$700bn rescue bid fails

The US House of Representatives shocked the nation by rejecting a revised draft of the $700bn Bush rescue plan, even allowing for the addition of safeguards to prevent fat-cat profiteering.
Stock markets plummeted at the news thus demonstrating the nature of the gamble that the Bush administration are proposing to take with the people's cash....
Nevertheless the feeling is that in some form or other the bill now has to be passed in a situation that will become a self-fulfilling prophecy if it fails. Failure to get this plan off the ground could easily lead to a catastrophic market collapse far worse than if no-one had ever suggested the plan in the first place - what a ridiculous paradox to be in... a real damned if you don't, damned if you do scenario created by self-serving politicians. We, the taxpayers of course will be the ones to foot the bill whichever way it goes - George Bush will be well out of the firing line by the time the pigeons come home to roost, having feathered his nest and undergoing lucrative lecture tours.
The irony is that any half-intelligent economist must recognise that trying to buy your way out of trouble is a huge gamble, and messing it up is unforgivable on a major scale - so who is it that is advising the Bush administration to go down this route? My guess is that we are looking at those who are politicians first and economists second (or maybe third, fourth.....), the market can smell fear and a bluff and right now the much mooted $700bn stinks more and more every day! Yet it must be dressed up to look attractive otherwise the whole smoke and mirrors plan will push us into a realm where no-one wants to go.

I never envisaged that this website was going to become a political soapbox, and personally despise party politics with a passion, but I am beginning to believe a new theory. I always have thought that religion and politics were incompatible, I have recently formed a new opinion about politics: ECONOMICS AND ECONOMICS SHOULD NEVER BE MIXED.

Popular Questions:
Will we all end up broke?
How long will the credit crunch last?
Sub-prime mortgages to blame?
Is this the new Great Depression?

Santander to buy B&B assets

Santander have stepped up to buy part of the Bradford & Bingley group to add to it's recent purchase of Alliance and Leicester - Santander already acquired Abbey in 2004, and has formulated plans for Abbey to take over the network of Bradford and Bingley high street branch offices.
Banco Santander are the largest bank in Spain, Bradford and Bingley have been one of the institutions exposed to the credit crunch particularly due to their involvement in the buy-to-let market which has suffered a collapse over the last year or so.
Meanwhile the Benelux governments (Belgium, Netherlands and Luxemburg) are trying to formulate a plan to rescue ailing financial house Fortis, early reports suggest that this will cost over 11bn Euros.

Credit Crunch latest news

The two big stories of the day span the Atlantic as both are about Government intervention in the financial markets. In the UK, the Government has agreed to nationalise Bradford & Bingley, one of the many former building societies who re-invented themselves as a bank. This adds to the Governments growing portfolio of financial houses along with Northern Rock. Financial commentators believe that the three institutions most exposed to the credit crunch have now been secured ie:

• Northen Rock
• HBOS
• Bradford and Bingley

The debate still rages whether financial instituions who have made critical errors of judgement should be saved or whether they should take the consequences of their actions by going bust like in any other industry.

The same attitude has been adopted in the 'States with the belief that throwing $700bn at the problem will magically restore consumer and market confidence - for what it's worth, I think this is the biggest gamble the world has ever seen, and I don't like the odds one bit.
In actual fact neither of these deals (the US rescue package and the Bradford & Bingley) has been totally worked out, but apart from the niceties, the deals will certainly go ahead. Good to see at least the financial fat cats will have their outrageous bonuses capped, but I would like to see some of these people falling on their sword and admitting their own incompetance for allowing this crisis to come about. In fact this should be part of the deal - anyone with executive powers in any financial house that benefits from the public purse should be forcibly removed from their leather-clad offices before a cent is released.

Related posts:
Government Intervention
CBI predicts 'shallow' recession
25% house price drop expected
Fanny&Freddie are nationalised

First EU country to enter recession

The Republic of Ireland today became the first EU country to slide into official recession since the start of the Credit Crunch.

The GDP (Gross Domestic Product) in Ireland has shrunk in two consecutive quarters as reported today. GDP dropped by 0.5% in the first quarter of 2008, and a drop of 0.3% has been reported for the second quarter - Technically an economy has to record two consecutive quarters in order to be officially in recession.
It is expected that Germany, Spain and the UK will also succumb to recession before 2008 is out. A great many people believe that the Credit Crunch is a recession, today's news should serve to draw out the distinction between a squeeze on credit reserves and an actual slow-down in the economy.

