Government to underwrite loans to businesses?
December 15, 2008 | Leave a Comment
David Cameron (Conservative leader in the U.K) has, again, commented on the problem of banks being unwilling to lend to businesses in the current economic climate. The problem is that the banks’ fingers have been so badly burned by the credit crunch and resulting financial crisis that they are scared stiff of being caught out again - especially when the full impact of all that has happened in the economy has yet to reveal itself.
Cameron argues that intervention is needed to kick-start the process of lending to businesses and that the only way to give the banks the confidence to do this is for the government to act as guarantors on appropriate business loans thereby taking away the risk from banks.
He has argued that a national loan guarantee was “a massive state intervention to help the banks lend again.” This seems like a great idea…however, with a government up to its neck in debt as a result of spending, taxation and bank bailout decisions, where is the money going to come from if called on for bad debts.
I am with Cameron when he called for “new rules and incentives to create a new culture of responsibility” which need to be enforced by the regulating body. However, it seems like a high risk plan (if recession is leading to the fall of many businesses) for a highly in debt government to act as guarantor to high risk loans.
I know that some risk taking has been necessary to intervene in the economic downturn - but surely it needs to be low risk?
Santa to blame for the credit crunch?
December 12, 2008 | Leave a Comment
Netmums.com surveyed 1,000 parents this year and found that around 40% are saying that Santa has had to tighten his belt too this year. Around 5% were planning to have a frank conversation with their kids and shattering the myth of Santa so that their kids don’t build false expectations.
However, nearly half of respondants claimed they would do whatever it took to ensure that their children still has a good Christmas and would deal with the consequences later. It is precisely this attitude that has caused hundreds of thousands of people to ratchet up inappropriate levels of debt in order to live out some form of ideal of being able to instantly buy the things they and their family want perceiving is as a need. “I need to get my child present X or Y (or even X and Y) for Christmas” is the refrain whilst putting the cost onto the plastic and facing the mounting debts later. Dare I suggest that the most valuable gift that we can give out children this Christmas is love, quality time and humble gifts teaching them the true value of the season as well as the importance of being financially responsible?
Credit crunch rise insurance claims
December 7, 2008 | Leave a Comment
Why would the credit crunch raise insurance claims?
It is feasible that, in the wake of the credit crunch and the start of a recession that insurance claims will rise. As people planned holidays then find they have either lost thier job or are nolonger able to pay for it using credit, there is potentially a rise in fraudulent travel insurance claims.
The Observer Newspaper recently quoted Direct Line Insurance and the Absolute Fraud Management (AFM) service as expecting a rash of claims from unscrupulous policy holders. Of course, this problem will not only be reflected in people trying to recoup what they have paid on failed holiday plans….a rise in household policy claims as a means for unscrupulous people to raise funds claiming loss of expensive items is also expected.
How will the rise in insurance claims affect customers?
Chris Price at Direct Line added: “It is generally said that during an economic downturn insurers see an increase of fraudulent claims on their books.” As a result, we can expect an increase in the time takes by insurers over legitimate claims as everybody’s insurance claims will be carefully scrutinised and authenticated. Customers seeming vague or nervy in during telephone claims will be expecting a face to face interview…otherwise premiums could end up going sky high to compensate for fraudulant claims.
For the rest of us this may simply mean that we have longer to wait for genuine claims to be settled. The current financial crisis also means that customers are more likely to claim for loss or damage to lower value items making the claims process slow down due to claims volume.
Automobile Industry Affected by Credit Crunch and recession
December 5, 2008 | Leave a Comment
Falling car sales leading to manufacturing cutbacks in the automobile industry
I suppose it stands to reason that as credit becomes less easily available, those big ticket items like new automobiles are going to be one of the first industries to suffer. The credit crunch and recession seem to be feeding off eachother now. In the U.S, the U.K and Australia there have been announcements about cut backs in automobile manufacturing. The result? Redundancies / shorter working hours, less income available to spend in the economy and retail outlets suffer further.
So what is the fallout of cutbacks in the automobile industry (amongst others)?
