Sunday, 15 May 2011

What the Credit Crunch means to you. (Written 02/26/2011)

We’ve been told it was lax regulation, bad loans, overinflated home prices, easy access to credit. All of these are good and valid reasons in their own right, but what was the one item that really sparked the banks’ downfall. To me it was the City/Wall Street/Corporate greed. Now I’m no financial analyst, but basic math works well for me and here’s how that math answers a few questions.

Corporations are REQUIRED to make money, pay dividends and increase share prices to keep their investors happy, they exist for no other reason, otherwise the investors leave. Quite simply they take their money somewhere else. Wall Street and the City are simply middle men who rake of an exorbitant profit and have inserted themselves between the Investor and the Corporation.

Easy credit and lax regulation in the US and UK, Ireland and Iceland, who as four principle players were major contributors to this worldwide economic catastrophe had a great deal to do with it, but in and of themselves they could not have engineered this complex disaster. That took the assistance of Wall Street and the City, the “markets” in general, which had to know the margins were unsustainable, yet the investors could not be disappointed. It all worked well until this greed hit those nations who had permitted their economies to be financially centered, where their “money burden” exceeded their “real wealth” in land or manufactured output by many times, and an event came around which stopped the money flowing.

The fact that credit was inappropriately available was a direct desire of Wall Street / the City to make more money, people in debt give a decent return as long as they can afford to pay it. To make certain they would pay it, bankruptcy laws were strengthened. More than once I have been told “the bank always gets its money”. The problem with this attitude is that you can’t just print “more money”, money only has value when it’s backed by something tangible, like work or goods, if you do print more without value behind it, you simply devalue what’s already in circulation.

As long as people could pay their debts, there was no obvious problem, and from about 2000 to 2008 for the most part the world ambled along in blissful ignorance to mantras like “No more Boom and Bust”. Then in 2007 there came that speculative increase in the price of oil. Petrol in the US went from $1.86 in 2005 to $4.12 in 2008, that’s an increase of $2.26 / gallon or <120%. The world demand for oil did not increase by <120% in three years, and David Malone’s articles demonstrate better than I can how this happens in a “free market” speculative system. The issue is that the USA is energy hungry, it’s also a good part of the consumer engine driving the world economy. They consume more per capita than anyone else. People in the USA could no longer afford to get to work, pay the bills and spend their disposable income as the disposable income was no longer disposable. It wasn’t that they didn’t want to pay bills or were badly intentioned, they simply couldn’t. They bought fuel, but stopped spending on much else, businesses closed and the economy ground to a halt, creating judgments and foreclosures over the following months, with the banks now being deprived of income the credit crunch hit. The timeframes are not unrelated, as a high incidence of severe fuel price drops, to about 30% of previous levels has historically seen a knock on effect in bank failures over the next few years. People lacking funds could not drive or even sustain the inflated goods and property prices. The crunch spread worldwide as fast as the 1918 flu. A “correction” took place, but unlike other corrections in the past, those who engineered the inflation did not suffer in any remarkable way – they’d ensured we put systems in place to protect them!

Interestingly when we examine the last century, if you lay a graph of banking failures over the top of oil prices there’s three distinct periods where oil prices collapse by about 2/3 and lagging a couple of years behind on each occasion bank failures multiply. So historically energy prices climb, people can’t pay for extras, markets collapse, banks can’t recover debt and banks fail. This indicates that today, banking viability is tied directly to big oil / energy.

We’re an energy hungry world, and as the above chart shows to maintain our energy consumption as prices escalate we will need to sacrifice other items, and when we do that economies literally collapse, and that energy price is swinging upwards again! The base norm price for energy in a balanced supply/demand system is actually only about $20/barrel, though that has naturally increased somewhat recently as we pursue harder to get at resources.

These events led us all to live through the instigation of “The Great Bank Bailout” years, which history should rightfully record as 2008/2009/2010, but why do I say the “instigation” and can it happen again?

Breaking it down we should look at what really caused the period of the “Great Bank Bailout” in our modern history, what it’s got the potential to cost each of us individually and briefly examine the reasons that have been popularly spread by media and government, even the banks themselves. It’s certain that the lax financial laws have not yet significantly changed, the City, Wall Street and Corporate interests still reign supreme, so that next perfect storm appears waiting in the wings with the seas still boiling from the last one. Indeed the Arab world is already experiencing it.

The man in the street should understand that in this worldwide banking and commerce system, pretty much everything is interdependent. I’ll use some hypothetical examples to illustrate the probable or potential scenarios, ones that most of us don’t really relate to when we hear figures on the news.

