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Financial crisis: Is it over hyped?

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Pete_Robinson 24 Sep 2011
Having been told on Thursday that the global economy is close to "staring down the barrel of a gun", and reading daily reports of the country being in 'financial meltdown', it got me to thinking that if I didn't read or watch the news then would I actually know that anything was happening?

Personally, I have felt absolutely no effect of the financial crisis. Neither do I know a single person that has been affected by it. Yes, prices are rising on some key things (namely fuel and insurance mainly), but that can't be attributed to this crisis. And of the major towns and cities that I've visited across the country, all the high streets still appear to be buzzing, and for all appearances it seems to be business as usual.

When you think of financial crises in the past and from history lessons at school you immediately think of high streets with all the shops boarded up, and bread lines stretching round the block etc etc. And when I hear the reports in the media about the so-called financial crisis this is what I imagine to be happening. But in reality I think if I had a complete media blackout and just went on what I observed directly then I wouldn't have a clue that anything out of the ordinary was happening.

Don't get me wrong, I'm not saying that it's a complete myth, but a part of me can't help feeling that it's being slightly overhyped by the media and politicians. A bit like the Millenium bug!

Any thoughts? What are your experiences?

[Apologies to anyone who has been directly affected by it - I'm sure there must be people who have been hit hard by it]
 Chris Craggs Global Crag Moderator 24 Sep 2011
In reply to Pete_Robinson:

I have noticed that the stock markets have a few days of gains then one financial 'expert' or another starts screaming how we are all doom and everything crashes. A few days later the cycle is repeated - why don't they all just shut the fook up?


Chris
Fawksey 2 24 Sep 2011
In reply to Pete_Robinson: Bird flu anyone?
Frogger 24 Sep 2011
In reply to Pete_Robinson:


I agree with your sentiment, that this 'crisis' is no different to normal life. Our country has been run on borrowed money for years, and that will never change. The UK, and all the other 'major economic players' will always be running on 'promised' money. Which makes it all a little bit unreal, doesn't it, if it's never actually paid back?

It's all just a load of numbers flying around in the magical, mystical world of modern economics.

As a great financial philosopher once said, "Show me the money!"




 Postmanpat 24 Sep 2011
In reply to Pete_Robinson:
>
> Don't get me wrong, I'm not saying that it's a complete myth, but a part of me can't help feeling that it's being slightly overhyped by the media and politicians. A bit like the Millenium bug!
>
> Any thoughts? What are your experiences?
>
It's actually potentially worse than the politicians and mainstream media are prepared to acknowledge.

We are a bit like an alcoholic that has been having a fine old time for years. In 2008 we had a nasty health scare and a warning from the doc but we discovered that drinking made us feel better so we kept at it.That's why you and most people feel OK. One time it won't just be a scare.

In 2008 the global banking system came within days of seizing up which would have rapidly bankrupted thousands of companies dependent on loans for working capital and thrown millions out of work.

The "solution" was for the government (UK,US, etc etc) to borrow lots of money to keep the banking system alive and then print lots of money to keep the economy running along and finance the borrowing.

It is simply not possible to keep borrowing and printing money on this scale. This is what the markets are telling Greece, Ireland, Portugal etc and if they fail that will necessitate further bank bail outs, further borrowing and money printing by governments and ultimate those governments too will be unable keep doing that and their banks will fail.

The best we can hope for is a repeat of the past 3 years: low growth, high unemployment, diminished public services, squeezed standards of living for the majority interspersed by nasty downturns every 2-3 years.

If the Euro situation is not "dealt" with in an orderly way and the European banking system begins to fail then expect 30%+ unemployment, sharp falls in living standards and all the risks of social unrest that entails. much of Europe and the US could well look like Greece is
 SARS 24 Sep 2011
In reply to Postmanpat:

Wow Pat, that's bearish! So do you think UK banks (Lloyds, RBS and Barclays) are still deep in it or has recapitalization put them on a sounder footing?
 andy 24 Sep 2011
In reply to SARS: I think that the british banks have less exposure to piigs than (for example) the french, and i think they've probably taken most of the hit on most of their assets. So i suspect the uk banks will be ok (relatively) - however it's the contagion risk that you can't predict. My Top Tip for hidden shite is the Spanish banks.
 SARS 24 Sep 2011
In reply to andy:

In fact you can see their exposures a Dec 10 from the European stress tests. RBS and Barc are similarly exposed - Lloyds is basically UK and Ireland. Also one thing often forgotten is that UK mortgage default rate highs have always been below 1% at their worst.

I think the recent banks selloff ie overdone myself - but agree a lot hinges on Europe sorting itself out.

There could be good money to be made by being brave (or alternatively lots lost).
 Postmanpat 24 Sep 2011
In reply to SARS:
> (In reply to Postmanpat)
>
> Wow Pat, that's bearish! So do you think UK banks (Lloyds, RBS and Barclays) are still deep in it or has recapitalization put them on a sounder footing?

They're in better shape than in 2008 but they have a large direct exposure to Irish debt and counterparty risk with, er, "everybody".

Whether its Spanish banks, German Landesbanks (which are probably all technically bankrupt!) or SocGen where the immediate problems lie you'll remember that when the shit began to hit the fan last time the credit markets just seized up pretty much regardless.

 Martin W 24 Sep 2011
In reply to Pete_Robinson: In our local high street (not the city centre, but the suburb which used to be a village in its own right before the city expanded) about 30% of the shops are empty with "To Let" signs outside. A number of local businesses have downsized to smaller premises, presumably because trade had declined.

I was made redundant two years ago, a friend of mine was made redundant 18 months ago, the company I'm now with has just laid off 20-odd people due to depressed demand for the products that our product goes in to. Across the country unemployment is over 2.5 million, and we probably haven't seen the full impact of the public spending cuts yet in terms of redundancies. Many, many people who do have jobs haven't had a pay rise of any kind in at least two years. With inflation at its current levels that means they've actually taken a significant pay cut, at the same time that some essentials such as domestic energy have risen by getting on for 20% a year.

You don't see breadlines because these days we have this thing called the welfare state (at least for now). But to suggest that the state of the world economy isn't having a detectable effect seems to be based on a somewhat blinkered view.
 Yanis Nayu 24 Sep 2011
In reply to Chris Craggs:
> (In reply to Pete_Robinson)
>
> I have noticed that the stock markets have a few days of gains then one financial 'expert' or another starts screaming how we are all doom and everything crashes. A few days later the cycle is repeated - why don't they all just shut the fook up?
>
>
> Chris

Agreed. It's all just mass psychology.
Fawksey 2 24 Sep 2011
In reply to Martin W: who said there wasnt a "detectable" effect?
 Chris H 24 Sep 2011
In reply to Pete_Robinson: What is the absolutely worst case scenario though? Vital services kept going on minimum wage - everyone else on benfits with rationing of food and goods? Army keeping order on the streets?
Pete_Robinson 24 Sep 2011
In reply to Postmanpat:

Forgive my ignorance in any points or questions made - obviously I'm not an expert in this, just inquisitive.

So,

> In 2008 the global banking system came within days of seizing up which would have rapidly bankrupted thousands of companies dependent on loans for working capital and thrown millions out of work.
What type of companies? Financial, construction, or across the board? Would this really be 'allowed' by the government? Would they not be bailed out like with Northern Rock if it was on such a massive scale?

