The credit crunch – who’s to blame?
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a tenner
The idea of this article is to explain the credit crunch run a few things by you as everyone wants to look round and blame someone, even if sometimes its a little looking in the mirror….and taking responsibility. So lets look at the front runners:
1. Gordon Brown, or any other present government leader or finance minister
2. Greedy Bankers
3. Mortgage Brokers and subprime mortages
4. Credit Card Lenders
5. Credit rating agencies
6. The chinese
7. You and me
8. All of the above and more
Ok lets start at the top, and run with a simple explanation of the credit crunch that brings in some of the above…
Really the credit crunch is just an unexpected shortage in availability of funds for lending…so there are not enough loans, whether private or bank driven. That means I cant get a loan from the bank and lets say as a builder with a building supply company, the supply company will not let me buy products on account, or recues the amount I am allowed to buy on account.
Straight to number 3 then, a sharp rise in defaults on so called subprime or self certified mortgages appeared to trigger a drying up of credit availability. These mortgages were mainly used in the USA. The lenders sold mortgages to customers with low income and poor credit. They gambled that the boom in the housing market and house prices would allow these inappropriate mortgages to remain affordable. In addition these mortages had been packaged together in groups and then the risk on them sold as a kind of stock market product. Much as a bookie will “lay off” bets by passing all or part of a gamble to another bookie. This had to be done because the risk of the loan was not backed up by savings. (actually much of the money backing these deals came from China’s financing of the American economy with savings from their own burgeoning economy, some say when they refused to give the US any more finance, we are on number 5 here, that this is when the bubble burst)
Fiscal oversite was poor with brokers getting a fee or a percentage of mortgages sold, it was in their interest to sell anything even if they were too costly to really pay back.
Further Fiscal oversight that should have come from teh rating agencies was poor as somehow they managed to give subprime mortagegs lent on the basis of a gamble rather than savings, a low risk rate and the financial establishment could pretend when presenting their balance sheets that the money they were owed through the mortgages was low risk.
Coupled to this many of this US sub rime mortgages had intro periods of 2 years where interest rates were artificially low and just at the time many of them were coming out of the intro period in 2007, the Administration put up interest rates to combat inflation.
High interest high payments and high inflation (high fuel -remember 100 dollars a barrel- and food prices)meant low disposable income and many began to default on their mortgages, when I say many, I mean thousands. House prices plummeted and the US housing boom was over…people defaulting with 100% mortgages had negative equity and banks no longer had security on their loan because if the repossessed the houses and sold them they wouldn’t get back the money they had leant….oops!
Then the mortgage companies began to go under, as they couldn’t recoup and the mortgage companies had been leant to by the banks and they began to go under and so they refused any more loans and would give no more credit….CRUNCH, it became too difficult to borrow money and credit just dried up as this.
In many ways credit/borrowing drives the econmoy even if it is only as I explained above in having an account with a supplier which is paid at the end of the month, so when credit is hard to comeby its harder to get things done. On a alarger scale certain types of high risj business cannot find investors (previously banks or bank related organisations) because banks will not take on the risk.
Now whilst his can be seen as being driven by US markets the same thing has happened in the UK but to a lesser extent, Northene Rock and Bradford and Bingley suffered because of the types of laons and mortages tehy offered and people defaulting or getting into negative equity. Other UK banks are really the UK marques of a global finance brand and had already involved themselves heavily in US markets. Other european countries have suffered because of the drying up of credit markets though rates of mortgage and home ownership are lower so they have not been effected in the same way.
Some say the leaders of our governemnts should have seen this coming, or at leaast given regulators more teeth, but we must remember before this time the people running these financial institutions had enormous leverage, its why parties of the left like Labour in the UK wooed them before coming to power. For leftist parties like Labour they were glad of the boom as this increased tax revenues and allowed them to pursue social programmes without raising taxes (for which they were previously criticised), hospitals, schools, and other policy was funded by skimming off the boom.
So is Gordon Brown to blame, well my feeling is any government is only as good as its opposition, and here the main opposition Party (the Conservative Party) is seen as representative of big business and finance and did little to ask the government to increase oversight. They are presently against any fiscal stimulation. If we need to point the finger at politicians it must be all of them or no one.
There is another catholic guilt trip crossed with protestant work ethic going on too. That says we all enjoyed ourselves and took mortgages and credit cards we couldn’t afford, how dare we assume that money is our right (its only for the wealthy and failed bankers) we created the credit crunch because we weren’t responsible, abstemious and we didn’t live simply. How the Greens amongst us are crowing, it was you and you have polluted the Planet as well. Its a new Puritanism, pojnting to the maypole of credit and demanding all the jollity must stop.
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