Before you read on expecting this article to have contained within it a solution to the world's
money problems, STOP! Unfortunately I haven't got the answer, and only over time will we all
discover the true cure for our global financial ills. All I can do is speculate for the future and
examine some of the ideas being circulated at the present time, and perhaps offer up my
humble opinion as what could be the way to go.
To start off, for those of you who are without television, radio, newspapers or indeed any
contact whatsoever with the outside world, we are currently facing a global financial crisis the
like of which we have never seen before. Of course there was the great stock market crash of
1929, but without trying to make light of that catastrophe, money these days is simply vastly
greater then it was back then. We are currently talking about the loss of hundreds of billions
and even trillions in the case of some countries.
This is ultimately the crux of the problem. As a lender, once you lower your standards you are opening the floodgates to all manner of problems. Some people should not be allowed to borrow because they are either unable or unwilling to pay the money back. Now obviously there will always be the odd financial risk on the part of the lender but what occurred over the last decade was that lenders seemed to have no compunction about which they lent money to with result that they were faced with colossal sums of money that they were unable to recover.
So how has this caused the problem? The problem with lowering your standards especially to borrowers is you expose yourself as a lender to more risk. There is a reason why some customers can't or shouldn't get credit; it is because they might not pay it back. Now normally this is an acceptable risk for lenders to have some borrowers who may not pay their debt back. The problem is over the last decade lenders have lent way too much money to these people and as such they are unable to recover that money back from them.
And so begins the vicious circle. Due to getting their fingers burnt, the lenders are now less willing to part with their money and loans are harder to obtain. With regards to banks and building societies, the money that is at their disposal comes from deposits made by the public for the purpose of generating some interest. Because of the fact that these institutions are now less willing to agree loans due to bed debtors, their depositors start losing faith in the institutions ability to safeguard their money and so they start to withdraw and close their accounts. So now the bank finds itself in the situation where it has even less money to loan out to what they perceive as good debtors. This is recognised by the stock market and in turn the banks stocks start being sold off and the stock value spirals down and before you know it the bottom has dropped out.
So what solutions are being proposed to fix this mess?
To start with, some banks in the US, the UK and Ireland made the first move by guaranteeing
their clients money with tax payers' money. This move was clever as it instilled clients with
confidence, which is what has been lacking over the past months. There may in many cases be
no need for a bank's downfall at all, but when people get nervous, they tend to bolt at the first
sign of uncertainty, which can be the cause of a bank's unnecessary demise. Boosted
confidence means that people are happy to stay put so that the banks' assets are not
undermined.
Secondly the US and the UK have both proposed major bailout packages the complexities of which I will not be going into here in this article but suffice it to say they are essentially buying into these large financial institutions with large sums of tax payers' money. Will it work? I don't know as I said earlier time will decide if any of the ideas are good ones. That said it really does depend on whether the institutions start lending to each other again because the kind of liquidity drought that we are all currently experiencing is dragging the world into what could be the biggest recession we have ever seen.
One thing I can say is we all need to radically change the way the banking system works. I don't dispute there is a lot of regulation, hey as an independent financial advisor I am subject to it on a daily basis. My concern is I don't know whether the large financial institutions are actually regulated in the right way. I don't think anyone has ever turned round to a lender and stipulated what their minimum lending requirements should be, maybe because this would be considered restrictive practice, but lets think for a second if lenders weren't allowed to lend to such bad risk clients we probably would not have seen the sort of economical growth we have seen over the last ten years and we definitely would not have seen the house price rises we have seen over that same period but the million dollar question is .... Would we be in this mess now? I honestly don't think so!
money problems, STOP! Unfortunately I haven't got the answer, and only over time will we all
discover the true cure for our global financial ills. All I can do is speculate for the future and
examine some of the ideas being circulated at the present time, and perhaps offer up my
humble opinion as what could be the way to go.
To start off, for those of you who are without television, radio, newspapers or indeed any
contact whatsoever with the outside world, we are currently facing a global financial crisis the
like of which we have never seen before. Of course there was the great stock market crash of
1929, but without trying to make light of that catastrophe, money these days is simply vastly
greater then it was back then. We are currently talking about the loss of hundreds of billions
and even trillions in the case of some countries.
This is ultimately the crux of the problem. As a lender, once you lower your standards you are opening the floodgates to all manner of problems. Some people should not be allowed to borrow because they are either unable or unwilling to pay the money back. Now obviously there will always be the odd financial risk on the part of the lender but what occurred over the last decade was that lenders seemed to have no compunction about which they lent money to with result that they were faced with colossal sums of money that they were unable to recover.
So how has this caused the problem? The problem with lowering your standards especially to borrowers is you expose yourself as a lender to more risk. There is a reason why some customers can't or shouldn't get credit; it is because they might not pay it back. Now normally this is an acceptable risk for lenders to have some borrowers who may not pay their debt back. The problem is over the last decade lenders have lent way too much money to these people and as such they are unable to recover that money back from them.
And so begins the vicious circle. Due to getting their fingers burnt, the lenders are now less willing to part with their money and loans are harder to obtain. With regards to banks and building societies, the money that is at their disposal comes from deposits made by the public for the purpose of generating some interest. Because of the fact that these institutions are now less willing to agree loans due to bed debtors, their depositors start losing faith in the institutions ability to safeguard their money and so they start to withdraw and close their accounts. So now the bank finds itself in the situation where it has even less money to loan out to what they perceive as good debtors. This is recognised by the stock market and in turn the banks stocks start being sold off and the stock value spirals down and before you know it the bottom has dropped out.
So what solutions are being proposed to fix this mess?
To start with, some banks in the US, the UK and Ireland made the first move by guaranteeing
their clients money with tax payers' money. This move was clever as it instilled clients with
confidence, which is what has been lacking over the past months. There may in many cases be
no need for a bank's downfall at all, but when people get nervous, they tend to bolt at the first
sign of uncertainty, which can be the cause of a bank's unnecessary demise. Boosted
confidence means that people are happy to stay put so that the banks' assets are not
undermined.
Secondly the US and the UK have both proposed major bailout packages the complexities of which I will not be going into here in this article but suffice it to say they are essentially buying into these large financial institutions with large sums of tax payers' money. Will it work? I don't know as I said earlier time will decide if any of the ideas are good ones. That said it really does depend on whether the institutions start lending to each other again because the kind of liquidity drought that we are all currently experiencing is dragging the world into what could be the biggest recession we have ever seen.
One thing I can say is we all need to radically change the way the banking system works. I don't dispute there is a lot of regulation, hey as an independent financial advisor I am subject to it on a daily basis. My concern is I don't know whether the large financial institutions are actually regulated in the right way. I don't think anyone has ever turned round to a lender and stipulated what their minimum lending requirements should be, maybe because this would be considered restrictive practice, but lets think for a second if lenders weren't allowed to lend to such bad risk clients we probably would not have seen the sort of economical growth we have seen over the last ten years and we definitely would not have seen the house price rises we have seen over that same period but the million dollar question is .... Would we be in this mess now? I honestly don't think so!
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