If the situation is as serious as you and the media / politicians suggest then is there no way to default to a previous state when things were running better? A bit like when Windows crashes?

> The best we can hope for is a repeat of the past 3 years: low growth, high unemployment, diminished public services, squeezed standards of living for the majority.
This is what I've been confused by, as I personally haven't felt any of these effects, but I take people's word for it - it's obviously affecting some people! I'm not suggesting there are no effects or consequences of the recession, just that it doesn't appear to be as bad as the hype makes us believe. Not so far at least. Martin - if you hadn't been watching/reading the news would you have immediately linked your redundancy to your friend's and in turn to a national recession / financial crisis? Or would you have just thought "that's bad luck", and started looking for another job?

If energy costs are increasing 20% year on year then shouldn't the government be looking at that as a means to reducing living costs, instead of sitting by watching oil companies making huge profits while rinsing us of our cash at the pumps?

As I said earlier, when I think of a depression I think of MASSIVE unemployment, starvation, people queuing for handouts etc. I take Martin's point that we now have a welfare state, which is why we don't see breadlines etc, but isn't this just a sign that our notion of what a depression is is relative to today's living standards and what we've come to expect? Or are we likely to see situations like this in the street if the banking system fails as you suggest is a possibility?

One final question. Without going into too much detail / "bank bashing" / lengthy explanations, am I right in thinking this whole situation has come about due to the banks being too greedy? By authorising mortgages to people who had no prospects of keeping up payments in order to make themselves more cash. Allowing people to spend ridiculous amounts on credit in order to make themselves more cash, etc etc. Why is it that banks are allowed to make such astronomical profits when the going's good but when the sh!t hits the fan it's the general public that suffers? [a bit like the banker's 'one way' bonus schemes]

This has turned into more of a rant than anything. Sorry about that - better out than in!
Pete_Robinson 24 Sep 2011
In reply to Pete_Robinson:

And while I'm ranting...

...I also find it competely incongruous that this year Apple announced such huge profits while we're in the middle of this recession. Surely a technology company selling essentially non-essential items like the iPad(2!), iPhones, music downloads etc should be the first to go bust in the middle of a recession? Not make record-breaking profits, with people queuing overnight to get their hands on the iPad 2!

Although maybe that's more a sign of the ridiculous consumer culture that we live in today!
 andy 24 Sep 2011
In reply to Pete_Robinson: Just to take one of your points re the reason for the crisis - no, uk banks and their lending practices have a relatively minor effect on this. Uk mortgage 3 month arrears have never gone above 10% overall (i suspect never above 6% but i can't remember the high point). NR didn't go tits because it did 125% mortgages - it fell over because the credit markets closed - which will be the problem that hundreds of other businesses will face if they close again.

The government bailed out banks because they have a dispropotionate effect on society - if an engineering firm goes bust it affects its employees and creditors - if a bank goes bust people can't get their money out to buy food. That's the reasoning behind Vickers - make the retail bit of the bank that looks after our money so safe it can't fail, so no more bailouts. Well not after 2019 anyway...
 andy 24 Sep 2011
In reply to andy: Although lloyds ended up being bailed out because of some appalling commercial lending done by BoS.
 SARS 24 Sep 2011
In reply to andy:

UK banks have modest Greek exposure but Lloyds has significant Irish exposure. If Greece defaults, French banks are stuffed, but does that mean UK banks are? For the UK it's all about Ireland I think.

Will Ireland default and how does this probability change with a Greek default? Will Lloyds need another bailout if Ireland defaults?
 SARS 24 Sep 2011
In reply to SARS:

And while I'm at it, there's a lot of talk about defaults etc but what does this mean in practice? Lloyds Irish exposure is mainly through commercial loans and mortgages etc. How do all these 'defaults' filter through to loan impairments for UK banks?
 andy 24 Sep 2011
In reply to SARS: I suspect Lloyds will have taken the hit on the Irish stuff already - there was a good deal of "kitchen sinking" going on in 2008 with UK banks downvaluing assets and building provisions (unlike the Spanish who I suspect are holding some really smelly stuff at inflated values). Lloyds have basically put their Irish buiness in runoff, and have outsourced that to some of their ex-management:

http://www.certus.ie/
 andy 24 Sep 2011
In reply to SARS: i think the defaults everyone's talking about now are governments defaulting on gilts etc - not unheard of, as didn't Argentina default on a load of sovereign debt?
 SARS 24 Sep 2011
In reply to andy:

Yes. Think that's probably true. So the question remains - what can cause another capital strain on UK banks? If it's not the piigs then why the huge selloff in the past 6 months? Or is it just a case of chucking out the baby with the bathwater?
 andy 24 Sep 2011
In reply to SARS: I suspect it's fears of exposure to banks that have exposures in the eurozone - so whilst not many UK banks have a lot of sovereign debt in italy or greece, the french ones do - and UK banks do have exposure to french banks (for example) - and i guess part of it is driven by old fashioned sentiment of low profit growth - so they may not be at risk of going bust, but a depressed world economy and a slowing domestic one aren't going to drive growth and dividends.
 Postmanpat 24 Sep 2011
In reply to Pete_Robinson:
> (In reply to Pete_Robinson)

>
> ...I also find it competely incongruous that this year Apple announced such huge profits while we're in the middle of this recession.

Well, it's a sign of exactly what you described in your OP. People who have kept their job, and maybe benefiting from lower mortgage rates, are in quite good shape for now. A Tory MP got bollocked for saying that!

 Postmanpat 24 Sep 2011
In reply to Pete_Robinson:
> (In reply to Postmanpat)
>,
>
> [...]
> What type of companies? Financial, construction, or across the board? Would this really be 'allowed' by the government? Would they not be bailed out like with Northern Rock if it was on such a massive scale?
>
Any companies that depend on bank loans which includes most of them across the board.
For reasons Andy described most would not be bailed out and there comes a point when the State can't finance further bailouts.


> If the situation is as serious as you and the media / politicians suggest then is there no way to default to a previous state when things were running better? A bit like when Windows crashes?
>
Only by spending 20 years reducing the excessive debt levels accumulated in the past 20 years. The alternative is simply for the government to default but it's a very unattractive one.
> [...]
> This is what I've been confused by, as I personally haven't felt any of these effects, but I take people's word for it -
>
If you have a job you are OK except that inflation is about 5% so unless your pay rise is matching that you are being gradually squeezed.


> If energy costs are increasing 20% year on year then shouldn't the government be looking at that as a means to reducing living costs, instead of sitting by watching oil companies making huge profits while rinsing us of our cash at the pumps?
>
Governments cannot just dictate prices unless there are illegal cartels. How are eg.oil companies going to keep finding and developing oil resources if they are not allowed to make profits?

> As I said earlier, when I think of a depression I think of MASSIVE unemployment, starvation, people queuing for handouts etc. I take Martin's point that we now have a welfare state,
>
Well you are right but the negative scenario would be that this is on the cards. The welfare State in that scenario would ultimately become unaffordable.

> One final question. Without going into too much detail / "bank bashing" / lengthy explanations, am I right in thinking this whole situation has come about due to the banks being too greedy?
>
Not in my view: there is enough blame to go around: greedy incompetent bankers, stupid greedy consumers, crap government regulators, profligate central bankers, all of us enjoying the ride.
Andy has explained why the banking system had to be bailed out but there had been a 20 year record of central banks stepping in to protect markets by lowering interest rates. How can markets work if they are rigged?