Related posts:
Is there really a credit crunch?
Is this a recession?
Credit Crunch News
The Multiplier

Bush attempts to stem the tide

Economic madness or genius??
Who's to say what will be the outcome of the unprecedented scale of George Bush's latest interference in the market economy. In a move that is supposed to balance out the effects of the credit crunch the US President is gambling $700bn of the American people's money on the premise that you can buy your way out of a natural slump in the market.
One need look no further than the national debt of the USA to figure how this is going to be paid for... on credit, the USA already has a national debt running upwards of ten trillion dollars - Most people have a hard enough time thinking about what a billion dollars would look like, I openly admit that I can't get my head around a trillion...
The US government has committed to buy "mortgage-related assets from any financial institution having its headquarters in the United States." There are further measures proposed that will support non-US companies that are active in the US mortgage market.
The effect on the stock markets around the world has been immediately positive, but this is very early days and the market has time to show whether it can be bought off for $700bn...
In the economic climate calling for individuals to keep a lid on their personal debt, there is something fundamentally wrong, it seems to me for a further $700bn of debt to be incurred in order to 'fix' the leak. Time will tell if the calculations are near the mark, or whether this is a hugely unsuccessful gamble made by an administration on it's way out - one thing is for sure, Mr Bush won't be the one picking up the pieces if it all goes wrong.

Economic meltdown takes a hold...

News stories relating to our current economic climate are hitting the head-lines daily now. Reports on the stock-exchange, the collapse of financial institutions and the movements in the stock-exchange are filling up the news bulletins.
It is important to keep a realistic perspective on what is happening, and whilst it would be silly to ignore the looming economic chaos, it is not always as bad as it seems. Firstly we have to recognise, then when the newshounds scent blood, they change their agenda to concentrate on specific topics, and the economy is a topic that is currently setting their pulses racing. In a different news climate these stories would be pushed down the agenda and more or less ignored. There is always the danger of economic collapse as a self-fulfilling prophecy if everyone changes their economic activity based purely on what they hear on the news. It could have the same effect as if you announced a bread shortage - We all know how that goes... announce a bread shortage and within an hour there is one, whether there was one before the announcement or not.
It is also important to look at survival techniques for the recession. As a business it is important to be lean - don't overspend, keep the cash-flow going, look at where you can cut spending and be as competitive as possible, that way you could be the one that wins where your competition loses...
From a personal perspective, keep your debts as low as possible, make a budget and stick to it. Look at all your income and all your expediture and work out a realistic budget - include everything you are likley to spend and you may well find that you need to be more careful than you previously thought...
It's not all bad news, but on the other hand this situation needs to be treated seriously, ignore the credit crunch and the recession at your peril.

Popular Questions:
Will we all end up broke?
How long will the credit crunch last?
Sub-prime mortgages to blame?
Is this the new Great Depression?

'Shallow' recession predicted by CBI

The Confederation of British Industry are talking down the gathering hysteria about the coming recession by predicting a mild short-lived recession along the same lines as predictions already issued by the European based OECD.
Small shrinkages in the economy are expected, along with rises in unemployment, whilst acknowledging the rapid loss of momentum in the economy we are currently experiencing.

My question is whether this is the business world's attempt to talk up the economy along the same lines as the failed politicians attempt to talk it up. It is true to say that markets can be 'talked up' and confidence restored with well-chosen words, but you have to aim these well-chosen words at the right target. The target here is the public at large, the house-wives who have decided to spend less in the supermarket, the workers who have decided to make cut-backs by taking sandwiches to work, the student who has just decided that he can't afford to run a car after all. We are not talking about those that would normally listen to the rhetoric put out by either politicians or the CBI - If this is an attempt to talk up the market, then the target has been missed. People already firmly believe in the credit crunch, most think we are already in a recession, many unable to even percieve a difference between price rises and the credit crunch. The general public probably switches off at the name 'CBI' and definitely does not trust the words uttered by politicians.

The truth is that people will believe the evidence of their real income being diminished on a daily basis with rising fuel costs impacting every purchase, mortgages rising as discount rates expire have added to the burden of monthly outgoings whilst wages have remained static. There is no real reason to think that this sudden slow down in the economy will not continue as the reality bites, though you can see why the CBI and the Government would fear this happening.

The CBI is insisting that this is not a return to the 1990's where jobs were the big issue and demand slumped dramatically, but the truth is that nobody can really know how the market will react. My own feelings are that demand will certainly slump and jobs will surely be lost. The CBI acknowledge the speed of the initial reaction from the public, and like a self-fulfilling prophecy this drop in demand will have a real impact on jobs and sunsequently will lead to another wave of drop in demand. The impact of that drop will knock-on again and until we can quantify the gathering speed of this slump, there is no real way of knowing what the final outcome will be.