I don’t know about you but I have really noticed (when out and about) how grim peoples’ expressions are. There is a lot of pressure on most households’ income ….Thanksgiving, Christmas, school recess (an needing to entertain the kids)….all these factors are a pressure financially at the best of times….let alone when credit bills are hitting the doormat and there is uncertainty about how many more paycheks might be coming in if the recession bites hard.
So how do we move forwards from here? When can we feel safe to spend again? Public perception is that the VAT reduction in the U.K is not expected to have much impact on the spending of many households …the main benefit might be on heating bills (but any saving is quickly offset by rising household fuel costs). Banks are enjoying lower interest rates but passing only a fraction of them on to the customers. Everyone is scared.
Well, back to the Christmas preparations…this year it all seems much more balanced…a bit of giving but having the space to remember the reason for the season.
“Woollies” - that great high street institution - in receivership. I can’t believe it!
November 27, 2008 | 1 Comment
I don’t know about you, but I was shocked yesterday by the announcement that Woolworths was going into liquidation with an enormous £385 million of debts that have been prevented from getting any larger and have forced them to look at their options.
Everywhere I went this morning, people were talking about it. Generations have bought their pick and mix and bargain toys there as well as those weird and wonderful household items that you just didn’t seem to be able to find anywhere else. I salute you Woolworths for all that you have been over the years. You will be a sadly missed presence in our town centres!
As the news was announced last night, there were other casualties of the credit crunch fallout looking like they were heading the same way - MFI, Dolcis, Ethel Austin to name but a few AND THIS IS BEFORE CHRISTMAS!!!! If businesses that have weathered out many a recession are going to the wall now, where will it all end as the post Christmas slump in spending comes around.
I don’t know about you but I think the enormity of this global financial crisis is starting to sink in. Yes. I have been watching the news. I know about the extent of the financial crisis. It is the hidden depths of its impact that is starting to reveal itself….and, as I meet people in the North of England who have been laid off from different jobs more than once in the last few months, I don’t think I’m alone in wondering where it will all end.
Can the Credit crunch be reversed by central banks?
November 23, 2008 | Leave a Comment
The last few weeks have seen a whole lot of negotiation by governments with central banks in the hope that the huge cash injections that were eventually forthcoming would avert the worst effects of the credit crunch. Wold leaders have been discussing together how they can work together to save the world from the horror that the subprime crisis has revealed.
How can central banks reduce the impact of the credit crunch?
The federal government and their opposites across the world have been pumping more money into the financial markets in hope that this will allow funds to move more freely so easing the credit crunch. Basically, this allows more banks to borrow more money more cheaply. These lower borrowing rates will also be secured against lower value collateral.
Will the central banks be sucessful in reversing the credit crunch?
What these arguments for federal cash injections into the banking system are ignoring is that the money is being used to try to patch up the injuries to the system caused by bad lending decisions. It now seems unlikely that a major recession can be avoided. I also suspect that inter-bank and bank-customer trust has been so badly impaired that we will never quite go back to the “good old days” of freely available credit quickly supplied. Nor should we.
The economic backdrop in the U.S, the U.K and Europe is appalling and worsening too. Suddenly all the lenders are a bit skittish and yesterday’s good risks for lending are now not looking so good a risk…especially with possible redundancies around the corner as the recession deepens.
This means that, whilst there is already a lot of bad debt out there, there will be more bad debt looming as jobs get lost and spending is cut back. Even other banks will take a long time to look like a good credit risk as nobody seems to know what dark secrets lurk on eachother’s balance sheets. It will take at least a year before that kind of information becomes publically declared and so the decision to lend to other banks can be made based upon transparently declared facts.
Everyone is starting to hoard money ready for any surprises in their own financial affairs…consumers, banks and businesses. I wouldn’t hold your breath that these cash injections are going to be made available to customers too quickly. All the banks have had a major scare and need time to catch their breath, see the impact upon their own financial stability, work out what on earth happened and try not to do it again.
When will the credit crunch end?
November 19, 2008 | 1 Comment
What do we need to know when assessing when the credit crunch will end?