Pete_Robinson 24 Sep 2011
In reply to andy:
> uk banks and their lending practices have a relatively minor effect on this.
I meant US banks with regards to the mortgage side of it.

> NR didn't go tits because it did 125% mortgages - it fell over because the credit markets closed
Was this a result of the US sub-prime problem or something different?

> if a bank goes bust people can't get their money out to buy food. That's the reasoning behind Vickers - make the retail bit of the bank that looks after our money so safe it can't fail, so no more bailouts.
It beggars belief that no-one in the government / banking world had thought of this before!
 Graham T 24 Sep 2011
In reply to Pete_Robinson:

> It beggars belief that no-one in the government / banking world had thought of this before!

I'm pretty sure someone had thought of this before, the only issue being that the banks would have thrown their teddies out of the pram big time, the only reason it is being considered now is due to the mess we are in
Pete_Robinson 24 Sep 2011
In reply to Postmanpat:

> How are eg.oil companies going to keep finding and developing oil resources if they are not allowed to make profits?
I take your point, but profit within reason surely?! Fair enough they can't dictate prices, but raise taxes? Particularly in the current climate.

> there is enough blame to go around: greedy incompetent bankers, stupid greedy consumers, crap government regulators, profligate central bankers, all of us enjoying the ride.
Yep that seems to about sum it up!

p.s. Thanks for taking the time to explain without patronising!
 teflonpete 24 Sep 2011
In reply to Pete_Robinson:

It's because governments are secretly waking up to the fact that money has just become an abstract concept and while people still need commodities and someone can pretend to sell some, the numbers on bottom lines of some spread sheets change but nothing else really happens.
 Postmanpat 24 Sep 2011
In reply to Pete_Robinson:
> (In reply to Postmanpat)
>
> [...]
> I take your point, but profit within reason surely?! Fair enough they can't dictate prices, but raise taxes? Particularly in the current climate.
>
Define "within reason". Most of the time their returns on investment are not spectacular. Last year BP made a loss.
 andy 24 Sep 2011
In reply to Pete_Robinson:
> (In reply to andy)
> [...]
> I meant US banks with regards to the mortgage side of it.
>
> [...]
> Was this a result of the US sub-prime problem or something different?
>
> [...]
> It beggars belief that no-one in the government / banking world had thought of this before!

US sub-prime mortgage-backed securities were at the start of it, yep. NR fell over because the inter-bank lending markets closed - but they ran the same business model as everyone else, just a bit closer to the edge (actually no closer than hbos - that was really just a timing difference).

The "ring fencing" thing is only part of the issue - that stops the massive, almost unlimited losses, but they will also strengthen the capital and liquidity rules to guard against losses inside the fence. Which is the irony of the current situation, as you have that gobshite Cable talking about "forcing" the banks to lend, when the regulators are insisting that they rebuild their capital. Don't forget that NR had no investment banking arm.
 Rob Exile Ward 24 Sep 2011
In reply to andy: 'you have that gobshite Cable '... Not a fan then? What about his boss?
 andy 24 Sep 2011
In reply to Rob Exile Ward: I can't stand Cable - posturing, soundbiting, self-obsessed nob. Underneath it all he probably knows what he's talking about, but his ego takes over the moment he's confronted with a journalist. He never acknowledges that all this stuff about "forcing banks to lend" to businesses means that you risk lending to people that don't pay you back - which is Not A Good Thing, and is one of the reasons we got in this mess in the first place.

 Rob Exile Ward 24 Sep 2011
In reply to andy: To be fair, quite a lot of politicians - from Darling on - have been saying that the answer to our woes is to 'force banks to lend', I've never quite understood that either, why hasn't John Humphries questioned that: 'If it makes commercial sense to lend why don't they?'

 Postmanpat 24 Sep 2011
In reply to Rob Exile Ward:
> (In reply to andy) To be fair, quite a lot of politicians - from Darling on - have been saying that the answer to our woes is to 'force banks to lend', I've never quite understood that either, why hasn't John Humphries questioned that: 'If it makes commercial sense to lend why don't they?'


There is a somewhat obvious irony in all this. Our basic problem is that we are too indebted so the solution is supposedly to, er, borrow more.

 alan wilson 25 Sep 2011
In reply to Pete_Robinson: If so many countries are in so much massive debt, then who has all the money ? It had to go somewhere, it does not dissapear.
 Tobias at Home 25 Sep 2011
In reply to Graham T:
> (In reply to Pete_Robinson)
>
> [...]
>
> I'm pretty sure someone had thought of this before, the only issue being that the banks would have thrown their teddies out of the pram big time, the only reason it is being considered now is due to the mess we are in

After the Great Depression, the Glass-Steagall Act forced commercial and investment banks to be separate entities. I don't think anyone sensible would argue that repealing it in 1999 was a really bad idea and massively contributed to the mortgage mess in the US.
 Mike Stretford 25 Sep 2011
In reply to Pete_Robinson: There must be somethong unprecedented going on

http://www.bbc.co.uk/news/business-11013715

 Mike Stretford 25 Sep 2011
In reply to andy:
> (In reply to Pete_Robinson) NR didn't go tits because it did 125% mortgages - it fell over because the credit markets closed - which will be the problem that hundreds of other businesses will face if they close again.
>

So it couldn't refinance the large amounts of money it had lent out!
 Postmanpat 25 Sep 2011
In reply to alan wilson:
> (In reply to Pete_Robinson) If so many countries are in so much massive debt, then who has all the money ? It had to go somewhere, it does not dissapear.

1)Remember that when asset prices go down nobody has actually "lost money". They have just lost a perceived value.

2)In terms of money (which is mainly just debt created by banks) it has gone into the system. If you borrow £100k to buy a house the money goes to the seller who no doubt spends it on something else the seller of which spends it etc etc.
A lot of it ends up in current account surplus countries eg.China, Germany.

3) The problem is that if you are a forced seller of your house at £50k then you have lost the money and your bank has written it off so neither you nor your bank is going to lend,borrow or spend much. The beneficiaries of your money will be scared of what might happen to them and stop borrowing, lending and spending and you get a recession.



 Martin W 25 Sep 2011
In reply to The Outlaw Josey Wales:
> (In reply to Martin W) who said there wasnt a "detectable" effect?

The OP (to whom I was replying) seemed to suggest that very strongly, in his second paragraph.

 Martin W 25 Sep 2011
In reply to Pete_Robinson:

> ...I also find it competely incongruous that this year Apple announced such huge profits while we're in the middle of this recession. Surely a technology company selling essentially non-essential items like the iPad(2!), iPhones, music downloads etc should be the first to go bust in the middle of a recession?

It's basically only Western economies which are really badly stuffed at the moment. A number of the Far Eastern economies, and China (which just happens to be the third largest economy by GDP after the EU and the USA), are doing OK the moment. And a fair few people in those countries like iPads and other shiny consumer goods just as much as we do in the West.

That said, Apple's success is probably also partly because it is better at doing what it does than a lot of its competitors are. My current employer makes chips which go in shiny electronic consumer goods and they recently had to lay off 50-off people because our customers (which unfortunately do not include Apple at the moment) aren't managing to sell as much of their shiny as they had expected.
 Martin W 25 Sep 2011
In reply to Papillon:

> So [NR] couldn't refinance the large amounts of money it had lent out!

