The Credit Crunch

[AngryPaul]

As the markets continue to fall, albeit not as bad as Monday, the world finds itself facing an economic rollercoaster over the foreseeable future.

The main cause of this, I've read, is the US sub-prime mortgage market. The banks loaned people money that may or may not be payed back, this then caused holes in the value of the banks and then made the banks more reluctant to lend to eachother, meaning less moeny for credit and mroe mortgages.

The UK has felt the brunt of this with more and more people being refused credit and the Northern Rock saga.

What are peoples thoughts on this subject. Is the US/UK heading for a recession? Is globalisation a big player in this as the world becomes affected by the US? Is the US at fault?

[gembird]

It's always those bloody Americans:p

Seriously though, I don't think our problems have got that much to do with the US. Obviously there's the connection in that we see all the Hollywood stuff going on and want the same fancy lifestyles as the Americans do, and so people in both countries get into debt pursuing that dream. But I'm not sure that it's all that's having an effect- we've had rising house prices and so on over here for a while, things like that aren't going to help finances for individuals, or for the banks when people can't pay the mortgage.

That's about all I can say really. I don't know a great deal about things like this.

[terrorbite]

International bankers have the power to bring entire economies to their knees. It wouldn't surprise me if this was part of some broader agenda.

[GorillaBearBear]

International bankers have the power to bring entire economies to their knees. It wouldn't surprise me if this was part of some broader agenda.

It's the zionists!

I want to have something more important to add, but I am not very knowledgeable when it comes to the economy. From what I've seen on the news I don't think anywhere will be affected as badly as the US - although Britain might come close, and apparently it looks like other markets are staying vaguely stable.

I think it's fairly clear we are headed towards a recession of some kind, unless the chancellor can pull something really spectacular out of their hat, but I'm not sure that it will be as bad as some papers are making out?

Also: I wonder if this is a cycle that's unavoidable - perhaps this was always inevitable. Furthermore, you have to wonder if a bit of a recession would be good culturally. But that's just me

[AngryPaul]

Furthermore, you have to wonder if a bit of a recession would be good culturally. But that's just meAs in it would make people more respectful of their jobs, appreciate employment and the value of items more?

[Darkscull]

International bankers have the power to bring entire economies to their knees. It wouldn't surprise me if this was part of some broader agenda.

well, actually the economy is a very very complex thing, and although multi-national banks and corporations are certainly big enough for their decisions to have major impacts, what those impacts are aren't that easy to predict.

So although it may be quite probable that a certain action would cause a recession, they couldn't actually time the recession, or target it, and it's most likely that it would end up ruining them as well. I don't know what sort of agenda you're thinking of, but it seems to me that unless it's some crazy cult thing then not many people would be willing to ruin themselves for the cause.

and before you say it, no they aren't making it seem more complicated so that no one can question their motives, most of the major players are not economists, and most expert economists are not affiliated with big companies and such (you don't exactly need big budgets to do it, except when supercomputers come in).
If the economy wasn't so complex and unpredictable then there wouldn't be economists, and although I suppose you could say they would have an interest in keeping that impression up if it wasn't true, that doesn't explain how they got to be there in the first place.

and another thing, international banks and giant corporations aren't one-man operations. decisions are done by committee (although usually one person will have the deciding vote and be technically in control, they couldn't exactly keep their nefarious plans to ruin the company secret), and all sorts of people would have to be in on any conspiracy.

So yeah, aside from your general mistrust of anything that is the general consensus, do you have any reasons why you think it's part of some broader agenda, or any idea what that might be?
don't mention lizards.

[GorillaBearBear]

As in it would make people more respectful of their jobs, appreciate employment and the value of items more?

Yeah, and probably - if it was wide-ranging enough, pull people together into a closer society, a la the Blitz or The Great Depression and so on.

[maxxy_p]

The UK has felt the brunt of this with more and more people being refused credit and the Northern Rock saga.I'm not speaking for the market in general, but the mess around Northern Rock was predictable and almost entirely their fault. They'd been pursuing a policy of irresponsible lending for a while. There haven't yet been any major collapses in the market due to the credit crunch.

