How long will this last?

What caused the global financial crisis? and...
When will it end?
Unsurprisingly, this is still one of the most prominent questions concerning the current economic crisis. The Credit Crunch has given way to the Global recession, and so it is the longevity of the recession that I will attempt to address, along with the other crucial question about it's causes.

Causes:
There are probably numerous directions in which we could point the finger of blame, but our propensity to spend without proper accountability both in micro and macro-economic terms, is I feel, at the root of the crisis.
There has been an over-growth of the worlds economies funded by debt, secured largely on property. If you take a look at the rise in the price of property over the last 10 years
(there's a graph of UK property prices here:)
The steep rise between 1995 and 2005 is blatantly unsustainable, but neither home-owners nor politicians really wanted to face up to it. This period heralded an unprecedented drive to convert this property capital into cash by re-mortgaging. This capital was then released into the economy as if it were revenue (which is was not!), by this I mean consumers spent it as if it were pocket money.
The result was bloated profits throughout the economy funded in the main by the over-inflated property market. Retail companies were taking these funds through their tills assuming that this level of retail was sustainable and therefore could be built on as a revenue-model for future growth. These profits were channeled into buying out companies and expanding, expanding, expanding until...BANG! the property market stalled and the bubble burst.
Suddenly all this expansion (built on a wing and a prayer so to speak) had over-exposed some big companies, in turn the banks were exposed (they funded the expansion) and the growth that was meant to continue, not only stopped, but has begun to go negative (recession = sustained shrinkage of GDP).
During this giddy growth period, the banks had indulged in some extremely suspect activity to amass 'assets' in the form of debt - in particular sub-prime mortgages which they bought with little thought of whether they had any real worth - these mortgages were only good whilst the market was growing (as the houses could be sold to recoup the debt). In a falling market, these 100% mortgages were losing value hand over fist, the banks' reserves were decimated leaving them calling in loans. Many of these loans were in the form of a normal operating overdraft for many of these expanding companies - removal of these operating funds left them looking for cash quickly. Exposed companies that had over-stretched themselves now had to sell off assets to pay the banks or risk going into administration.
A massive hole developed in the banks funds (I have lumped all banks together for ease of reference) and a lot of big companies fell into that hole, many of them having to sell out, make masses of redundancies and in many cases cease trading (even some of the banks got pulled into the same vacuum).

How long will it last?
A big, big question, which in truth, no-one knows the answer to - anyone who thinks they have an answer to this question is just guessing (me included), after all if this is deeper than recessions we are used to seeing, then we don't have a model against which to measure.
The crisis will continue until the world economies stabilise and can start to show some small amount of growth again - many commentators believe this will be at the end of 2010, beginning of 2011. Governments and trade associations have consistently underestimated the recession and have tried to 'talk it up':
The truth is somewhat more depressing, there will be a lot of knock-on effects until all the knock-ons are exhausted.
EG: If the motor trades collapse (they will certainly suffer), then the dealerships and garages suffer - the toolmakers suffer, the trade suppliers for plastic mouldings, air conditioning, upholstery, bulbs, sat-nav systems etc.. etc.. all suffer. Each local economy that is supported by large factories in any of these areas collapses taking all the local traders down (food outlets, clothing outlets, electronics retailers etc....) The down-turn in lots of individual areas takes down national retailers, big food chains, fast food outlets, media retail companies - the list is endless... When all these houses of cards have fallen, it will be up to the remaining industry to show an upturn, needless to say the deeper the recession the harder it will be to show any sort of upturn. If you can comprehend these facts then you should be able to see that this is not going to be resolved quickly.
In short: Two years - if we are not out of the woods in two years, we should at least have a good idea of when we will be on the road to recovery... we have never experience this type of recession (which may well end up being identified as a 'depression' in the fullness of time), in the advanced global financial markets that we have in place today - the market has changed out of all recognition since the last recession of this magnitude was upon us, therefore we wait and see...

Related posts:
Is this the new Great Depression?
Sub-prime mortgages to blame?
How long will the credit crunch last?
Is there really a credit crunch?

Survival through frugality...

Frugality is set to become a watchword over the coming months as more jobs are lost and belts are tightened. Recycling is already established as a growing concept, so combining the two makes perfect sense in the current economic crisis.
We are used to the idea of replacing our furniture nowadays almost as often as we change the bedsheets. Furniture companies flood the market with the latest trends, hoping that you will feel the need to get a newer, better sofa, but the quality of these 'fashion' items, like fashion clothing must be questioned.
Save Our Sofas aims to provide an alternative to purchasing low quality sofas, proving sound information on renovating your old sofa to give it a new lease of life. They provide information on buying new sofas, buying 'previously enjoyed' models and if the worst comes to the worst... how to effectively dispose of your old sofa.
These are the kind of concepts that will be embraced by those who are setting themselves up to survive the recession - buying a new low-quality item might give you satisfaction for a few weeks, but in the long-term, recycling represents money in the bank.