I would rather not be spreading doom and gloom, but I think there is a feeling that we can get out of this by ignoring it instead of facing up to the realities of the free market, and this attitude is short-term thinking firstly put forward by the Governments (both US and UK), and now backed up by industry. Maybe they are trying to reach those who don't believe there is a problem in the hope of encouraging them to keep spending, but it would be more effective to put ones' energy into preparing for the coming hard-times in my humble opinion.

Related posts:
Is this the new Great Depression?
Credit Crunch News
The Multiplier

Are price rises down to the credit crunch?

There is no obvious reason why the credit crunch would have an impact on specific products in high street shops, the credit crunch itself is concerned only with the lending market.
Everything naturally becomes more expensive when fuel goes up, and we are certainly experiencing almost unprecedented hikes in oil prices (not related to the credit crunch). Everything in the shops has had an element of transport (except maybe a farm shop...)
There will be transport costs incurred in getting the materials to the manufacturers and the products to the retailer. The retailer is paying more for fuel to get to work, for the lighting and heating in the shop and that increase has to be covered somewhere - either they make less profit or they pass the costs on.
On the other hand consider this:
the second-hand market is set to boom, eBay will be where many people will defy the credit crunch, buy the things they want at rock-bottom prices and cash in on their old stuff they don't want. So prices could drop if the second-hand market starts to effect sales of new products.
Retail Sales Events will become more frequent as middle of the market suppliers find it more difficult to shift their goods, (Often the very top end and the cheap end are untouched by a financial crisis in most markets) so there is a good news bad news scenario.
My prediction is that the leanest businesses will survive the credit crunch, so I estimate that there will be a lot of cut-price sales going on to keep revenue rolling into the shops, and then there will be a good number of sales where the owners will be sadly going out of business...

House prices to fall by 25%

Chief Executive of the nationwide Building Society Graham Beale admitted to the BBC that he felt house prices would drop by 25% by 2010. This at least goes some way to make my own crude prediction of 50% by 2015 look a bit more realistic. I still think that the market could overshoot that 25% mark and bottom out at 50% of the peak of two years ago.

If Beale's predictions are correct, then more than two million homeowners may find themselves in negative equity along with anyone who buys a house within the nest two years... If I am anywhere near the mark, it will be a heck of a lot more than two million who may suffer. Negative equity will only have an impact on those that experience an inability to pay their mortgage or would normally liquidate some of their property equity, so it is not always a disaster, and if they can carry on paying the mortgage ultimately the equity will stabilise and regain it's previous level.

What can we do about it?
Firstly do not try to liquidise any of the capital in your house, do not borrow against your property and make sure you do your budgeting so that you can always pay your mortgage. Do not assume that the housing market will recover any time soon. If you are looking for your first house wait for maybe two years if you can. If you are thinking of buying a bigger house, probably best to wait for two years if you can. Re-asses the market in two years and be prepared to hold out even longer.

Popular Questions:
Will we all end up broke?
How long will the credit crunch last?
Sub-prime mortgages to blame?

US Government 'nationalises' mortgage houses

After rumors over the weekend, the US Government confirmed it's intention to under-write the bonds issued by Freddie Mac and Fanny Mae potentially costing the US tax-payers billions of dollars.
Is this a good thing? and could it have been prevented?
My own view is that it cannot be a good thing to bail out greedy lending houses that made some catastrophic mistakes in the lending market, and in general any intervention by Government is likely to tip the delicate balance of the economy. In fact it is this propensity to 'tinker' with the economy that has accentuated the current financial crisis.

The market economy naturally experiences peaks and troughs, yet both UK and US treasuries seem obsessed with staving off an inevitable recession, as if playing with interest rates and handing out a few more benefits was going to make a real difference against the irresistible force of the free market economy.
Could it be with elections looming on either side of the Atlantic that this futile action and misuse of public money was a political ploy?
The blame culture we have courted seems to have misled collective Governments into thinking that they may actually be to blame, and if this is the case, they can take action to 'rectify' a recession.
Wrong on both counts, the treasury has a passing and slight effect on the economy as a whole and is neither to blame nor should be expected to be able to 'fix' it. The market is a beast which cannot be tamed or controlled - it is fickle and once it has made up it's mind, it does what it pleases.

Desperate actions however are required in a scenario where 9% of US homeowners are failing to meet mortgage payments. The two big mortgage companies Freddie and Fanny have been losing money hand over fist, billions per month and whilst they claimed to have the reserves to cover their losses, the writing is definitely on the wall for these two financial giants.
In writing a blank check (cheque) to keep the companies solvent, the Government is exposing the tax payers to a huge financial committment, and all the questions that surrounded the Northern Rock debacle in the UK are now been asked in Washington - the main one being Why are we bailing out a commercial enterprise that has gone wrong?