Big Chill hits Iceland

A political stand-off has begun between Britain and Iceland after Iceland nationalised three of it's banks leaving a cloud of uncertainty hanging over subsidiary banks in The UK. Gordon Brown moved swiftly to guarantee ALL private deposits regardless of whether they exceeded the £50,000 ceiling. Less certain is what will happen to the public money on deposit with Icelandic banks. Over 100 local councils, 96 police authorities and countless charities are thought to have funds at risk, and the UK government is making use of fraud legislation to 'freeze' the assets of Icelandic companies in response.

So far the Icelandic government have kept quiet about whether they will repay the public money owed to UK local councils, and unless there is a move to reassure depositors soon, the whole situation threatens to get ugly. The problems are due largely due to the outrageous growth of Icelandic banks fueled by foreign debt, a debt which dwarfs the domestic economy. Iceland will now be looking to borrow from Russia to preserve it's now fragile economy. Meanwhile the domestic currency, the Icelandic Krona is in free-fall.

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Starting a pension

In these troubled financial times, there are those who have been asking if this is a good time or a bad time to start a pension. I would that it is ALWAYS the right time to start a pension. Over the full term of the pension, the ups and downs of the stock market should really iron themselves out.
If you are over twenty, then you should consider a pension, most UK employers are now obliged to offer a pension scheme that can easily be transferred when you change jobs (stakeholder pension). Many employers actually contribute to the scheme too - if this is the case, then YES - it's a no-brainer, take advantage of any company scheme that offers to contribute to your pension.
Even if they don't contribute (there is no requirement for them to), it should be very easy for your employer to arrange your contributions and take care of the tax issues.
The only circumstances where you don't need to think about a pension is if you are working on a casual basis and will continue to do so, or likely to earn vast amounts that will enable you to make your own financial arrangements for your future.
My final bit of advice is this: don't go half-measures - if you decide to do this, make a real go of it to make sure you end up with a decent income. If you just 'dabble' and don't really put a significant amount in, then you will have wasted all your money.
Consider this (UK citizens only...), if you DON'T put money aside for your pension, what will happen? The state will provide you with income support up to a set level. If you only put a small amount into your pension, you may find that all you have done is to take the onus off the state to look after you, and you may well have only provided enough to just keep you above the level where the state was going to support you anyhow! So...either do it properly and set yourself up for a decent retirement or don't bother because the state is obliged to look after you.
The days of great employers offering fantastic pension plans are very quickly disappearing, it is up to you to sort out your own future now, the government has come half-way by making stakeholder pensions available to all - the smart people will take full advantage.

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Best buy balance transfers

Most credit card comparisons involve a combination of interest on purchases and interest of cash withdrawals, minimum payments and the like - when it comes to 0% balance transfer credit cards the only significant comparison is how long the deal will last for.
The 'norm' is to offer 12 months, so be aware of those who are only offering something less than the full year.

The 'Top Dog' spot has been fiercely contested, with Virgin money offering the longest period of 0% on balance transfers (I know because I used this particular offer myself...). Capital One then came along with a deal that lasted up to 16 months, snatching the number one slot.

Virgin credit card have now reacted by matching the 16 month deal - this goes to show that the market does not stay static for long and it's always worth doing a Credit card comparison to check what deals are currently on offer. Be good to yourself, get your finances in the best possible shape right now so that you are in the best position to survive the crunch.

A $700bn bill becomes an $800bn bill

Some relief has been expressed (at least politically) about finally getting the so called 'rescue-package' through the House of representatives. This bill that was originally a 3-page document has developed into a 451 page document and somehow been passed. These are the things that worry me:

• Easily-frightened politicians (there is an election just around the corner) have rejected an easy to understand 3 page document on the grounds that it was too much of a burden on the tax-payer.
• The Senate turn this document into a 451-page mega-bill in a matter of hours adding $110bn to the tab to make it more appealing to Joe Public.
• The House of Representatives totally 'buy' this with only one man who previously voted for the three-page bill admitting that the 451 page version was NOT the same as the bill he had backed and voting against it.

