these mortgage providers were not “stupid” when it came to selling these mortgages. Most of these mortgages have introductory periods where the interest rate on them was very low, maybe as low as 2%. This is all well and good, however, after this introductory period has ended, interest rates on the mortgage sky rocket, and the mortgage owner is left stuck in a big pile of debt. This was not helped by the fact that the US government had had to increase interest rates due to rising inflation, meaning that people who had taken out mortgages two years prior to this now faced the threat of even higher payments.

The spread...

Sub-prime mortgages in the UK were not as apparent as in the US, and the banks had not bought up as much bad debt. However, there were still problems, and the first institution to be hit was Northern Rock. NR had a high amount of risky loans, but also happened to have the highest percentage of loans financed through the capital markets. So, when the sub-prime hit, Northern Rock couldn’t raise enough money through the capital markets, and so had to do the financial “walk of shame” and ask the bank of England for money.

This is where the media comes into play in all of this. Obviously, the media is run as a business, and they need to use headlines that will catch your attention and make you read. So, when NR went to the bank of England, the newspapers were positively gleaming, as this was the perfect money spinner. They jumped on the crisis band wagon, and reported that things were heading down the pan. This cause a mass exodus of people’s funds from the bank, as everyone panicked and feared for the safety of their money. This meant that the bank got into more trouble, and leading to the long slow demise of the bank.

As in the US, house prices in Britain have been falling due to the lack of availability of mortgages. Banks will now not usually lend more than a 90% mortgage, meaning that the proposed lender will have to put forward at least 10% of the value of the property before they will be eligible for a mortgage, but even that isn’t enough for some at the moment. Falling house prices have also meant and increase in negative equity, meaning that mortgage defaults costs banks even more now, as they cannot retrieve the initial loan.

There is no way of knowing how long the credit crunch will last, but there are signs that it could well be a while. House prices are still falling, further reducing the value of mortgages. Many homeowners are still facing rising interest rates. Despite the fact that both the US and UK are entering recessions, interest rates are rising due to inflation. The usual course of action during a recession would be to lower the interest rates to try and encourage consumer spending. . However, due to the fact that inflation is still rising due to the financial crisis, interest rates have also been rising to try and control this inflation. This increase of inflation has nothing to do with consumer spending, and therefore one would presume that interest rates could be dropped. In short, only time will tell. We have to wait for the world economy to sort itself out before we can judge anything.

There are signs, however, that the governments of the world are trying to help out, with the US government recently pumping US$700 billion into the financial markets to try and stabilise them. However, as I have said previously, only time will tell.

So what effect does all this have on me...?

With all this bad debt, banks are more unwilling than ever to lend money over fear that they will never see it again. Due to this lack of credit, consumer spending is likely to be reduced. This means that you won’t be able to by that 42” TV that you’ve wanted for the past few months, as no-one will lend you the money for it.

So all in all, we can conclude that a bunch of money utterly senseless, money grabbing, greedy American bankers, are the cause of the current financial crisis. Whilst the British can also be blamed, if it hadn't been for these American bankers, we would never have bought the bad debt in the first place.

What a load of bankers!

That's it for this week folks. As always comments are appreciated, I'm sure a few of you will disagree with my views, and will want to make your own comments, so feel free to do so! (I'm sure Nimrod will stick his 2 cents in there )

Until next time...

David
(MunkyMagikUK)