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?

There is no Credit Crunch

The Credit Crunch does not really exist because it has not been properly defined.

The economic crisis we find ourselves in is a combination of the collapse of the sub-prime mortgage market in the USA, rapidly rising fuel costs and static wages.
Although you may call it a credit crunch, or any other name, until it is strictly defined, you cannot measure it and therefore you cannot know when the crisis is actually over.

When you listen to people's comments it is obvious that the credit crunch means different things to different people. To some it is about interest rates, to others exchange rates, to many it is the fact that our food and fuel is becoming more and more expensive whilst our wages remain unchanged. All of these are elements of what seems to be a common crisis and what will eventually see us entering a recession. In contrast, a recession is a defined economic term which can be properly monitored, therefore we can know for sure when a recession is over.

The danger of using a loose term is that those using the term will interpret it in different ways. This still happens when the term recession is used, for some they will see it is a time that they lost money on a property, others may see it as signifying job losses. The credit crunch will be blamed for all these things and more, yet what we are really looking at is irresponsible mortgage selling which tipped lending over the edge to the point where debt exchanged hands for more than it was worth. This precipitated by a drop in house prices and coming at a time where we rely far too much on credit and in at atmosphere of rapid inflation. Because it is not defined, the crunch is what you want it to be, you can be sure that the politicians will be exploiting this fact to their own ends time and time again.

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

Credit cards for bad debtors

There are many credit cards on the market: some with lower interest rates, some with short-term 0% interest rates and there are also some bad credit rating credit cards that are designed to help people who want to rebuild and strengthen a bad credit rating, or create a credit rating when they don't have one.

These cards may well carry higher interest rates, but whilst you use them and pay them off in full every month you can use the card to build up an improved or new credit record whilst taking advantage of the interest-free period (up to 56 days in some cases). It is important however, that you don't fall into the trap of building up a debt on cards with high interest.
Using debt to build up a credit-rating may seem a strange concept and it is important that you use the opportunity to demonstrate an ability and willingness to pay promptly.

If you use a good credit card comparison site, you will find that some cards offer added benefits, for example Capital One's Classic credit card offers free access your credit report twice a year for free - so you can see exactly by how your credit rating is performing.
Barclaycard Initial credit card, offers the lowest APR of the 'bad credit rating' credit cards available and also comes with the same cardholder services and benefits as a Platinum card.

Always shop around for the best card that suits your needs rather then just accepting the one offered by your bank. This applies as much to those who are seeking a 0% for balance transfers card as to those who need a card to 'repair' a bad credit record.

Future UK house prices

What does the future hold for house prices in the UK?
Currently prices are definitely on a climb down, but prices have not dropped as much as the market needs, so house sales are slowing down dramatically. I would estimate that the true market price is probably a good 10% lower than the current asking prices because sellers are not facing up to the reality of the devaluation of their properties. Until sellers face up to this reality, the market will just slow down until the market prices reach the buyers expectations.
Who can tell what the real price is then?
It's subjective, each house has it's own demand pattern whether that be simply price-elastic or not. The market however could arguably be estimated based on past performance and if that is the case, then the future could be grim!
I took the graph (produced by the Nationwide Building Society) that I printed a couple of posts ago and (very) crudely extrapolated it with the precise instrumentation to hand ie. a ruler and a pencil, and this is the new graph that I came up with:
This graph shows us that the average price of a UK house could HALVE by 2015 before climbing again. The red line is the average price which is present on the original graph the line below that is a line I added to represent the lowest price when the market has slumped, the one above is the top prices at the peak of a boom. I have followed the general 'shape' of the previous boom and bust scenario's from the 70's, 80's and 90's to produce a slump that will reach it's lowest point in 2015 with average prices at around £92,000. Recently average house prices have been £185,000, so that indicates a drop of 50% over the next 7 years.
I was shocked by the figures I came up with and am the first to admit that these look like pure speculation (and they are speculation), but if the graph is accurate and the current market is subject to similar pressures, then you cannot just discard the findings of this crudest of measurements.
I cannot imagine seeing prices fall to this level, but after coming up with this illustration I just wanted to nail my colours to the mast now and say let's see how accurate this prediction is in a few years time. Makes you stop and think doesn't it? After all the market has reliably risen year after year - in the past the rise has been roughly equivalent to the fall in terms of both time and the rate of change. there is no reason to believe that the fall cannot be similar to my rough estimation, if we are honest with ourselves, we know full well that house prices are over-inflated, we may be somewhat reluctant to face up to the extent to which this is true. Bear in mind also the fact that at the lowest point the market will dip below a 'true-market value' whilst the market adjusts, and I am now starting to convince myseolf that this prediction is not as crazy as it sounds...
The really worrying thing about this crazy graph is if you try and work out what the next price-peak will be, it is about then that you start to think 'this cannot go on...something has to change'

Are we in a Recession?