A bank fails in Hong Kong or Singapore, so what, to us it’s just an article of news that we may or may not bother reading, we sympathize with the people who lost their life savings, but it couldn’t happen to us could it? You bank with the Abbey Building Society, then you discover that the Abbey is owned by Santander which had a 50% share in these failed banks, which are now worthless. This basically means Santander / Abbey / You just lost money.

The problem is that you made no bets and just put your money there for “safe keeping” until you needed it. If you can’t get your money from your bank, because your bank just gambled with your money and lost it, how do you react? Of much greater importance to the UK and other governments, how do your neighbours react as their money is still in another bank – but is it safe? The chances are a good portion of your neighbours will pull their money, creating a “run” on the banks and the whole system collapses. Banks only keep enough money on hand to cover slightly more than what they perceive as their short term operating obligations.

The only way the system really collapses is if the banks themselves are insolvent, basically bankrupt, and can’t afford to meet their obligations. Surprisingly to most people that’s exactly how modern banking operates, for the most part they never have enough assets on hand to cover their obligations. As long as the perceived value of the assets increases, this system works, but when those assets fall in value the system collapses. Banks avoid bankruptcy by continually borrowing from each other through a process known as interbank lending, and when the banks run short, they borrow from governments who can print more money. The part most people seem to miss here is that WE are the government, the government gets its wealth from US, without US there is no wealth and it’s OUR money they’re lending to the Banks.

So where does that leave us, say an average individual who according to a recent Times article has about £3,600 pounds saved in the bank. With most of us not being paid any interest these days every year we’re losing between £100 and £200 just through that invisible tax, inflation, and for those of us that did earn a little interest, income tax is always waiting.

Now we need to add that bailout cost in, officially at £850 billion, but put it into real numbers and that’s £850,000,000,000, in anybody’s world that’s an awful lot of money. So in the real world where the UK has an average per capita savings of about £3,600, that puts the cost of the bailout to each of us at £850,000,000,000/60,000,000, now that we’re using the US numbering system. This means the UK government just spent ~£14,166, on behalf of every man, woman and child in the UK, basically to protect £3,600 of savings. That’s a bit like saying I’ve just insured my £3,600 car and paid £14,000+ for the privilege. We’re not even touching the national debt here!

In the most simplistic of fashions, where we’re ignoring corporate assets and debts, the banks were able to go to the government (us) and initiate the following conversation:

Banker representative: You know those laws we paid you to get rid of after we helped you get elected?

UK Government: Yes, but not so loud, please!

Banker representative: You should’ve though it through better.

UK Government: What on earth do you mean?

Banker representative: We’re in trouble, we need money!

UK Government: OK, how much?

Banker representative: £850,000,000,000,

UK Government: That’s almost £15,000 for every human being in the UK, what do they get?

Banker representative: They can still withdraw their £3,600 each. We’ll give you some shares in our bankrupt companies too, but not too many. Maybe they’ll still be able to get the money next year too!

UK Government: That’s crazy – why would you expect us to agree – you’ll bankrupt us!

Banker representative: If you don’t, we throw people out of the banks; they throw you out of office.

UK Government: OK then, but maybe someday if things work out you’ll pay it back?

Banker representative: Sure. If things work out, now about that new legislation we don’t want, and that bonus thing?

UK Government: Just give us a bit to figure out how to get the money, after all it has to come from the people, or we have to borrow it, and they have to pay the interest of £42,500,000,000 or about £700 each in the first year alone. By the way, will you need any more?

Banker representative: We’ll let you know.

That is how modern banking works in essence, banks borrow our money, and when things get tough they gets us to give them many times our original investment just to make certain we can still get access to our original “loan” to them which they promised we could have returned whenever we needed it before we agreed to give it to them in the first place.

And in England they wonder why the government wants to sell of the forests, it has precious little else left for the auction block!

So, what did this Credit Crunch mean to you, quite simply of your £3,600 you had saved last year you paid ¬£140 in tax (inflation) and £700 in interest for this year or about £840 after the markets finally adjust. The net cost in the most simplistic of terms is you just spent over 20% of your savings to support the banks for a year.

Banking laws are well overdue for an overhaul, not just a dance around the edges of current legislation. I don’t think we can stop the next fuel or legislative induced banking crisis, but we can certainly reduce its impact for the common person, but then that’s not really in either a Union or Corporate interest, is it?

This is the broken UK political system.

Independence or FFA and a basic Scottish banking charter might just help as well.

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