We are meant to believe that this massive document has been digested and understood and voted on in all good conscience a couple of days after it had first been written, with no re-writes or re-drafts, straight through... I hate to sound so negative, but this makes no sense to anyone without a hidden political agenda, in fact it stinks... The US Governing body has just voted NOT to spend $700bn on the grounds that it is too much, then turned around with a YES vote for the $810bn plan a matter of days later without surely having had the requisite time to make an informed judgment. Draw your own conclusions, leave me a comment....

Popular Questions:
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Recession or Depression?

As at the time of writing this article, neither the UK or US economies are officially in recession according to the precise definition, but already people are asking if this will be like the Great Depression of the nineteen-thirties.
The difficulty in answering this question is that there is not apparently a precise definition of an economic depression, and it is one of those terms that can only be applied in retrospect. In other words we won't really know if we are in a depression until it's over and then it will be up to historians to decide if the crisis can be compared with the Great Depression.
Paradoxically, the 'Credit Crunch' tag was already established even before recession had struck, the only definition we have for 'A Depression' is a prolonged recession, therefore we can compare the period of the thirties recession when this recession is over, but that is going to be the only tangible measure.

Employment figures are certainly a feature that will be common to both recessions, but the abject poverty, sickness and hunger that characterised the Great Depression can hopefully be avoided, and of course one must bear in mind that this came at a time of World War which thankfully is not the present situation. However the similarities that will be evident are bound to be unwelcome and could well include a near-collapse of the stock exchange, huge job losses and real economic uncertainty. What is apparent is that the current safety nets are breaking and hence the moves by Governments to try and establish new safety nets - judging the level at which to fix these nets is a gamble and we will only know the consequences when it is all over.
In conclusion then, terming a recession a 'depression' is a job for historians, we must continue as individuals to operate good budgeting and housekeeping to ensure that we stand the best chance of surviving financially intact. The fact that we are entering recession is quite bad enough without having to consider how deep a recession it will eventually become. Rest assured it will be quite bad enough!

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Now is the time for mutuals..

How is it that building societies have become victims of the credit crunch?
It is simply because they are now banks having de-mutualised themselves in the rush to become financial houses able to borrow money. The traditional building society was owned by the depositors since their money was the only cash reserves that the society had. They could only lend out money that was on their books and were not allowed to borrow from banks - in fact they were not allowed to go into debt. Since the eighties, we have been cashing in our good old building societies and turning them into banks. The members have been only too keen to let go of thier assets in return for some good hard cash and really who can blame them?
Now the chickens are coming home to roost with the unthinkable happening - building societies having behaved like banks investing in the sub-prime market, going into debt and finally going bust. Rest assured if your money is in a mutual society it is as 'safe as houses' (pun intended).
Meanwhile, the UK government's own new bank, Northern Rock has proved so popular with investors (after all it can't go bust now it has been nationalised..) that it has been asked to withdraw some products as the other banks see it as unfair competition. More mess created by this crazy interventionalist action. Northern Rock is now seen as THE place to put your money at the expense of other banks simply because it has performed so badly that the government has seen fit to underwrite the whole business - pure madness!

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$700bn rescue package approved by senate

The Senate has added $100bn to the $700bn Bush administration credit crunch rescue package, the House of Representatives will get a second chance to approve the new package. The added measures include improvements to deposit insurance (Ireland have already guaranteed ALL bank deposits, and the UK is considering increasing guarantees from £35k to £50k). This improvement to the bill is seen as a measure that helps to protect the individual rather than big corporations and the fat-cats. In the UK, it has been said that the new £50k protection actually covers 96% of the population as it is only the remaining 4% that have anything like £50k sitting in the bank. Of all the measures proposed, putting insurance in place to cover individual bank deposits is the main one that will restore confidence to the root level of the economy. Bailing out fat-cat companies that have made a professional error of judgment is not high on the agenda of the people...

$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:
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How long will the credit crunch last?
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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:
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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.

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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.