But andy's point is that the credit markets were drying up for everyone, not just NR.
 Mike Stretford 25 Sep 2011
In reply to Martin W: And NR were obviously more vunerable than mosst. Andy's arguments are contradictory.
 andy 25 Sep 2011
In reply to Papillon:
> (In reply to Martin W) And NR were obviously more vunerable than mosst. Andy's arguments are contradictory.

They're not contradictory at all - I was replying to the suggestion that NR failed because it had somehow lent money to the wrong people - it didn't, it was just more vulnerable to the drying up of the credit markets than anyone else. If they had no bad debt at all then they'd have still failed. The "wise after the event" merchants then came out to say their business model of borrowing short and lending long was the flaw - but every super-safe building society has always borrowed short (i.e. savers deposits) and lent long (mortgages). NR's problem was that too much of their short borrowing was other banks, and when that dried up then customers got nervous and started taking their money out.

None of which had much to do with the quality own their lending - which was the point I was making.
 Mike Stretford 25 Sep 2011
In reply to andy: You said that the 125% mortgages had nothing to do with it.... in situations were funding is a problem the quantity of money involved is fairly important, it's simple numeracy.
 andy 25 Sep 2011
In reply to Papillon: Well if you mean "if they'd never lent anyone any money then they wouldn't have had a liquidity problem because then they wouldn't have needed to borrow any money from anywhere to fund non-existent loans" then I guess you're right, but that's a pretty meaningless point. Because then they wouldn't have been a bank. My point was if wouldn't have mattered if they'd done 50% LTV lending at 2x income multiples - the credit quality was not the issue - the funding model was (but the funding model was, as I stated earlier, similar to every other mortgage lender in the UK).
 SARS 25 Sep 2011
In reply to andy:

According to some articles that's just not true: NR default rates in 08 were substantially higher than general market; 90 days in arrears rates higher; average loan to outstanding at 77% compared to market of 60% etc etc.

All of this to be expected from a bank that lent 125% LTV and helped perpetuate the UK house price myth. They deserved to go bust quite frankly - a poor business model.
 andy 25 Sep 2011
In reply to SARS: NR went bust in 2007 - i would never say their lending was better than the rest of the market, and they did some daft things (but it wasn't significantly worse either - arrears levels from lenders like GMAC and Kensington were significantly worse), but my point was that their problem was liquidity not capital - unlike Lloyds and RBS. Their liquidity problems were happening to literally dozens of banks all over the world - they were more reliant on short term wholesale funding than most, but the run on the bank was caused by savers, not borrowers.

125% UK mortgages makes a good soundbite for people like Cable, but they weren't what caused the wholesale funding markets to dry up - worries about exposure to US sub-prime did that just fine...
 andy 25 Sep 2011
In reply to SARS: Oh - another thing to remember about comparing any lend to the general market - it's always expressed as a %, and new lending is always more likely to go bad than more "seasoned" stuff. NR were the one of the biggest net lenders at the peak of the market, so they had more new stuff that would have gone bad in 2008, and as it was new lending that would have been at higher average LTVs.

Although I assume you know how the "Together" product worked? It was never really 125% lending - it was a 95% mortgage with an unsecured £30k loan on top - the 95%+ bits weren't included in those numbers you quoted.
 SARS 25 Sep 2011
In reply to andy:

I don't disagree with you in any respect re the reasons NR went bust. Just that I think it was never a good business to be into making unsecured loans as frivolously as they appeared to, and then backing this with short term wholesale funding.

It sounds like a mad business model when you take a step back and think about it for a second: borrow short from unreliable sources, lend long and with a substantial amount uncollateralised.
Wonko The Sane 25 Sep 2011
In reply to SARS: There's sense and sense.
It makes absolutely no sense in the long term of course, but in a rising market with massive pressure to make short term profits and year on year rise, it makes perfect sense.
Removed User 25 Sep 2011
In reply to Wonko The Sane:
> (In reply to SARS) There's sense and sense.
with massive pressure to make short term profits and year on year rise,


I think you mean "irrational exuberance", which never makes sense.


 John_Hat 25 Sep 2011
In reply to SARS:

I'll echo andy regarding NR. They screwed up because they were expanding very fast and were reliant on the wholesale markets for funding. This was reasonable at the time as the wholesale markets appeared reliable, and had been for years.

Basically they originated a shedload of mortgages, securitised them, then lent a shedload more, securitised them, etc. Plenty of banks were doing the same.

Trouble was NR were expanding so fast their dependence on the wholesale markets was greater than most. When because of unwarrented poor confidence (mainly driven by the US situation) demand for securitised products dried up they were left with no funding and went to the BOE.

Even this wouldn't have been a problem until some twit printed in the mass media that NR were going bust, causing the run. At this point their position went from bad but tenable, to utterly untenable as £4bn was withdrawn by savers more or less overnight.

As to the current crisis, first of all I'll point out that I know quite a lot about retail bank funding, but very little about soveriegn debt. Hence the following could be rubbish.

-------

As I understand it, governments across the world vastly increased their borrowing as they bailed out the banks. This was fine at the time - it was needed to stop the banks running out of cash and also to prop up market confidence, but it obviously left the governments owning more (though this was backed by collateal, they still had to make the interest payments).

For some countries this left them quite close to a situation where they could not pay the interest.

Normally, not a problem. Governments have a permanent supply of interest-paying subjects who are not going anywhere, and all they needed to do was refinance over a longer timescale and problem solved.

In this case it became a problem for two reasons:

1) The rating agencies hold a hell of a lot of power, and used this to force certain governments to make large changes to their finances in order to keep their high credit rating, without which they couldn't refinance, without which they couldn't solve the problem. Trouble is the changes being forced were deeply unpopular with the electorates, so countries (i.e. the politicians at the top) delayed and made the minimum cuts they could get away with.

This wasn't enough for the rating agencies, so they got downgraded, which set off a vicious circle. They needed to refinance to lower their interest payments, but they couldn't refinance without paying a higher rate of interest, as their rating had been downgraded. Which would increase their interest payments. Which they couldn't afford. Which would result in their rating dropping further. Catch-22.

2) For countries in the Eurozone, they had a lot less leeway to play with their individual finances and also to use the main get-out clause available - devalue the currency.

Hence the countries involved were stuck. They couldn't pay the interest, they couldn't refinance, and they couldn't devalue. The only option left was drastic internal cuts, which would only make an actual difference in the long run, but *might*, if they were lucky, persuade the rating agencies to up their rating, at which point they could get out of the hole by refinancing.

Unfortunately drastic cuts also has the effect of bu@@ering the economy, meaning less tax revenues, and even less ability to pay the interest. Catch-22 again.

The whole situation is nicely wound up into a bit of a mess. Like I say, I don't know a right lot about it, but I'd guess that either

a) the rating agencies will break, and get ignored, and other countries will led to the worse ones anyway at sensible rates.

b) the euro will break and some countries will leave the euro, followed by devaluation.

c-z) dunno?
Wonko The Sane 25 Sep 2011
In reply to Removed User: I know what you mean and I agree, but seen from the year on year perspective it makes complete sense. An athlete isn't usually thinking about the olympics after the one coming, they're focused on the next one
 andy 25 Sep 2011
In reply to Wonko The Sane: And NR were the darlings of the market (and most directors of retail banks) - i've lost count of the number of times i was asked why "can't we be more like the Rock.".
 SARS 25 Sep 2011
In reply to John_Hat:

c-z) Germany bails out the eurozone...