[terrorbite]

So yeah, aside from your general mistrust of anything that is the general consensus, do you have any reasons why you think it's part of some broader agenda, or any idea what that might be?
don't mention lizards.
David Rockefeller is secretly a lizard

Nope, I don't have any reasons or ideas about it. Just felt like saying it cause I'm one of those "crazy conspiracy theorists" :D

[katt]

Obviously there's the connection in that we see all the Hollywood stuff going on and want the same fancy lifestyles as the Americans do, and so people in both countries get into debt pursuing that dream. .

I think people would want a fancy lifestyle regardless of whether hollywood existed. If better things are within reach people will go for them. I suppose hollywood is particularly 'fancy' but it's also particularly 'crazy' and I wouldn't call it the dream of every american.

anyway, the housing market prices are falling here cause of the fact the banks aren't giving out new home loans as much. It is very useful if you are buying a house.

[gembird]

I think people would want a fancy lifestyle regardless of whether hollywood existed. If better things are within reach people will go for them. I suppose hollywood is particularly 'fancy' but it's also particularly 'crazy' and I wouldn't call it the dream of every american.

Oh no, I'm not saying every American is like that, far from it. Just that there's enough that it can have an effect. I just meant that we're both countries where celebrity life is very much in the public eye, and due to credit and so on it's easier to get that lifestyle- if you're willing to get into lots of debt.

Pretty sure we have plenty of idiots over here as well, it's nothing special about the US :p That's all I'm trying to say. I wouldn't want lots of designer clothes or gold taps or a gigantic house either.

:edit: Also, the better things aren't necessarily in reach, which is where we start getting a problem.

[Flava Dave]

Damn, I thought this was about a new financial-themed breakfast cereal. :(

[katt]

You are right it does influence some people. It always amazes me how some of these stars lead these fantastic lives of luxury and they still fall into turmoil. So obviously more material goods aren't always the answer.

although I always found the idea of british nobility living in those big manor houses talking in fancy accents and getting ruffled at the slightest bother very amusing. :P but those were just bertie wooster episodes and maybe the reality was different

I tend to think a more moderate, down-to-earth lifestyle (within one's means) is more likely to give someone a happy life. Some people don't seem to handle money/fame too well.

[Splush]

Also: I wonder if this is a cycle that's unavoidable - perhaps this was always inevitable.
The only sort of economics I know anything about is Marxist, and that was certainly something that Marx reckoned, that periodic recessions are just a inherent feature of liberal capitalism that it couldn't function without. We use credit to stave off recession until it gets to some tipping point where it has to implode, and then it gradually builds back up again. Marx would say recessions are actually desirable for capitalism, because if a society reached steady full employment workers would have too much bargaining power and productivity and profitability would decrease, so those in charge would either have to politically engineer a recession or use force to suppress workers.

[Bacon Machine]

Yeah, and probably - if it was wide-ranging enough, pull people together into a closer society, a la the Blitz or The Great Depression and so on.
A recession is more likely to push people further apart, the rich will most likely stay well off with only a few 'going bust'. To protect their assets the upper class will lay off the working class and the middle class. In particular arts and culture will be adversely affected as funding for these things will be the first to be stopped. During the great depression people turned against each other and it was only the fortunate timing of a war that meant that there weren't revolutions and the like. The economic collapse of Germany shows how badly a poor economy can affect the political scene as people turn to drastic measures to help them out of their situation.

An economy in decline does the opposite to pulling people together, it forces them apart as they struggle to survive.

[friedpenguin]

During the great depression people turned against each other and it was only the fortunate timing of a war that meant that there weren't revolutions and the like. The economic collapse of Germany shows how badly a poor economy can affect the political scene as people turn to drastic measures to help them out of their situation.
Ooh exciting times are to come then! World-wide revolution, the need for a strong leader, the biggest dictatorship since the history of time itself and then another revolution. Oh the joy of not living in a dull age, like I thought I was going to be, will be known to us all!

Seriously though, you guys are freaking me out with all this bloody seriousness. You make it seem like we're in a depression already. I think it's a good thing that the US are finally seeing the effects of nearly an import-only economy, and using for that money they don't actually have. Too bad almost the entire world depends on the welfare of the burger-eating, milkshake-sizzling, credit card-swiping people that are called Americans.

