I’m sure this subject will resonate with most of you, no matter which country you live in…The Financial Crisis!
As I watch the news on TV, listen to the radio and read the newspapers, I think to myself… Did we all go out and spend all our money? Nope because then the economy would be pretty strong. Did businesses start to sell stuff we don’t need or want? Nope…we all still want the things they’re making. Did our taxes go down so the governments revenues are down? Nope…they keep going up. Has the duty on petrol suddenly been halved? Eerrrrr Nope!
So why they hell are our countries in such a financial mess? Well there are a few reasons but the bottom line is…it is almost entirely attributed to sub-prime lending.
My mum’s going to shout at me for this one, but…houses…people’s greed for making money out of property…pushing estate agents to up the asking price way beyond what they are actually worth…thus stretching the amount people need to borrow in mortgages. Going waaaay beyond what they can afford…but in a lot of cases, at the bottom end of the market for first time buyers, it’s a case of having to as there is no alternative. To get on the property ladder around where I live, would require a 20-30% deposit…and considering you can’t buy a flat for less than £150k, that means saving £30-45k for a deposit.
So what does this drive… how does rising house prices cause such a crash?
Well…let me explain something that may not be clear to most…the banks…lending against earnings up to 10x’s people’s salary…WTF? Why would you do that? What possessed you to think that people could possibly afford to repay it? And what about those that you chose to give mortgages to that have a poor credit history or none at all? Did you really think you were going to get your money back? These are called ‘Sub-prime Loans’…
The sub-prime loans were given.
=> to buy overpriced houses
=> with no or little down payments,
=> to people with too low incomes
=> and usually at progressive interest rates.
The banks did this on the basis…or should I say ‘GAMBLE’ that the property market would continue to rise…and just as the dot.com bubble burst…so did the property market in 2007. So the banks did what they do best…and sought to recover their losses by calling in their debts…raising interest rates and forcing people to either pay them, or foreclose…or in English… reposes the houses…and leave people homeless and bankrupt.
How did all this affect the economy so much? It put extra value on the P & L sheets of the banks to make them look like they were worth more than they were and hence their stock prices were high, stock brokers traded money they didn’t own based on false numbers.
The original sub-prime loans were then repackaged (which is called securitisation) by the lenders in order to make them look like genuine securities.
Here’s the sneak part that not many people know…. these ‘genuine’ looking loans/securities were then marketed by investment institutions (shadow banking) or ‘vehicles’ …. basically, to move them away from the bank… which got them off the P & L sheets...and of course, they were sold with no guarantee of market liquidity…i.e. when not IF the risk materialised, there was no comeback on the bank that sold the debt.
This trading went on from Bank to Bank to boost valuations and make the banks billions…and then sold on to get them off P & L’s….until it got to the crash…then…and it makes my blood boil when I think about this…the banks left holding the baby ‘so to speak’….hid the debts in off shore bank accounts, down in the Cayman islands and such like and buried them under a web of deceit… which made them difficult to trace. And just to rub our noses in it…the traders and bankers got multi-million pound bonuses for their efforts!!!
Some estimates state that the scale of the problem…i.e. the total toxic debt amount rose to at least 3 TRILLION DOLLARS!!!
So what now? Well…the likes of you and I are being made to pay once again…our governments bailed out the banks with tens of billions if not hundreds of billions of pounds each…even taking over the banks in some cases… Northern Rock…which…incidentally, has now been sold to Virgin Money…for £747m!!! But…we the tax payer will be left with a ‘paper’ loss of between £400m and £650m…how is this so.. well the government split it in 2 when they took over… 1 piece was all the bad stuff…the other was the good stuff…which they sold to Virgin. So we’ve put in £1.4bn…got back £747m and are estimated to get back a further £280 over the next few years…I’d say that’s actually not too bad…but will our taxes go down? I doubt it…the people have shown they can pay… so let them.
And correct me if I’m wrong but the bailouts we gave were loans right… which means they must be paid back…which is fine…so when? How much interest? What exactly is their plan to repay you and me (via the treasury)? Because all we see and feel now is that you had our money, we’re being made to pay…you pay it back…but what do we get…how will our lives be made easier? Can we expect dividend pay outs? Bonuses? A better NHS? Cheaper Petrol?
Bottom lines is…we just don’t believe you! If these actions were taken by people within the company I work for, they would have been sacked immediately, stripped of bonuses and pensions and thrown out…simple…so what makes you think you are any different?
So do I feel sorry for Fred Goodwin…hell no…he knew exactly what was going on...and if he didn’t, then he’s even more of an idiot than we first thought and doesn’t deserve a penny! And certainly doesn’t deserve to be a Sir!
Woooooow….quite a rant Bert… I needed to get that one out there to help people understand just how we got into this mess. Yes there were various other economic imbalances in play, but the recession has been attributed nearly entirely to the sub-prime financial crisis!
How can I end this one on a positive note…as I always try to do? Well all I can say is it is a credit to us…the people that we ‘get on with it’…we…unlike the politicians and bankers…have no choice...so fair play to you. I for one, say thank you to those trying to run businesses to keep the economy going.
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