Latest UK economic view

Gordon Brown has put pressure on Lloyds and HBOS to fall in line with the bonus crackdown that has been meted out to Royal Bank of Scotland. RBS has seen bonuses slashed by up to 90% after accepting £20bn from the taxpayers, making a total of £175m in bonus payouts this year.
Lloyds is in the spotlight for announcing potential bonuses of £120m after warning of annual losses amounting to £10bn at new sister-company HBOS.

In today's complex contractual environment, it seems that some bonuses are a legal requirement - in which case they should surely be ear-marked as salary?? The fallout from the bonuses wrangle is set to continue with the spotlight falling on any company that receives government backing.
The government is currently outlining a scheme to underwrite some of RBS riskier assets called 'toxic structured credit assets', this is designed to strengthen the position of the banks and will enable them to effectively 'cap' losses.
In other recession news, high street media retailer Zavvi closes it's doors on 20th February, although some jobs have been saved after deals with HMV stores and another company.

Related posts:
Government Intervention
Is this the new Great Depression?
UK reports GDP decline
Gordon Brown rescue plan

Recession will be 'deeper than expected'

Mervyn King governor of the Bank of England expressed his view of the recession today and was forced to admit that his original estimation of the impact was flawed and the recession would be 'deeper than expected'. However, many of us have long suspected that this recession was going to be deeper than the so called 'experts' had been stating. This just goes to enforce the view that politicians and economists alike should admit that they have little control or even understanding of the workings of the economy - although admittedly that type of honesty probably wouldn't help matters... King acknowledged that the GDP could fall by 4% 'at best' which is certainly a more realistic view than previously expressed.
In the background, feelings are running high over proposed bonuses particularly at board level. This, alongside the claims by sacked HBOS risk manager Paul Moore that he was sacked for warning the bank that they were potentialy over-exposed. He is gunning for his former boss Sir James Crosby, who has also been an advisor to Gordon Brown providing advice on options for improving the function of mortgage finance markets. Sir James has resigned from his role in the FSA saying that he was worried about becoming a distraction to the FSA and felt that the right course of action was to step down.

Related posts:
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Are we in recession?
CBI predicts 'shallow' recession

Government to investigate bank payouts

Alistair Darling has announced an investigation into the way banks pay bonuses following the assignment of billions of pounds to bail out banks, including a majority stake bought by the government in the Bank of Scotland. The banks have complained that they are contractually obliged to make some payments, an argument that is not going to hold sway with the taxpayers who would argue that without bailouts, their employees would be collecting dole.
Already Northern Rock, another company under the ownership of the taxpayers, has announced performance-related bonuses for it's 40,000 employees.
Darling has said "I am now setting up a review which will examine how banks are managed, bank boards have a duty to ask more searching questions of their executives ..... when times are good as well as when they turn bad."

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Icelandic banks in trouble
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UK bank rate drops to 1%

As expected, the Bank of England dropped the base rate to 1% today setting a new record low for the lending rate in the UK. Those of us with tracker mortgages will get short-term benefits, but concerns about the wider economy are still a major worry.
In other news, the jobless figures recently released were higher than expected helping to give the overall impression of a recession which is still not responding to government intervention.
There is still a feeling that the rate could reach zero fairly soon, what is clear is that reductions thus far have not had the desired effect. The hidden effect of these interest rate reductions is the effect that it will have on investments and pensions, which will bite us all in the long-run.

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Interest rates to drop again

Following in the wake of other major economies (US Federal reserve set interest rates at between 0 and 0.25%, Japan set rates at a mere 0.1%), the Bank of England looks set to lower the base rate to 1% or even less. In the rest of Europe, rates are set at 2% and due for another drop next month.
All around the world, economies are setting their lending rate at unprecedented low levels in the hope that the economy will be stimulated as a result.
The threat of increasing the money supply (printing money) is still a possibility, but would have a potentially devastating effect on the exchange rate as the perceived value of sterling would plummet. That might sound like a great benefit for exporters, but when you consider the lack of a manufacturing base, the effect on our imports will be more significant.
The news of the drop in base rate will be welcomed by those who have a tracker mortgage that will follow the base rate.

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UK bank rate drops to 1%

The upside of a recession

There are always some niche areas that benefit from an economic crisis and UK holiday group have announced a £50m investment plan and are planning to recruit 2,000 workers for their various resorts around the UK.
How is this possible?
Two factors have combined here, 1) The general economic climate has persuaded some families that they cannot afford a holiday abroad, yet they are still keen to have their traditional Summer break in an affordable environment. 2) More significantly, the exchange rate has put off many families from going abroad, the pound being weak against the Euro amongst other currencies.
For several years now, holidays have not been a priority for my family, but where we have taken a break it has been strictly on British soil. This years planned holiday will take advantage of free shared accommodation that we have been offered rather than a costly holiday of our own. In years to come, when there is money in the bank, I certainly intend to 'push the boat out' and take the family to some favourite haunts world-wide. For now, I haven't even renewed my passport...

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