[Bacon Machine]

Ooh exciting times are to come then! World-wide revolution, the need for a strong leader, the biggest dictatorship since the history of time itself and then another revolution. Oh the joy of not living in a dull age, like I thought I was going to be, will be known to us all!

Seriously though, you guys are freaking me out with all this bloody seriousness. You make it seem like we're in a depression already. I think it's a good thing that the US are finally seeing the effects of nearly an import-only economy, and using for that money they don't actually have. Too bad almost the entire world depends on the welfare of the burger-eating, milkshake-sizzling, credit card-swiping people that are called Americans.
I didn't say it'd be as big a crash as that, it will probably just be comparable to the things that happened in the eighties; miner's strikes and the like.

Might even just mean a slight decrease in the quality of life for the average person.

[bionic sheep]

There's a large school of thought blaming this entire business on the money being funnelled into the Iraq war, and a lot of them are I-Told-You-So-ing about this right now because it was predicted before the war even started:
http://thinkprogress.org/2008/01/23/iraq-recession

I don't really understand economics so much, but my understanding of the bigger picture is that Iraq has caused America to go into massive debt just to maintain occupancy, and that's dragging a massive amount of money from the economy which has caused this recession. Whilst sub-prime mortgages and all factor in, my understanding is that it's primarily the war in Iraq which has caused this - if it weren't for the war, the government could theoretically bail out the banks and prevent a recession.

I might be wrong on every count here, just an FYI.

Didn't we have a recession in the 80s, incidentally?

[Darkscull]

it probably depends on your definition of recession, but yes, there was certainly a downturn at some point (something to do with black wednesday? or was that something else?)

[Smartie]

I would never pretend to know a lot of understand economics as it's a hugely complex subject, but what I learnt as part of my CIMA course is that the economic cycle is pretty much unavoidable.

There's will always be periods of recession because that's how it works. Economies rise and fall, and periods of mild depression are inevitable. How they are tackled can differ of course. Countries fall into favour, and others fall out of favour. I seem to notice maybe a 15-20 year pattern for this cycle, although the gravity of the 'recession' varies greatly, and I think sometimes it's just a period of stagnation rather than recession.

http://img184.imageshack.us/img184/5047/businesscyclejh2.png

There is a reason why China's economy has grown 11.4% through 2007. They're currently experiencing a period of boom, which will see costs start to spiral, in a similar way to the growth the UK and the US saw through the early 2000s (think housing for an example). Our costs reached almost unmanageable levels and we couldn't sustain it. So now it's someone else's turn as money finds more suitable and profitable countries to invest in.

We should accept we're going into a recession and make provisions for it.
Cutting interest rates to encourage spending probably isn't the way to do it right now (although cheaper mortgage for me if this happens)

[faragher]

I'm not speaking for the market in general, but the mess around Northern Rock was predictable and almost entirely their fault. They'd been pursuing a policy of irresponsible lending for a while. There haven't yet been any major collapses in the market due to the credit crunch.
Not entirely true - NR had a very specific lending policy that offered a number of things that other lenders didn't, specifically:
- High loan to values - that is, you could borrow up to 125% of the value of your property
- Higher income multiples - that is you could borrow up to 5.4x income
- Both of the above to first time buyers.

This would all be considered higher risk, but for one very specific fact - NR had really strict credit scoring criteria - if you did not have a very high score, you wouldn't get the high multiples, or the high LTV's. They also charged above average rates for this kind of business. What this meant was that NR had a mortgage book that was pretty good.

NR's problem was the way they raised their money. The traditional mortgage lender model is the "building society" - you take in savings from your customers and you lend that to other customers, making a bit of a margin between the two. The largest building society in the UK is Nationwide and they raise about 80 to 85% of their mortgage funding in this way.

A more recent model has been through securitisation. This is the packaging and selling of mortgage books on the financial markets. So, you take £100m worth of assorted mortgages and sell it to someone on the basis that they will make however many % a year on it. Then you use that money to fund more mortgages, and so on. Northern Rock raised about 80% of its mortgage funding in this way.