It's a question that many are asking... Why is this a Credit Crunch, Why not just call it recession??

The answer is simple, there is a very precise definition of recession - there is no official definition for a Credit Crunch - and in fact we are not (yet) in recession. There is little doubt that we will be, but the exact deifintion says that a country's GPD (Gross Domestic Product) should be in decline for two consecutive quarters. This is not yet the case.

Recession can be just a national event if the decline is only recorded in one country since each country natuarally has it's own GDP, and some countries may not even record any decline at all. It is not uncommon to see cuts in interest rates in this economic climate in order to stimulate the economy by stimulating investment. Dropping interest rates has two effects:

1. Those that need to borrow to boost their business activities can borrow at an advantageous rate.
2. Those that have money to invest may be more prepared to invest in risk ventures whilst bank rates are low.
   

Quite how this will work out when the banks are squeezed for cash to lend due to their previous bad investments gives some pause for thought.
A recession normally lasts anything from 6 months (two quarters) up to eighteen months (six quarters). The Credit Crunch is already here, but once the GDP begins to rise and we officially emerge from recession, no doubt the Credit Crunch will be declared defeated too...

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

The Credit Cruncher

This site has been live now for two months and is due for a review. I have a few burning issues that I really wanted to write about, and that was the basis of the Credit Cruncher. I used a familiar blogging platform but played with some of the elements to distance it slightly from the traditional blog format and illustrate that the posts made are not really more relevant just because they were written recently.
What I have found is that topics have really come together under the following headings:

1. Credit Crunch News
2. What is the Credit Crunch?
3. My personal experience in reducing my own debt

These are my main headings, and my inspiration has come from many sources, including newspapers, the internet and my own thoughts and distant memories of Economics classes....
My feeling is that the Credit Crunch itself is with us for the next two years, and I aim to make this site a major resource in the meantime.
Please feel free to read through the posts and leave comments.

Credit Crunch Latest

In the UK, Bank of England interest rates have been kept down at 5% it has been announced today, with many believing that there will be no rise in rates this year. However prices continue to rise driven mainly by rising fuel costs. Even without a change in the rate, it is widely believed that mortgage lenders will compete for business by lowering their rates. Nationwide have recently announced cuts, others including Lloyds TSB have already dropped their rates. In America, the US Federal Reserve is holding rates down at 2% for the foreseeable future in an attempt to encourage an economic up-turn.

At the same time, there are new figures on the slowdown of the housing market with a drop of more than 1.5% in house prices for the fourth month in a row. Prices still remain significantly higher than they were 5 or 6 years ago, and not many home owners are currently staring negative equity in the face. Some areas in the US have seen prices drop around 25 to 30% in the last 12 months, but when you look at the graph above, you can see the familiar pattern of boom and bust being repeated. The 'booms' are ever higher, but the 'bust' part of the curve never drops lower than the previous low... If we repeat the previous patterns, we end up with a real 'slump' in the market by about 2010-2011, but there is no guarantee that this current slump will follow previous patterns.

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

Economy fuelled by debt

I’m not one to subscribe to the conspiracy theories concerning why debt is so prevalent, but the widespread acceptance of debt as a way of life is certainly a contributory factor to the credit crunch. Why else would the sub-prime market borrowers have been happy with the deals they were offered unless they were comfortable with the concept of debt.
In generations gone by when debt was the domain of the upper classes, the working man would have shied away from debt like a disease. ‘Modern’ man (in the Western world) now embraces debt like an old friend who will see him through hard times.
In fact debt is neither a disease nor a friend, but something to be used appropriately and with caution, like a medicine that could be fatal in the wrong dose. The truth is that our economy is fuelled by debt, and when this is in proportion, it can help to keep the economy afloat. However, when foolhardy lending tips the balance from healthy to unhealthy – that’s where our friend the credit crunch rears it’s ugly head.
I have heard it rumoured it certain quarters that the credit crunch doesn’t actually exist, but it is a kind of conspiracy theory to keep the proletariat in their place ie. to justify static wages and rising prices, and to a degree there is some truth in saying the credit crunch does not exist. This is because as a single identifiable entity – it does NOT exist in that it cannot be quantified. Bad debts can be quantified as can negative equity, the price of fuel and interest rates – but the credit crunch cannot as it means different things to different people.

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