The Euro - another mess that was predictable (and in fact predicted by quite a few). I remember having a job interview with the head of equity trading at a large investment bank in 1999 and the conversation ended up focussing on the impact of the euro on economies of... drum roll... Spain and Ireland versus... another drum roll... France and Germany.
Removed User 25 Sep 2011
In reply to andy:
> (In reply to Wonko The Sane) And NR were the darlings of the market (and most directors of retail banks) - i've lost count of the number of times i was asked why "can't we be more like the Rock.".

Perhaps but I recall seeing threads on here maybe five years where folk were agreeing that we were in a bubble that was going to burst. The folk posting, perhaps even yourself, were no more than interested outsiders but seemed to have had a better idea of what was coming than those running the banks did.

I've just started reading reading Alistair Darling's book where he spends a whole chapter discussing Northern Rock, the role of the BoE, the FSA, the government and the other banks. Worth reading, seems like a fairly honest account of things.
 John2 25 Sep 2011
In reply to andy: I realise that you know more about his than I do, but I thought that NR made the fatal mistake of simultaneously offering greater than 100% mortgages ( buy the house and get a Porsche as well) and startospheric income multiples (I have heard 6 times). Was this really the norm at the time?
 andy 25 Sep 2011
In reply to Removed User: Bubble or not (although the deflation has been somewhat less violent than many of the doom and gloomers were saying - maybe 15-20% from the top to the bottom) NR did not fall over because of the quality of its mortgage book - Darling is being quite spectacularly wise after the event, because the government are the FSA's bosses.

To be honest I'm not even convinced that recent house price deflation is the bubble bursting - there's been a correction, but if we were so over-inflated what's happened to the falls of 40-50% that people on here were predicting? House prices are actually slightly up over the past year (although I reckon there's another bit to come off whike the economy's bumping along thr bottom).

The relationship with the FSA is very different now though - I didn't deal with them much pre-crunch directly, but I prepared stuff for people that did, and it was generally about putting a positive spin on things - I talk to them a fair bit now and they are far more intrusive and their approach tends to be "prove it". Which is as it should be - the same applies to our internal governance people, who hold a lot more clout than they ever did in 2006-7, when the sales people had all the cards.
 John_Hat 25 Sep 2011
In reply to John2:
> (In reply to andy) I realise that you know more about his than I do, but I thought that NR made the fatal mistake of simultaneously offering greater than 100% mortgages ( buy the house and get a Porsche as well) and startospheric income multiples (I have heard 6 times). Was this really the norm at the time?

Nothing to do with the reason the bank failed. A convienient soundbite peddled by the media, but acutally nothing whatsoever to do with its fall, which involved the liquidity and funing of the bank.

As andy will no doubt be along in a minute to say, the actual number of 100%+ mortgages were small. 95% secured were certainly the norm at the time, and the "together" product was only a secured 95% loan + a unsecured component for the rest. About the same as another bank lending 95% then also lending the same person money for a car - which was certainly normal practice. NR only got the headlines becasue it lumped the two together.

As to the six times income multipler, it is due to banks moving towards affordability rather than strict income multiples, for good reason: The affordability criteria was a better judge of whether people could afford mortgages.

e.g. A person with fifteen kids (ok, but you get the point), three car loans, four credit cards and a massive overdraft could not afford a 3.5x mortgage, and it was this kind of credit exposure that the banks were trying to take account of when working out whether to loan people money.

Conversely, someone with a high income (i.e. high disposable income), no dependents, and no debt, could easily afford much more than 3.5x.

I can certainly say that up to, through, and during the credit crunch 6x multipliers were nothing unusual. I got offered 6.6x in September 2008 (I didn't take it), well after everything kicked off.
 andy 25 Sep 2011
In reply to John2:
> (In reply to andy) I realise that you know more about his than I do, but I thought that NR made the fatal mistake of simultaneously offering greater than 100% mortgages ( buy the house and get a Porsche as well) and startospheric income multiples (I have heard 6 times). Was this really the norm at the time?

They did have poky criteria (but so did nearly everyone else) - but once again, their "mistake" was to build up large amounts of lending that was funded by short-term wholesale funding (some of which could have been as short as overnight, but lots was only for a year or two) that relied on them being able to effectively sell that debt on via securitisation (as they had for years) before the counterparty wanted its money back. Once they couldn't get securitisations away (same as everyone else) and the banks that had lent them the money said they wouldn't roll the debt over, then their only option was the bank of england - the "lender of last resort". Someone in the Treasury briefed Robert Peston, he put the story on the BBC and then the queues started. End of bank.

100% mortgages aren't a problem til you need to sell. Big income multiples aren't a problem if the customer can afford it (I'd still happily lend someone on £100k a year with no other debts and no dependents 6x their income - well I wouldn't because the FSA wouldn't let me - but I could show you a stressed affordability model that shows that they can afford it, even with rates at 8%). And actually big losses aren't a problem if you're adequately capitalised for the risk - which is questionable in the case of NR (because we never got to find out) and was certainly not the case for RBS (because they fell over because of lack of capital, not liquidity).

If they'd been allowed to borrow some more money then they might (just might, mind) have been able to secure some other longer term funding and survive. But once the queues were on the telly they'd had it.
 John_Hat 25 Sep 2011
In reply to John_Hat:
> (In reply to John2)
> [...]
>
I got offered 6.6x in September 2008 (I didn't take it), well after everything kicked off.

For the sake of accuracy, it was April 2008, not September 2008. We bought the house in August 2008. I was clearly having a "moment" there.
Removed User 25 Sep 2011
In reply to andy:
> Darling is being quite spectacularly wise after the event, because the government are the FSA's bosses.
>
>
I think you misinterpret me. I wasn't saying he blamed the FSA rather that in his book he points out some difficulties with the "who does what" between the government, the FSA and the BoE in regards to dealing with banks. After NR a lot of lessons were learned and legislation put in place in case the same thing ever happened again...

Can't quite remember the precise details, I'll maybe re read that bit, but the book's worth reading.
 John_Hat 25 Sep 2011
In reply to Removed User:

I think that part of the problem is the media. If the Daily Mail printed tomorrow that "Xxxxxxx bank was going bust" (followed by the requisite five exclamation marks), then no combination of government, FSA and BOE could stop a crisis the following day, regardless of the actual situation with the bank. It might not kill the bank, but it would certainly cause difficulties.

The media need to be a lot more responsible with this kind of thing. However I have zero hope of this happy event actually occurring!
Removed User 25 Sep 2011
In reply to Removed User:

In fact, embarassed that I couldn't remember the precise details I went back and re read some bits. A relevent excerpt, after pointing out that he had been responsible for the architure that regulates the city:

"...for ten years there had been no financial crisis. The regulatory system had only ever operated in good times. The Bank had concentrated on it's monetary policy duties, primarily the regulation of interest rates. Although it had had responsibility for financial stability since becoming independent in 1997, it did not have a suficiently deep understanding of what was going on in the individual banks- or indeed the critical relationships within the banking system. The FSA had in turn spent a great deal of time since it's inception concentrating on consumer issues rather than examining the systemic risks that were to bring the entire system to the brink of collapse twelve months later. And the treasury had not seen financial regulation as a priority....It had just not been seen as urgent..."

