How do we solve the economic crisis?

This is the subject of much discussion in the 'blame culture' that has developed over the last few decades. We demand to know who is to blame for the situation and how can we stop it happening again. This is as true in the global economic situation as it is in the workplace, we expect answers and have procedures in place to prevent unwanted events.
However, when we are discussing a free market economy, we have to accept the 'bust' along with the 'boom'. Anyone who has studied the economy knows we have been experiencing a boom, and the bigger the boom, the harder they fall... A speech from some years ago by Gordon Brown proclaims the longest sustained economic growth for centuries - Right there is the reason for the deepest recession we could ever have imagined...
So what now?
Controls, measures, plans... all manner of suggestions are out there and each one strangles the free market, each one takes us closer to the 'monster' we thought we had defeated at the fall of the Berlin Wall twenty years ago. I don't wish to appear right-wing because economics, not politics is the issue here, but I can see how the free market is supposed to work, and the boom and bust is part of that system. I can also see that the more controls you place into the system, the less 'natural' balance it has, and the more it is susceptible to wild swings. Once you try to control the free market, you have more or less killed it off.
When things are going well, everyone wants to live by the 'sword' that is the Western free market, when things are going badly, no-one wants to die by it...

Related posts:
Economic meltdown
How to survive recession
Gordon Brown rescue plan
Government Intervention

UK economy set for deep recession

According to the International Monetary Fund, the UK economy is set to shrink by 2.8% this year - a significant drop compared to previous predictions of between 1 and 1.5%. This could turn out to be the worst drop experienced since the 1940's.

On reading the headlines, this could sound like we will all be destitute, but when you consider that the economy has been over-inflated on debt for decades, it is hardly surprising that there should be a redressing of the balance somewhere along the line. Don't forget, a week ago there was every chance that a footballer was going to change hands for over £100m - just thirty years after the very first £1m player (Trevor Francis sold by Birmingham City to Notts Forest).
A good indication of how the economy has been over-inflated, is the sharp rise in housing prices over the last decade. When you look at the graph of house prices:

The steep rise is way out of line with the 'natural' climb in house prices that you would expect to see in line with inflation and the general cost of living.
[in the picture (left), the thirty year trend is shown as a red line - it runs left to right and sits at a level between the low points (valleys) and high points (peaks)].
When the actual price varies so wildly from the trend, there should be a redressing of the balance, and prices will most likely fall to form a new low point as indicated 'X' by hand on the diagram (just my rough guess...).
The knock-on effect of the house price rise specifically has been to lead people to believe that they are wealthier than they actually are, and to borrow against this capital. This effect knocks-on into the economy as a whole with spending being driven by these 'fantasy' house prices. The drop in economic activity is due in part to reality kicking in a house prices slowing down as they were bound to do eventually. Of course the banks got caught up in the same fantasy and the credit crunch was born...

The economic crisis has had, of course, a global effect and in the global picture, it is estimated that 50 million jobs could be lost worldwide this year in a' worst case scenario' prediction based on the current economic crisis. It is estimated that the developing world will suffer most.

Related posts:
UK in recession
Is there really a credit crunch?
CBI predicts 'shallow' recession
Is this the new Great Depression?

UK in recession

Well, readers of this blog will hardly be surprised to hear that the UK is now officially in recession. The only real point of interest is the rate at which the economy is declining. GDP shrank by 0.6% in the third quarter of 2008. The predictions are coming in of a shrinkage of around 1.2% or 1.3% for the final quarter which is an indication that the decline is gathering pace at a somewhat alarming rate. [UPDATE: the figure announced was actually 1.5%]
One of the problems that will face the government is that now a lot of economic bolts have been 'shot', how much more intervention can be introduced in the face of the fact that the economic measures so far employed are having little effect in arresting the decline?
We knew from the start that this period was going to be deep and dark in economic terms, and so far there has been nothing to suggest that this is not the case. For those that are not currently experiencing any negative effects (and there will be plenty that are not directly affected as yet), spare a thought for the growing line of jobless folks who stand little chance of finding decent alternative employment any time soon.
No we are not starving, but if we don't learn quickly how to cope with the hard times, and learn the lessons of habitually over-extending our budgets, the economy will be in for a severe bashing.

Related posts:
Is there really a credit crunch?
Is this a recession?
Is this the new Great Depression?
Will we all end up broke?