So what went wrong? It turns out that the US mortgage market is shonky as hell. The lack of regulation (and, it appears, morals!) meant that the lenders would give pretty much anyone any money. On top of that, the US mortgage deals were not the most transparent, there was lots of up front discounting and stepped rates and heavy transfer penalties. So a lot of US lenders suddenly found that their customers weren't paying their mortgages. Which meant that all those companies who bought the securitisation papers from the lenders (mainly banks and investment houses) suddenly found that their investments were worth a lot less. Which meant that they all stopped buying securitisation, even from people whose mortgage books were in good condition - like Northern Rock.

What happened next is mainly a bunch of panic and misinformation. NR went to the Bank of England, the papers went crazy, people freaked out and there was a run on the bank.

/edit

Smartie - and anyone else for that matter - if you want to chat about mortgages PM me - its my job.

[yellowmongoose]

I'm not an economist and I don't actually know much about economics but here's my take on it.
I think recession in a capitalist economy is inevitable. Look at how it works. The people at the top of big companies have most of the money. For example, Tesco had profits of £2bn a couple of years ago and most people know about the countless billions Bill Gates has. They get that money from the majority of the population buying their products/ services. A fraction of that money does trickle down from the top to the bottom (in wages and taxes for example). The problem is that there is only a finite amount of money in an economy.

So, as people buy more and more things, more and more of the money goes to the top. The big companies at the top get higher profits. However, inflation increases when people buy stuff. Factor in the constantly rising house prices and increase in interest rates and the money the workers get doesn't go as far as it used to. Which means the big companies sales start to fall. But they want to hold on to their high profits so they cut costs. Usually by sacking people or not giving them as big pay rises. Which means that people have even less money to spend on things.

Basically the trickle of money from the top to the bottom gets less and less and the flow of money from the bottom to the top also decreases. This slows down the economy and eventually leads to a recession. Recession can be put off for a while with borrowing but eventually the debt gets too great. People can't pay back their loans and so huge holes start appearing in the economy. This is where I think we are at now. I think a recession is just starting or just about to start. There's not much governments can do to stop it but maybe there are things they can do to lessen the effects of it. Surely they've learnt some lessons from 1929 and 1987.

Then again, they are politicians :p.

[faragher]

I'm not an economist and I don't actually know much about economics but here's my take on it.
I think recession in a capitalist economy is inevitable. {... snip ...} There's not much governments can do to stop it but maybe there are things they can do to lessen the effects of it. Surely they've learnt some lessons from 1929 and 1987.

Then again, they are politicians :p.Good stuff this, apart from the fact that it is missing a couple of major points:
- You'd be suprised at how significant wage and taxation costs are in a business. You have to remember as well that lots of things that don't look like wages actually do pay someone - if you buy paper, you are indirectly paying some the wages of timber companies, paper mills, retailers - as well as shipping and distribution companies etc etc Every purchase has a "people cost". Take someone like Aviva - their sales in the 6 months to 30 June 2007 was about £25,000 million. They have £377,000 million of funds under management - a quick assumption here, they charge 1.5% ish for fund management, so lets say they made £5,550 million for that. Total money made then is £30,550 (ish) Their operating profit (net) was £1,375 million. Or about 4.5% profit BEFORE TAX. The rest was operating expenses, which as you saw above include a significant amount of people cost...

In a small business its even more obvious. I have a small business, and lets say, for the sake of argument, I turned over £100,000* per annum. I would pay about £30,000 of that to a company that provides me with regulatory services - they spend this mainly on people. I would pay about £20,000 per annum for a PA, once you have taken into account all the costs of employment. I would pay about another £10,000 of that in 'costs' - office, phones, paper, IT etc. About £10,000 on marketing and promotion. Leaves me 30,000 - my wages? Then I have to pay tax...

- Where do you think this profit goes? It is usually reflected in the share price and dividends paid. And the majority of the shares are owned by institutional investors - mainly investment and pension providers. And these investments and pensions are mainly owned by the general public - so again we get the money...

* Not my actual turnover. I'm not telling :p

[Smartie]

Smartie - and anyone else for that matter - if you want to chat about mortgages PM me - its my job.

Thanks for that, I appreciate the offer (my fixed term is due up end of March).