Removed User 25 Sep 2011
In reply to John_Hat:

Yes, apparently a rescue plan was in place for NR but hours before it was announced the BBC was tipped off and went public with the news that NR was in serious trouble and not long after that the queues started to form..

 andy 25 Sep 2011
In reply to Removed User: I think that's probably fair - and it's still not absolutely clear how the BoE and the FSA split their responsibilities.

The Treasury, on the other hand, are almost entirely concerned with bonuses...
 John2 25 Sep 2011
In reply to andy: Corrrect me if I'm wrong Andy, but I think that I remember reading that NR's directors were given bonuses directly relating to the amount of new business that they brought in. They therefore concocted a business plan that brought in the maximum possible number of new mortgages.
 andy 26 Sep 2011
In reply to John2:
> (In reply to andy) Corrrect me if I'm wrong Andy, but I think that I remember reading that NR's directors were given bonuses directly relating to the amount of new business that they brought in. They therefore concocted a business plan that brought in the maximum possible number of new mortgages.

No idea - but it'd surprise me if it was that simple. Most bonus schemes for top people at that time made the serious money from share price growth, often with some kind of multiplier for earnings per share (or a similar measure) vs the market.

Typically there'd be a short term bonus, based on stuff like profit, income and probably some balanced scorecard type stuff like risk management (snigger) which would pay (let's say) 30-50% of salary (but that was up to 150% in some businesses, which I guess led to short-termist behaviour). But the big earnings would be from stuff like shares being granted to the same value as the bonus that would be subject to a multiplier of up to 4x (plus the resulting share price growth) that could mean you ended up with shares worth several years' salary.

The key thing was the balance between short-term and long-term reward, but to be honest even for the very top people in firms like that were on nothing like the bonuses that got people so excited when the big investment firms were announcing multi-billion pound bonus pots. I know a bonus of (say) £300k is a huge amount of money, but I don't think it'd necessarily drive people to do things they knew were wrong - but if the market keeps driving your share price up and up then I guess there's something inside you that'd make you less questioning of your approach, because it must be right, mustn't it? I'm not really a subscriber to the theeory that says that NR (or any other retail bank) behaved in ways that they knew were wrong - rather they started to believe the myth that credit and house price growth were endless - which is daft, but there were an awful lot of people, including most of the customers of these institutions that behaved as if it were true!
 neilh 26 Sep 2011
In reply to Pete_Robinson:
I would be interested to know what you do for a living,where abouts you live and your age?

May give everybody, including yourself, a better perspective.

 John2 26 Sep 2011
In reply to andy: Here we go - http://www.fleetstreetinvest.co.uk/economy/uk-economics-business/northern-r... .

100% bonuses for senior directors - 'From the top of the boardroom downwards Northern has been intent upon growth. Incentive payments have been very generous and their value has depended upon Northern achieving rapid growth of profitability'.

I'm not suggesting that the directors did anything that they knew to be wrong, but rather that an incentive scheme was in place which encouraged short term profitability without regard to long term stability.
 Mike Stretford 26 Sep 2011
In reply to andy:
> (In reply to Papillon) Well if you mean "if they'd never lent anyone any money then they wouldn't have had a liquidity problem because then they wouldn't have needed to borrow any money from anywhere to fund non-existent loans" then I guess you're right, but that's a pretty meaningless point. Because then they wouldn't have been a bank. My point was if wouldn't have mattered if they'd done 50% LTV lending at 2x income multiples - the credit quality was not the issue - the funding model was (but the funding model was, as I stated earlier, similar to every other mortgage lender in the UK).

You're trying to tell me the quantities are 'meaningless'? I'm not on about quality, I'm on about the sums involved. It's not about lending no money, or lots of money, the numbers matter.

http://www.open2.net/blogs/money/index.php/2007/11/08/northern_rock

According to that link 27% 0f their funds came from 'retail funds' and 70% from the money markets. If they had been lending 50% LTV they would have had to have borrowed much less from the money markets, and hence would be far less vulnerable to that funding source drying up. That's assuming the same number of mortgage customers but obviously they would have had far less (they wouldn't be the mortgage specialist they were).


 neilh 26 Sep 2011
In reply to Removed User:
I am not sure that is relevant in the overall scheme of things. People seem to concentrate on side issues like directors salaries rathar than the really big issues. The banking system - throughtout most of the world( there were the odd exceptions)was overleveraged both in the corporate and personal sectors.

We are now seeing the results of that - the banking sector downsizing/deleveraging - and the knock on effects of the readjustment.This will take a good few years to wash its way through the system. And this will be painful for alot of people
 andy 26 Sep 2011
In reply to Papillon: You're massively over-simplifying it to the point of it being pointless.

Yes, they were more reliant on wholesale funding than most. They did some slightlier riskier lending than many. But you can't say 'well if they'd had a 74% retail fundig ratio they'd have been fine" - because they would have been a different business. They attracted savings balances through being able to afford it because of lending profits. If they lent less, their savings rates would have been worse. So the retail funding % goes down. So they lend less. And before long they're the Staffordshire Railway BS.

My original point stands - if they had an £80bn book at 50%ltv they'd have still fallen over - credit quality was not the issue.
 SARS 26 Sep 2011
In reply to andy:

I don't necessarily agree with you here. The markets picked off NR because they were seen as weak - in the same way that Lehmans and Bear Sterns were consigned to history because of their perceived weaknesses.

If NR had had better quality loans (and of course higher retail deposits) the market may not have pulled back so much. Credit drying up for NR was the same as an (inter)bank run.
 Mike Stretford 26 Sep 2011
In reply to andy: In reply to andy:
> (In reply to Papillon) You're massively over-simplifying it to the point of it being pointless.

You are trying to separate factors which are intrinsically linked and then apportion blame...nonsensical.

> Yes, they were more reliant on wholesale funding than most. They did some sightlier riskier lending than many. But you can't say 'well if they'd had a 74% retail funding ratio they'd have been fine" - because they would have been a different business.

Agreed!


> My original point stands - if they had an £80bn book at 50%ltv they'd have still fallen over - credit quality was not the issue.

That would not have happened. They would never have attracted the customers. They would have been a different buisness. The same argument you just made above.

> - credit quality was not the issue.

Agreed, that hasn't really been tested yet, but high LTVs are also about quantity.
 pec 26 Sep 2011
In reply to Pete_Robinson: To get back to the original thread topic (not that the failure of the banks stuff isn't of interest), I think there is a valid point about how a modern recession actually feels compared with, say the great depression.
Clearly many people are feeling the pinch, some quite a lot but we're starting from a much higher base line which makes it easier to absorb the hit, even if its taken a lot of people by surprise because they'd got so used to frittering their money on crap they didn't really need.

Back in the 20's and 30's domestic plumbing meant one cold tap, central heating was a warm meal and electric light a luxury. A 10% reduction in lving standards from that base meant real (absolute, not relative) poverty.

Today a similar percentage hit means cancelling the gym subscription you never use, making your own sandwiches you couldn't be bothered to make before, replacing your car after 7 years instead of 5 and fishing out those clothes from the back of the wardrobe you'd forgotten about instead of going shopping.