Unemployment effects

I remember first hearing the theory that a rise in unemployment leads to a rise in crime, and having one of those 'wait a minute...' moments. Are you saying that if I become unemployed I am more likely to steal something? How short-sighted, prejudgmental and downright rude...! The sort of thing you would expect from a politician - who are quite adept at demonstrating white-collar crime and sleaze despite the fact that they are wealthy fat-cats with excellent prospects. Peter Hain should be able to explain how it was that £103,157 of donations were not properly declared, however it seems such a paltry sum got overlooked... an administrative error.. I'd like someone to make such an administrative error in my favour...

However, I digress from my theme... my own feelings are that if you are the sort of person that is likely to steal, then having more time of your hands whilst being unemployed will make you more likely to steal from the general public rather than your employers, but really theft, crime, muggings and the like are a result of your state of mind not the state of your employment, job prospects or CV.
Whilst it is true that the criminal classes (?) are less likely to be actively pursuing work, it is NOT true to say that a person is more likely to become a criminal when they are unemployed.

Nevertheless it has been reported that the current financial crisis has had an effect on the crimes that are being committed and some of those specific areas of 'petty' crime are listed here:

• Shoplifting - a marked increase has been evident in supermarket thefts leading to some surprising goods such as organic food being security tagged.
• Garden theft - theft from gardens and allotments are on the increase as the fruits of the hard-work of domestic agriculture is being diverted to petty thieves.
• Burgulary - There is concern that burgulary will be on the increase as a result of the failing economy and leaked government memo's have leant gravitas to this view.
• Fuel theft - 'Bilking' (driving away from a forecourt without paying) and fuel theft from vehicles on the road have both been reported as on the increase.
• Insurance fraud - Fraud such as deliberately writing off vehicles and false claims against holiday insurance, are on the increase - it is estimated that false car insurance claims cost other insurers around £40 a year.

Having looked at the evidence, there is a fair argument that economic crisis can lead to a crime wave, but I would stop short of linking unemployment with crime - how many burglars hold down a steady job I wonder? The list of crimes above does not signify a collapse of society into chaos, just an increase in activity by the low-life that stoop to these depths.

Related posts:
How to survive recession
Effects of the crunch in the UK
Will we all end up broke?
How long will the credit crunch last?

Government consider printing more money

Alistair Darling is considering printing more money in an attempt to ease the credit crunch.There is a distinct possibility that the Chancellor and Mervyn King, the Governor of the Bank of England, may try expanding the money supply by billions. The prime aim would be make these funds available to the government to boost the economy.

So this is Gordon's get-out clause then - he can promise to spend billions but may have to devalue the pound in the process and even print the billions he is promising the spend... not quite the brave new Gordon who flew to Europe to persuade everyone to jump on his heroic spending bandwagon.

The real fear is the danger of deflation, NOT a major concern for those who are shopping for bargains if course.. and the decreasing interest rate is plainly having little effect on the economy. In fact the separation between the Bank of England and government has become blurred over the last 18 months far more so than at any time since official government constraints on the BoE were lifted, allowing it to effectively set it's own rates.

There may be uncertainty about the economy and the effectiveness of the interest rate cuts, but there are some certainties about printing money which you can 'take to the bank'.

• Inflation is certain and with increasing unemployment, this is NOT a welcome side-effect.
• Massive and instant devaluation in the pound is likely, making imports hugely expensive - those companies whose business relies on imports are likely to be hit very hard.

Whatever the uncertainties might be, the effects that we know about should make this a non-starter even though the government are being quoted as suggesting that this is a 'sensible contingency..'. I think we have already demonstrated that government actually has very little grip on the economy, and a measure like this could easily send things spiraling out of control. I heard only today that Zimbabwe has had to start printing Trillion dollar notes such is the extent of their inflation...

Don't forget that this idea is from the man who claimed the recession would be a shallow one, this is the man we are trusting with our fragile economy. Apparently he no longer things the recession will be over in 6 months... frankly Alistair Darling, nobody with an IQ of higher than 6 believed you anyway... whether that covers a percentage of the ruling party I just cannot say.

This does however put to bed those rumours about the government taking the opportunity of parity with the Euro, to adopt the European currency... If you are part of a pan-European currency, you won't be allowed to just print your own money to arrest deflation...

