Did we have it too good?

The economy has dominated the headlines for many months now as people fear a financial squeeze. However this fear is based on people not being able to live the way they have done for the last ten years. Therefore, has the focus on the economy driven by ten years of booming world markets shifted people’s view of the world and life in general? Have we all got too caught up in our own little bubble – an unrealistic and materialistic world? People have been able to benefit from a growing economy by being able to afford bigger and better houses, buy and sell shares that may have been worthless after the recession seen at the end of the 1980s, early 1990s, borrow competitively and use their income and savings more effectively. Now that we are faced with tighter budgets and a falling housing market what do we have left? We are told in the days of a recession to sit tight, and wait it out and that’s all we can do. However these times also offer people a time to reflect and reassess. It is widely expected, as in times such as these that people face bankruptcy – from the average man to the successful business man.

In times like these people turn to the government for help, particularly as seen with banks, who have in recent months been crying out for help. Many people on the right of the political spectrum argue for no government intervention. However without it many people throughout society could face financial ruin as banks would be forced to declare themselves bankrupt and shut up shop. We saw the Federal government in the United States, a country with a very free market policy, offer their banks help in the spiralling crisis. The UK Government has also bailed out several banks in recent months with the nationalisation of Northern Rock – a bank that developed out of a growing economy offering excellent borrowing and saving rates in comparison to many high street banks, and Bradford and Bingley – which has been around for a longer period of time investing primarily in the buy-to-let market (a major factor in its downfall).

In times like these it is important that the government intervenes as it is in the interests of the general public. Many people rely on the banks to keep themselves afloat. If a bank goes under there is a high possibility that individuals throughout society will face financial problems too. I would however argue that when the economy turns around that the taxpayer should get some sort of a return on the investment made by their government instead of working at a loss.

Change of focus

The society in which we have lived in the last ten years, with its ideals based on capitalism and a free market economy has created change in the mindset of people. We have people seeking to better themselves (and don’t get me wrong this should be encouraged), however we now see a shift in outlook to life as the economy dries up people switch their focus to things like family, friends and work. Maybe this isn’t such a bad thing.

  • Nomad

    I do agree that this should have some impact on materialism.

    I also think that it will curb the activities of some of societies main benefactors, for a while- bankers and property speculators.

    Other than that I think for most people life will go back to being how it was in 2004 in about a years time. Most people were not bathing in money, the new name of the game in the short run will be job security. Once that’s felt again most will be fine.

  • Mack

    Andrew,

    Many people on the right of the political spectrum argue for no government intervention. However without it many people throughout society could face financial ruin as banks would be forced to declare themselves bankrupt and shut up shop

    It’s precisely because the banks perceived that there were no consequences to their actions that they persued the policies that have left them insolvent (bankrupt bar the shouting). Unfortunately their business model has impacted large swathes of the population negatively.

    Nobody wants prudent businesses to be denied credit. But capitalism relies on creative destruction, the good companies must be allowed prosper and take over from the bad. By bailing out the bad we punish the prudent banks who did not pursue aggressive lending practices.

    The millionaire bankers who have brought the western economic system to it’s knees should not be given the green light to continue with these practices. For if they think, if they take risks that are big enough they won’t be let fail then they can return to bankrupt another generation.

    To quote Jim Rogers, what we’re seeing now isn’t capitalism, it’s socialism for rich people. Bad economics and terrible morality.

  • dewi

    100% agree Mack – bail out bankers and leave Woolworths go to the wall (25,000 jobs lost on statuatory terms) something wrong surely.
    And it’s worse than that – we’ve bailed out the bankers without understanding the root causes. Astonishing.

  • Nomad

    Dewi,

    “And it’s worse than that – we’ve bailed out the bankers without understanding the root causes. Astonishing.

    That’s a little disingenuous I think.. While the problems seem obvious and complex at the same time most people with a direct interest in this- economists, bankers, lawyers etc have a fairly good idea of “the root causes”.

    Too many people being given mortgages for homes they couldn’t afford.

    Leading to: increase of sub prime mortgage defaults

    Leading to: the securities packaged up and sliced together (often largely of mortgage payments) being of dubious value (securitised and therefore fairly anonymous.

    Which meant when being marked to market, with no market they became valueless.

    Which in turn meant write downs on banks assets…

    Which meant a jumpy stock market and undercapitalised banks.

    After which, when no one knew who would write down what the banks stopped lending to each other, and businesses for that matter too as they wanted to hord money.

    I’m sure I’ve left out a couple of stages, and causes and effects. But this is just off the top of my head.

    Unfortunately for Woolworths, they are probably going down first because their business just isn’t competitive enough- not just because of liquidity problems.

  • Dewi

    Nomad – if it was so obvious then it’s even worse. Why on earth am I bailing out these idiots?

    “Unfortunately for Woolworths, they are probably going down first because their business just isn’t competitive enough- not just because of liquidity problems”

    But “fortunately for the banks” it doesn’t matter how competitive they are…- absolutely bizarre.

  • Nomad

    Dewi,

    Nomad – if it was so obvious then it’s even worse. Why on earth am I bailing out these idiots?

    This is exactly what the Queen asked a ‘leading’ economist in public last month. It seems to have been collective ignorance of the extent of the risk. Basically, all the big banks did have models and stress testing for “worst case” scenarios for this sort of scenario. Unfortunately they just didn’t think it was even possible for it to become as bad as it did. When it did go into freefall, and the billions of $’s worth of assets became valueless, the bottom just collapsed at a rate the banks couldn’t cope with. This is not a great excuse, but it is an explanation of sorts.