Modern production has become so efficient that even for people who've lost their jobs there's so much "stuff" around these days you can actually get by on very little with a reasonable standard of living. Charity shops, car boot sales, giveaway stuff for free websites etc abound for those with a bit of savvy.
Its quite possible we actually throw away more useable stuff (food, clothes, electrical gadgets etc) per year than was actually produced per year in the 30's.

So whilst we may think its tough (and I don't doubt the serious threats to global stability still to emerge) anyone transported from the great depression to today might well scartch their head and wonder what all the fuss is about.
 andy 26 Sep 2011
In reply to SARS: I think it was more about timing - they just happened to have some big maturities at the wrong time. I'm not sure they would have been able to refinance short term debt whoever they were (don't forget HBOS had the same problem within a year and there's never been any questions asked about their mortgage lending quality). everyone was desperate for funding at the time - just look what was happening to retail savings rates.

I still maintain this is not as simple as "NR drove volume through stretched criteria so therefore they ran out of liquidity". They ran out of liquidity because of their funding model and the timing of the BBC story - don't forgetbthey lost about £12bn in savings balances that weekend.

they could have grown slower, yes, but whoever was looking for funding when the music stopped was always going to be in trouble - especially when the BBC leaked it.
 John_Hat 26 Sep 2011
In reply to andy:

I'm with andy on this. Barclays went to the BoE the week before NR but the story didn't hit the press in the same way. As andy says, who got caught was entirely due to when the music stopped.

NR were unlucky. Yes they were more exposed than most, but they were also just plain unlucky.

http://www.telegraph.co.uk/finance/migrationtemp/2814975/Barclays-urges-BoE...

http://news.bbc.co.uk/1/hi/6971731.stm
 John_Hat 26 Sep 2011
In reply to John_Hat:

You'll also notice that the second article states that BOE emergency funds had been used 14 times in 2007 before Northern Rock used them.

Any of those occasions could have been used by the media to parade that any one of those particular banks were "going bust", so causing a run, hence pretty much ensuring that that was exactly what happened.

Personally, I think that the media managed to turn a containable and manageable drama into a crisis, and bear a large responsibility for the ensuing fall out. Of course, they wouldn't see it that way, which is why

a) I didn't read a single article over the period that gave the impression that the writer understood the first principles of bank funding and

b) they keep wittering on about 125% loans.

Incidentally, I work in the financial sector, generally in the area of retail bank funding, and a fair bit of my work concerns securitisations. for the record, I don't earn a fortune and don't get a huge bonus.
 SARS 26 Sep 2011
In reply to John_Hat:

Are you seriously comparing Barclays and NR? Different banks, different cultures and totally different levels of sophistication.
 John_Hat 26 Sep 2011
In reply to SARS:
> (In reply to John_Hat)
>
> Are you seriously comparing Barclays and NR? Different banks, different cultures and totally different levels of sophistication.

Good god no. I would hope that given my stated profession that question would not need asking!

I was saying that it wasn't just NR who went to the BOE, NR were not the first, and any of the banks concerned could have been a victim of the "xxxxxxxxxx is going BUST!!!!!" articles in the press.
 MG 26 Sep 2011
In reply to John_Hat:

> I was saying that it wasn't just NR who went to the BOE, NR were not the first, and any of the banks concerned could have been a victim of the "xxxxxxxxxx is going BUST!!!!!" articles in the press.

And HBOS, RBS and others all did effectively go bust in the end not because of newspaper articles but because they couldn't borrow.

But do you really think NR were really no more vunerable than the others? They seem to have pushed their funding model, lending requirements and lending amounts further than all other the banks - so taking greater risks in all directions. Given a small crisis is it not possible that only NR could have gone and not the whole lot? It wasn't invetitible. HSBC, for example, didn't go bust even in the crises that did occur.

 John_Hat 26 Sep 2011
In reply to MG:

See my post at 20.32 Sunday. Just going out for pizza so no time to retype it all!

 andy 26 Sep 2011
In reply to MG: HBOS went tits (originally) for exactly the same reason NR did, liquidity - Lloyds then took a proper look at the books and found they were under-capitalised. RBS had no liquidity problem - they ran out of capital to cover their bad debts (not mortgages).

I think NR were probably slightly more vulnerable than most to a liquidity crisis, but everyone (I think) except Barclays and HSBC used the special liquidity scheme the government set up, so if that hadn't been there then arguably anyone could have fallen over. But I still think you need to consider the two sides of the balance sheet as connected but different.

To be strictly fair to Papillon's view NR did grow rapidly, and if they'd been smaller it's possible they'd have been less reliant on short term wholesale funding. But they actually grew on the back of an ability to lend money then sell the debt fairly quickly, then reuse their funding lines. The vast majority of their book growth (i.e. their net lending) was because they were incredibly good at hanging onto their customers with attractive (you might say suicidal) pricing for existing customers, which they subsidised with large(ish) arrangement fees that were added to the loan. Their share of the gross market was never that massive - so whilst it's fair to say they grew quickly they grew by keeping more in their bucket rather than by putting tons in the top.

 andy 26 Sep 2011
In reply to MG: Oh - and HSBC are a completely different kettle of fish (as are RBS from a liquidity point of view) - massively diversified internationally, and a tiny (I mean still not top 5 in the UK, even with the demise of NR and B&B) mortgage lender.
 andy 26 Sep 2011
In reply to SARS:
> (In reply to John_Hat)
>
> Are you seriously comparing Barclays and NR? Different banks, different cultures and totally different levels of sophistication.

Interesting comment - could you elaborate? I know quite a lot about NR, and a fair bit about Barclays in the UK as I know people who work for both (and have worked with quite a few from both banks) - and I don't know anything about Barclays that makes them "more sophisticated". Are you talking about risk modelling? Funding? Dress sense (although those Geordies sure do scrub up for a night out)?

Agree on the pre-crunch culture being different (although I think you'd find that there were large parts of Barclays retail that were seeking to become more "NR-Like" in their culture.
 MG 26 Sep 2011
In reply to andy:
> > I think NR were probably slightly more vulnerable than most to a liquidity crisis, but everyone (I think) except Barclays and HSBC used the special liquidity scheme the government set up,

That was the main point of my (not very clear) post. Loads of banks needed support. THe fact NR's problems were leaked to the press probably only made a small difference to the date, not the actual events. Arguing as john_hat seemed to be that if the press had just kept quiet, everything would have been OK, does not seem plausible to me.
In reply to Pete_Robinson: I think you are being selective and naive if you think it is only things like fuel and insurance.

Take a look in your local supermarket - prices are up by a minimum of about 10% this year, quantities you get are very heavily reduced for the same price (look at the fruit bags), some prices have more than doubled, bus fares are up by over 10% where I am, cinema tickets are up by about 30%. All these things add a few pounds. They add a few pounds every day. That's maybe in the order of hundreds of pounds a month, at least. That's in the order of grands per year. It all adds up.
 andy 26 Sep 2011
In reply to MG: Msybe, maybe not. Compared to how much liquidity the BoE pumped in post-rock what it would have taken to keep Rock afloat was tiny. They'd never have got through without support, but then again neither would Barclays. It's the difference between a loan and a bail-out.
Pete_Robinson 26 Sep 2011
In reply to nickinscottishmountains:
> (In reply to Pete_Robinson) I think you are being selective and naive if you think it is only things like fuel and insurance.

They were merely a few select examples that are increasing significantly above the rest. I'm not for a minute suggesting that prices across the board aren't rising.