The credit crunch is essentially the constriction of available credit available in the global economy for institutions to lend to eachother as well as the public. A important part of how banks earn money is by lending to eachother as well as predicting exchange rate fluctuations and buying and selling currencies in order to profit from those fluctuations in currency value.
The way in which banks assess how much they trust eachother in the UK is measured through something called the Libor. Fluctuations in the Libor rate tell us how much banks trust eachother at the moment….as a result, this figure is a good way of assessing the extent of the credit crunch.
The Libor and swap rates between banks are used to work out how much they should be charging for new mortgages and loans. When everything is running smoothly in the financial markets, we would expect the 3 month Libor rate to average between 0.1% and 0.2% above the bank rate.
At the start of the credit crunch (August 2007) the Libor rate soared higher than this signalling problems ahead. By the summer of 2008 it was recovering a bit but the collapse of Lehman Brothers in September 2008 caused the Libor rate to spike again as financial markets panicked.
In the UK the $700 billion bailout of banks in the U.S had a negligable impact (it was more than 6% above the basic rate by then). It wasn’t until Gordon Brown arranged a similar cash injection into the UK banks of £40 billion has improved the Libor rate in the UK (modestly). The significant drop in interest rates has also made modest improvements as well.
So, when will the credit crunch end?
It is important to consider the knock-on effect of the recession, redundancies and cautious spending when answering “When will the credit crunch end?” All of these factors will have an impact upon how how long it takes banks to start trusting eachother as well as customers to be able to repay monies that they have borrowed. There are slow and cautious signs of banks re-building their trust in eachother following these major cash injections by U.S, U.K and European governments. However, the financial world nolonger feels like a safe place for most people and businesses as everyone seems to know of poeple who have been badly burned by the fallout of the credit crunch.
The credit crunch will end….but we may need to wait several years for the full fallout of the credit crunch to work out of the system and trust levels to be restored to where they were in 2007 before it all began.
Who is to blame for the credit crunch?
November 14, 2008 | Leave a Comment
Are the banks to blame for the credit crunch?
During the economic boom, banks became ever more lax about who they were lending to. The credit bubble was huge and there seemed to be plenty to go around. The huge profit margins on lending eventually lending institutions to get greedy and less discerning about who they loaned money to. They were starting to gamble and consumers lapped it up. Eventually, with 100% mortgages, cheap loans and cheap credit cards, people were going to find it hard to repay debts and the bubble burst.
In America, subprime mortgages were being widely made to people with a poor credit history who would find it difficult to pay. This has been a major factor in banks now being wary of lending money and so is a major cause of the credit crunch.
In the United Kingdom house repossessions are up by 40% but U.K. bankers still largely blame the collapse of the subprime market in the U.S. The subprime loans were billed as being Triple A star safe loans. Mortgage companies selling these loans played a huge part in the credit crunch as over confidence lead to complacency and less discerning lending decisions being made.
How far are consumers to blame for the credit crunch?
Consumers need to carry some blame for taking out loans that they could not afford to pay back. However, they were also encouraged into inappropriate borrowing by aggressive sales by lenders, inappropriate loan sizes and too high a credit card limit. The lenders were keeping their eyes more on the huge potential profits to be made out of interest payments and took their eye off whether consumers could realistically repay their debts if they kept being added to.
The old trick of 0% interest for 6 months was a good one for getting people to transfer lending companies…but the ides was that the original loan would be repaid with the new one. As consumers’ budgets got squeezed by interest payments, credit cards were still being used rather than paid off and the acount being closed.
Agressive mortgage lending made it easier to buy a home. This forced realty prices unnaturally high meaning a 100% mortgage could easily leave a buyer with negative equity when the bubble burst.
Are estate agents to blame for the credit crunch?
All estate agents are guilty of is encouraging people to buy at the peak of the housing boom. Realtors who had commission arrangements for selling particular lenders’ mortgages will have played a lesser role in the credit crunch and they encouragesd a housing boom. However, this could not have happened without mortgage lenders making the money available in the first place.
Is the government to blame for the credit crunch?