Related posts:
Government Intervention
CBI predicts 'shallow' recession
Negative interest rates
Mortgage safety net

Drop in interest rates today

New Rate: 1.5%
As expected the Bank of England announced another drop in base rates to day, taking the rate down to it's lowest ever level at 1.5%. This represents a drop of 3.5% since the beginning of October when base rate was at 5%.
Naturally this will be good news for some householders with tracker mortgages and not so good for those that were enjoying 5% return on their savings 12 months ago. When you take into consideration the global economic climate, a drop in mortgage rate will not compensate for the thousands who will find themselves out of work in the next few months. The hope that these measures will magically stimulate the economy could still be a forlorn one and there is still likely to be another cut in two months time which could well see the rate drop to or below 1%.

Further reading..
interest rate news
can interest go negative?
drop in base rate
UK heads for recession

Interest Rate News

Speculation is growing as pressure builds up on the Bank of England to cut interest rates again on Thursday this week. The only real doubt is whether a cut of 0.5 or a full 1% will take place. This will take the Bank of England base rate lower than it has ever been in its 300 year history. It is hoped that this will release funds for lending to both businesses and the domestic market. The government will also want mortgage companies to pass these new rates on to tracker customers, but there is a growing resistance amongst the banking sector to allow their clients to benefit from these low lending rates. Just because they will be able to borrow at less than 2%, mortgage companies obviously feel that their right to profiteer from the situation over-rides the interests of their clients.
Just to retrace our steps for a few seconds...how did the credit crunch come about? oh yes, it was the banks trying to make money from sub-prime mortgages wasn't it?? So the banks that caused the problem in the first place are now benefiting from huge injections of cash from the taxpayers. The base rate has plummeted to allow more cash into the system, borrowing is now cheaper than it has ever been, and yet the self-same banks refuse to pass on the benefits to their lenders - those same tax-payers who are funding their lavish life-style... I don't want to be overly dramatic, but revolutions have come about with less provocation than this!!

Related posts:
Negative interest rates
Mortgage safety net
When will the property market recover?
sub-prime mortgages to blame?

TalkMoneyBlog review

The internet is a great resource for finding helps and tips for frugal living and coping with the Credit crunch, presumably you are aware of this fact and that is why you are reading this blog.
I like to report on financial stories and how they might impact on the average household, and I also like to find good advice and resources for surviving the financial crisis that we are currently in the middle of.
The ‘TalkMoneyBlog’ offers advice on all types of topics related to financial matters, three of which I have chosen to highlight here:

• The first issue is whether Buy to Let Landlords can survive the current financial crisis. This is a comprehensive and detailed examination of possible pitfalls for landlords and how to avoid them, particularly in the light of tightened mortgage offers.
• There are some general money saving tips where the idea of combining ‘freecycle’ and eBay is mooted as a money generating ruse…
• There is advice on Credit Cards Debts Cleared Legally. This last article is the most intriguing of all. The argument is that most credit card agreements actually violate the Consumer Credit Act and therefore can be legally challenged in court. Your previous debt could even be turned into a compensation payment.

This blog is worth bookmarking as articles are added frequently, and the advice is always up to date in this fast-moving environment. Interest rates and exchange rates are currently in a constant state of flux and advice needs to be updated on a daily basis. Every consumer can find something useful at TalkMoneyBlog.

The outlook for 2009

There is no doubt we are sliding into decline at speed and every indicator points this way. As far as the housing market is concerned, the UK is in the steepest decline ever recorded with prices falling 16% in 12 months back to the level of prices more than four years ago. Spending and manufacturing output is down, and apparently a further drop in interest rates is being considered even though rates are currently the lowest they have been for nearly sixty years. The US is leading the way when it comes to low interest rates, and the Bank of England base rate has never before fallen below 2%. The rumours are that a further cut to take the UK base rate down to around 1.25% is on the cards very shortly with more cuts under consideration for March 2009.

There are no guarantees that tracker mortgages will follow suit, and Nationwide has already announced that it will go no lower than the current level of 2%. There is a clause in most Nationwide tracker contracts which allows them to charge a minimum of 2.75%, this clause was not invoked on the last round of cuts. Several other lenders have also said that they will go no lower than 2%, even though the UK government has urged them to pass on interest rate cuts to clients.