My main point in all this is basically summarised by pec a few posts up:-

> "Clearly many people are feeling the pinch, but we're starting from a much higher base line which makes it easier to absorb the hit, even if its taken a lot of people by surprise because they'd got so used to frittering their money on crap they didn't really need.

> Back in the 20's and 30's domestic plumbing meant one cold tap, central heating was a warm meal and electric light a luxury. A 10% reduction in living standards from that base meant real (absolute, not relative) poverty.

> Today a similar percentage hit means cancelling the gym subscription you never use, making your own sandwiches you couldn't be bothered to make before, replacing your car after 7 years instead of 5 and fishing out those clothes from the back of the wardrobe you'd forgotten about instead of going shopping"

Maybe andy, SARS and the others discussing the causes of the banks' downfall in great detail could start another thread? as that wasn't really the intention of this one
 John_Hat 26 Sep 2011
In reply to MG:
> (In reply to andy)
> [...]
>
> That was the main point of my (not very clear) post. Loads of banks needed support. THe fact NR's problems were leaked to the press probably only made a small difference to the date, not the actual events. Arguing as john_hat seemed to be that if the press had just kept quiet, everything would have been OK, does not seem plausible to me.

Arguing hypotheticals is always a little pointless, however I don't think that saying that if NR had not had billions of cash deposits withdrawn in a couple of days they would have been in a much better position is anything other than stating the obvious.

Who knows what would have happened? They might have survived, they might not. I'd put my money on them surviving, personally. Like Andy says the amount of money they would have needed to survive without the medias' "help" as opposed the amount required as it was would have been vastly lower.

They'd have jacked up their mortgage rates and made themselves uncompetitive, hence reducing lending, and jacked their savings rates on the back of that, they might have had a massive influx of savers for the higher rates. It could have worked.

What annoys me is that they didn't get a chance. Once the media printed they were going bust, the media - a few editors in London - had effectively made the decision that thousands of people were going to lose their jobs. Personally I don't think that the media should be able to do that.

 John_Hat 26 Sep 2011
In reply to Pete_Robinson:

To answer the OP, quite a lot of friends in public sector are seeing their jobs vanish, contracts not being renewed, etc [1]. So certainly I can see an effect, but that is more from the government's policies than the financial situation per se.

However I think in terms of the current (soverign debt) crisis, we'll not see anything on the ground until its well too late.


[1] Especially in what might be considered "care and outreach" programmes - i.e. the ones that help the people who would never vote tory.
 SARS 26 Sep 2011
In reply to Pete_Robinson:

Ok here's an example of what the financial crisis meant for some people. In 2009 the bank I worked for in Tokyo closed their Tokyo branch and made everyone redundant - 300 or so people in total. Most of those people did nothing wrong in their job and some are still looking for new positions to this day. Luckily for me I found something new within a month, but for others I know, many with young families, it's been a struggle since.

On the flip side, a number of senior guys went off into the sunset with their millions.

Does that help?
Frogger 26 Sep 2011
In reply to John_Hat:
> ...but that is more from the government's policies than the financial situation per se.



Never miss a good crisis as an excuse to cut jobs
 Tobias at Home 27 Sep 2011
In reply to Pete_Robinson: inflation measures are a joke. there is no way the cost of living is only rising by a few percent each year. how do they deal with things like computers which get more powerful year-on-year? do they consider computers getting more powerful deflationary or just the cost of the average spent on a new computer?
 Trangia 27 Sep 2011
In reply to Chris H:
> (In reply to Pete_Robinson) What is the absolutely worst case scenario though? Vital services kept going on minimum wage - everyone else on benfits with rationing of food and goods? Army keeping order on the streets?
>

But would the Army still function if it's soldiers aren't being paid? Post Great War Germany is probably a prime example of complete economic collapse. It produces a fertile breeding ground for extremist political parties resulting in a power struggle between each other and the government.

The rise of Nazi Germany and all it's horrors was the result.
 AJM 27 Sep 2011
In reply to Tobias at Home:

I believe with things like TVs and laptops and that sort of thing there's implicit deflation factored in because when they get the price for the basket they try and split it into something for the improved features and the rest for the value of the old unit, if such a thing were still on sale. Don't like it personally, but I think that's how it works.
 Mike Stretford 27 Sep 2011
In reply to Pete_Robinson:
> (In reply to nickinscottishmountains)

>
> Maybe andy, SARS and the others discussing the causes of the banks' downfall in great detail could start another thread? as that wasn't really the intention of this one

It's ok I think we made our points and agreed to disagree.

If we're going to have rules can you reply to the posts that rebut the sentiment expressed in your OP?

Pete_Robinson 27 Sep 2011
In reply to Papillon:

> can you reply to the posts that rebut the sentiment expressed in your OP?

What do I need to reply to? I asked for people's thoughts and experiences as I was genuinely curious, and that's what people have given. I'm not looking for an argument / heated debate, although maybe I should have expected that given it's UKC!
 Mike Stretford 27 Sep 2011
In reply to Pete_Robinson: Well, you're suggesting it's good form not to deviate from the OP, even on related topics. I'm suggesting it's good form to reply to posts that oppose your opinions (you did express an opinion).... but you don't have to do anything obviously.

Yes, journalists do use hyperbole, they always have, but we are in changing times. Real financial crisis was averted by governments taking on the debt, QE, and record low interest rates, we've yet to see the effects of that. Do you not accept Pat's point about that being a big health scare we haven't really taken on board?
 Chris Craggs Global Crag Moderator 27 Sep 2011
In reply to Pete_Robinson:

It is a bit of an aside but have I got this right; they are going to write off half of Greece's debt then lend them some more money? Absolute madness!


Chris
Pete_Robinson 27 Sep 2011
In reply to Papillon:
> (In reply to Pete_Robinson) Well, you're suggesting it's good form not to deviate from the OP, even on related topics.
I'm not denying it's a related topic. And deviations I have no problem with. But the deviation was more along the lines of one or two guys arguing their case for post after post. It's not that it was irrelevant or uninteresting, just not the main point of the thread.

> Real financial crisis was averted by governments taking on the debt, QE, and record low interest rates, we've yet to see the effects of that. Do you not accept Pat's point about that being a big health scare we haven't really taken on board?
Of course I accept it. I accept many people's points on this thread - that's why I asked for people's thoughts and experiences. The title of the thread wasn't "Financial crisis: It's all a myth and anyone who says otherwise is talking bullsh!t". If I haven't replied to every post rebutting the original sentiment then it's because I've taken it on board and not outright disagreed. Is that acceptable?

I understand that people are being financially squeezed (myself included), and that the worst may yet be to come. However, my original reason for posting was to express that, in my opinion, relative to other less developed countries and financial crises / depressions in the past or even general living standards in the past it may not be as terminal as we are being led to believe.

Yes people are losing their jobs, businesses going under, branches closing down etc etc. However, for all these stories of doom and gloom there are also other businesses doing very well indeed, jobs being created etc. I'm not saying that the positives outway the negatives - the current unemployment figures show that isn't true - BUT at the moment the media / politicians tend to be focusing far more on the stories of negativity than anything else. I also have to agree with others that the cuts in public services do look suspiciously like they're being done under the pretext of a financial crisis rather than any real necessity to do so.
 Rob Exile Ward 27 Sep 2011
In reply to Chris Craggs: Ultimately, for 'they' read 'we'...

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