Before you read on expecting this article to have contained within it a solution to the world's
money problems, STOP! Unfortunately I haven't got the answer, and only over time will we all
discover the true cure for our global financial ills. All I can do is speculate for the future and
examine some of the ideas being circulated at the present time, and perhaps offer up my
humble opinion as what could be the way to go.
To start off, for those of you who are without television, radio, newspapers or indeed any
contact whatsoever with the outside world, we are currently facing a global financial crisis the
like of which we have never seen before. Of course there was the great stock market crash of
1929, but without trying to make light of that catastrophe, money these days is simply vastly
greater then it was back then. We are currently talking about the loss of hundreds of billions
and even trillions in the case of some countries.
So what exactly is it that we are talking about here? Why has the world become so far plunged
into debt? In a nutshell, we are dealing with liquidity, that is to say, the money moving in the
markets. Money is as essential to the economy as air is to humans, and so without this life
giving air, the economy is choking, and choking badly. What has been happening is that global
lenders have been doing their thing and lending money. In order to keep doing business, these
lenders had to keep lending out their money. However, when the good debtors had all the
money they needed, the lenders dropped their standards and started lending to people with
less rigorous checks. Of course once one did it, in order to compete, the rest of the lenders had
to follow suit. The rules of the competition meant that all the lenders then lent to less than
ideal clients.
So how has this caused the problem? The problem with lowering your standards especially to borrowers is you expose yourself as a lender to more risk. There is a reason why some customers can't or shouldn't get credit; it is because they might not pay it back. Now normally this is an acceptable risk for lenders to have some borrowers who may not pay their debt back. The problem is over the last decade lenders have lent way too much money to these people and as such they are unable to recover that money back from them.
This then creates a domino effect so that global lenders lose confidence and are reluctant to
lend more money. Well, a high street lender that has no more money to lend is about as useful
as a chocolate fireguard, so they go out of business as customers start to leave. In the case of
banks and building societies, these lenders also have depositing clients. These customers
receive interest on their deposits, but the banks also use their money to lend out to their
borrowing clients. If the borrowing clients subsequently fail to repay their loans, the lenders
stop lending out money and then the depositing clients lose confidence and want to get their
money back out. And so the bank or building society collapses, with no good customers'
money, no more money lent to them and a whole heap of bad unpaid debt. This lack of
confidence then transfers onto the stock market, ending the house of cards.
So now that is all clear, what is being proposed?
First a handful of major countries such as the USA the UK and Ireland have started guaranteeing the depositors money with Tax Payers money. This in principle is a very good idea, because a lot of the time it is pure lack of confidence in a bank or institution that can bring on its downfall and as a consequence there may be no substantive reason for its failure at all. Restoring confidence in people's savings will as a result make them leave their money there and therefore not undermine the banks assets.
Secondly the US and the UK have both proposed major bailout packages the complexities of which I will not be going into here in this article but suffice it to say they are essentially buying into these large financial institutions with large sums of tax payers' money. Will it work? I don't know as I said earlier time will decide if any of the ideas are good ones. That said it really does depend on whether the institutions start lending to each other again because the kind of liquidity drought that we are all currently experiencing is dragging the world into what could be the biggest recession we have ever seen.
One thing I can say is we all need to radically change the way the banking system works. I don't dispute there is a lot of regulation, hey as an independent financial advisor I am subject to it on a daily basis. My concern is I don't know whether the large financial institutions are actually regulated in the right way. I don't think anyone has ever turned round to a lender and stipulated what their minimum lending requirements should be, maybe because this would be considered restrictive practice, but lets think for a second if lenders weren't allowed to lend to such bad risk clients we probably would not have seen the sort of economical growth we have seen over the last ten years and we definitely would not have seen the house price rises we have seen over that same period but the million dollar question is .... Would we be in this mess now? I honestly don't think so! - 15224
money problems, STOP! Unfortunately I haven't got the answer, and only over time will we all
discover the true cure for our global financial ills. All I can do is speculate for the future and
examine some of the ideas being circulated at the present time, and perhaps offer up my
humble opinion as what could be the way to go.
To start off, for those of you who are without television, radio, newspapers or indeed any
contact whatsoever with the outside world, we are currently facing a global financial crisis the
like of which we have never seen before. Of course there was the great stock market crash of
1929, but without trying to make light of that catastrophe, money these days is simply vastly
greater then it was back then. We are currently talking about the loss of hundreds of billions
and even trillions in the case of some countries.
So what exactly is it that we are talking about here? Why has the world become so far plunged
into debt? In a nutshell, we are dealing with liquidity, that is to say, the money moving in the
markets. Money is as essential to the economy as air is to humans, and so without this life
giving air, the economy is choking, and choking badly. What has been happening is that global
lenders have been doing their thing and lending money. In order to keep doing business, these
lenders had to keep lending out their money. However, when the good debtors had all the
money they needed, the lenders dropped their standards and started lending to people with
less rigorous checks. Of course once one did it, in order to compete, the rest of the lenders had
to follow suit. The rules of the competition meant that all the lenders then lent to less than
ideal clients.
So how has this caused the problem? The problem with lowering your standards especially to borrowers is you expose yourself as a lender to more risk. There is a reason why some customers can't or shouldn't get credit; it is because they might not pay it back. Now normally this is an acceptable risk for lenders to have some borrowers who may not pay their debt back. The problem is over the last decade lenders have lent way too much money to these people and as such they are unable to recover that money back from them.
This then creates a domino effect so that global lenders lose confidence and are reluctant to
lend more money. Well, a high street lender that has no more money to lend is about as useful
as a chocolate fireguard, so they go out of business as customers start to leave. In the case of
banks and building societies, these lenders also have depositing clients. These customers
receive interest on their deposits, but the banks also use their money to lend out to their
borrowing clients. If the borrowing clients subsequently fail to repay their loans, the lenders
stop lending out money and then the depositing clients lose confidence and want to get their
money back out. And so the bank or building society collapses, with no good customers'
money, no more money lent to them and a whole heap of bad unpaid debt. This lack of
confidence then transfers onto the stock market, ending the house of cards.
So now that is all clear, what is being proposed?
First a handful of major countries such as the USA the UK and Ireland have started guaranteeing the depositors money with Tax Payers money. This in principle is a very good idea, because a lot of the time it is pure lack of confidence in a bank or institution that can bring on its downfall and as a consequence there may be no substantive reason for its failure at all. Restoring confidence in people's savings will as a result make them leave their money there and therefore not undermine the banks assets.
Secondly the US and the UK have both proposed major bailout packages the complexities of which I will not be going into here in this article but suffice it to say they are essentially buying into these large financial institutions with large sums of tax payers' money. Will it work? I don't know as I said earlier time will decide if any of the ideas are good ones. That said it really does depend on whether the institutions start lending to each other again because the kind of liquidity drought that we are all currently experiencing is dragging the world into what could be the biggest recession we have ever seen.
One thing I can say is we all need to radically change the way the banking system works. I don't dispute there is a lot of regulation, hey as an independent financial advisor I am subject to it on a daily basis. My concern is I don't know whether the large financial institutions are actually regulated in the right way. I don't think anyone has ever turned round to a lender and stipulated what their minimum lending requirements should be, maybe because this would be considered restrictive practice, but lets think for a second if lenders weren't allowed to lend to such bad risk clients we probably would not have seen the sort of economical growth we have seen over the last ten years and we definitely would not have seen the house price rises we have seen over that same period but the million dollar question is .... Would we be in this mess now? I honestly don't think so! - 15224
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