Many argue that the government should have ensured that the central banks controlled the situation more tightly and prevented irresponsible lending. The fallout of the credit crunch has shown that a lack of central control can have massive implications.
Further questions arise over whether banks should be bailed out by governments as this partly exonerates them of the moral responsibility for their actions and places further financial stress at consumers and businesses doors.
Saving money on fashion (Part 2)
November 12, 2008 | Leave a Comment
In addition to keeping the neutral essentials of your wardrobe (smart jacket, cardigan, jeans, tailored trousers, little black dress etc) in neutral colours, there are ways to save money on fashion whilst getting an up to the minute individual look.
Discounted catwalk looks at the mall.
All the main shops at the mall take their styles and derive them from that season’s best catwalk looks. High fashion items, therefore, do not always need to be with a high price designer price tag. Look around at the mall for high quality seasonal looks to bring your wardrobe up to the minute at budget prices.
Charity shops can save money on fashion
Whilst charity shops generally deal in second hand clothes, many also bring in discount labelled stock that are sold much more cheaply than at the mall. Add to that vintage looks or items that can be adapted (with your sewing machine) and you will soon create a unique statement of the current fashions and the confidence that you will never be in the same clothes as anyone else at an event.
Where possible use cash instead of credit cards to save on fashion
Credit card payments cost huge amounts of money by the time you have paid them off. Also, in times of impending recession, the last thing anyone needs is to increase their debts when job security is uncertain. Many banks are also suddenly reducing peoples’ credit limits….so make sure you can deal with that my not racking up debt.
Payment by cash is a great way to really appreciate what you are spending on an item and to reflect on whether it really is the bargain you thought it was.
Set a monthly clothes budget
That fashion item to cheer us up on an off day (and, lets face it, with the credit crunch and recession a lot of us are having bad days!) can make a real hole in the month’s budget. Despite this, clothes do wear out or get shabby so its not realistic to cut right back on the family clothes budget.
When people enter an Independant Voluntary Financial Arrangement with creditors or, worse still, go bankrupt, the type of budget that is ofetn set for all clothes and shoes is $50 per month per adult and £25 dollars per child. It is possible to be clothed and shod on that budget from discount stores…but not easy. This will help to focus the mind if you feel that your debt levels are too high and you are considering spending a lot of money on a clothing item. Better to save money on fashion now by setting a clothes budget than to face these restrictions if made bankrupt.
Obama choosing team to turn the U.S economy around
November 6, 2008 | Leave a Comment
Obama wins the Presidential Elections
Well, unless you were living in a bubble these last few days, you couldn’t fail to notice Obama’s stunning election result.
He has already set about selecting his team that will handle his transition to power….particularly his new Treasury Secretary and Wall Street continues its turmoil of recent months. Possible names for this role include Clinton’s last Treasury secretary Larry Summers, former Federal Reserve chief Paul Volcker and investor Warren Buffett. Another possible candidiate is Timothy Geithner (president of the New York Federal Reserve) who has been executing the US central bank’s sudden explosion of market activity.
Has he inherited a poisoned chalice with the current financial crisis at the start of his presidency?
In his acceptance speech, Obama reasurred voters whilst warning them that this was going to be a long haul with no quick fixes. He also stressed that he would listen to people’s opinions and move the U.S back into economic growth, whilst stressing that this process may take longer than one term.
It is easy with a great orator such as Barack Obama to imagine that those rousing words can translate to action as quickly as the image of a brighter future for America is planted there. He was, however, right to be reticent. The severity of the shock due to the credit crunch that the world has faced and the fallout from that cannot be erased by a magic wand. It will take hard work. It will leave scars. Painful lessons will be learned about national as well as personal financial management. Obama was right to warn the American public that this would not happen briskly.
Obama has been feted by the media as his key accomplishment to dae being that he is the first black American President. Whilst, with looking at the history of the country, this is remarkable, I feel that we need to put that to one side and see the man that he is….he has shown so many facets to what he can offer the U.S public during this campaign.
I wish him well with the work ahead and pray that at the end of his term he goes down in the history books as not only the first black American President, but the President that turned around the U.S economy and made great strides towards peace and freedom from terrorism.