    At the end of the day, I can live without pick & mix and top 40 CD’s from Woolworths. We can’t live without financial liquidity though. This isn’t about protecting labour, (could we afford to?) it’s about protecting the economy as a whole.

  • Dewi

    Nomad – let them all go bust quick – something else will emerge – that’s capitalism. Now we have donated trillions with no effect on liquidity where it matters. If we want to intervene we should have given every individual in the UK £1000 – cheaper – and by hell would have improved liquidity…

  • Dewi

    And while I’m ranting the only thing that causes bankrupties is lack of liquidity – that counts for sweetshps, Steel mills, advertising agencies and believe or not bankers – perhaps they should have known how to manage it better !!!

  • Nomad

    Perhaps! But I hear the ’30s wasn’t exactly a big party.. Your suggestion is perfectly logical but would probably lead to a new system of exchange, ie a new money system.. the international collapse of governments and a world filled with poverty. Without this intervention the ’30s would seem like the high life.

    (Also- giving everyone in the UK £1000 is exactly what America did last year- $500 cheques in the mail to be precise. You can look up the stats- most of it was saved, 30% of it spent I think… not terribly productive in the long run. But nice for a couple of weeks!)

  • Nomad

    Oh, and with a bit of luck, much of the money the government is investing in recapitalising will become profit when sold in a couple of years, so it could be sound financial national planning. (In some cases at least).

    And it already is working- the banks seem safe right now, trust is building, the credit markets are showing signs of thawing and we COULD be at the bottom about to begin an assent- now or in the next couple of months. It seems feasible now.

  • Dewi

    Or being entirely rational – double the dole – that would get spent at least.

  • Dewi

    “And it already is working- the banks seem safe right now, trust is building, the credit markets are showing signs of thawing and we COULD be at the bottom about to begin an assent- now or in the next couple of months. It seems feasible now. ”

    Before that Nomad I thought you were sensible. Have a look at Steel scrap prices and issues of letter of credits…oh and the $40m worth of cars at San Francisco docks….eh and Llanwern shut till April…..(I shouldn’t talk it down should I)

  • Nomad

    I try not to pretend to be too sensible! I agree with your last post, but think that this started with housing and finance, and these will be the first to stabilise. When they do, the shedding of jobs will continue for a few months (hopefully not longer) and then we can pick up the pieces. Not without suffering unfortunately. (Can speak about that from personal experience relevant to this.)

  • Dewi

    Nomad – Fancy sharing my last mince pie?

  • Dewi

    “Not without suffering unfortunately. (Can speak about that from personal experience relevant to this.) ”

    Sorry – read that as “Can’t speak” – best wishes.

  • Nomad

    Would love to.

    Thought you might like the title, at least, of this article-

    “The Profits were Imaginary but the Bonus’s Were Real”

    http://www.nytimes.com/2008/12/18/business/18pay.html?em

    I’m pretty sure that was the title of the front page of the [paper] NY Times this morning. For some reason it’s shortened online.

  • Nomad

    Dewi,

    “Sorry – read that as “Can’t speak” – best wishes.

    Excuse me?

  • Nomad

    Ignore- I understand now.

  • aquifer

    We had an asset bubble financed by imports of foreign capital. The rating agencies were paid by lenders to pretend that loans would be repaid, and bankers were paid bonuses based on money lent out, not on money paid back in. But when this all goes into reverse, falling asset prices increase the number of loans that will never be repaid. The bankers still have to pay for the extra money they borrowed from abroad, so their shareholders struggle to make up the difference and have no money left to lend to real businesses that make or do things people want.

    Maybe we need to tax unproductive assets more to stop their values getting so crazy in the first place.

    But our executive keeps postponing water rates etc.

  • Dewi

    Nomad

    “And a 30-something trader with a $180,000 salary got $5 million.”

    Thank you – that really cheers me up…..

  • Dewi

    Nomad

    “Mr. O’Neal, however, got even richer by leaving Merrill Lynch. He was awarded an exit package worth $161 million. ”

    Please never link any articles on Slugger again…..$161m – you could buy Wales for that !

  • Niall

    Nomad,

    To say the problem is all about the house credit bubble may be “northern irelandised” the financial markets. The unravelling has in my view been more to do with the unregulated speed of trade of repackaged debt and the pressures in the city to work the asset sheet through trade (and therefore theoretical cash flow/development) without the need for oversight.

    As for woolies, their lack of unique selling point may have been a proble with no way out but the bubble allowed the management to do some what look like attrocious property deals which ultimately have cost them……… I think they sold all their property and agreed leases with fixed rent rises which have scared of any potential saviours, be it govt or otherwise.

  • Nomad

    Niall,

    I don’t know where you are getting your information from if you don’t think the “hundreds of billions of housing-related credit investments [going] bad” wasn’t what sparked this. (Link below)

    Investment bankers and economists in New York, London, Hong Kong and Dublin put the credit crisis down to a fall in the ability of mortgages to be paid, in- as you say- largely unregulated packaged debt. This is of course packaged with student loans and other debt, but the problem came from US housing. You can argue about pricing to market, or models if you like- and how CDO’s are made up and regulated, but in terms of an explanation much is superfluous- certainly difficult to do without writing a treatise of a post!

    Of course what I wrote above doesn’t cover the details of the complexities of the finance market (or northern irelandised as you put it for some reason), but it is sound I think.

    Decent overview, if a little lacking in detail: http://topics.nytimes.com/topics/reference/timestopics/subjects/c/credit_crisis/index.html