Monday, December 15, 2008

In a nutshell

London Banker sums up what went wrong over the past 25 years, in 1,610 words. It's a reprint from May, but he's right to show it again: it pretty much says it all.

Those who are old enough may remember having to do a precis in English. This is a very valuable, rational, intellectual exercise, which perhaps is one of the reasons it was ditched in New Teaching.

Do you think you could distil LB's observations in, say, 600 words?


Anonymous said...

"We have eatne the seedcorn" - well, clearly we haven't. That is where the solution, and the danger, of this crisis lies. If we start thinking that paper bills = food then we won't resolve the crisis and we could end up with the food riots predicted.

Now you have suggested that it is the bansk fault, and debt must be forgiven. I have suggested it is the governments fault because interest rates were set too low and the banks and consumers merely responded to it in a logical fashion. The solution in either case seems clear - half the debt but double the interest rate! Income to the banks will remain the same, sums paid by debtors will remain the same, but the banks will have less debt on their books and hence more freedom to loan to those that really need it.

Consider this: at 5% rates a £100,000 loan will cost £150,000 to pay off after 10 years including interest, and save £50,000 in interest from the following 10 years. At 10% rates a £100,000 loan will cost £200,000 to pay off but save £100,000 in interest in the following ten years. So the incentive to pay off a debt is much clearer when rates are at 10% compared to 5%.

Saving becomes even more worthwhile. At 5% compound £100,000 will be worth £162,000 after 10 years. At 10% compound £100,000 will be worth £259,000.

You can see if rates are too low it severely discourages saving and encourages a "buy now, pay never" mentality. So rates must normally be kept at or near 10%. Naturally, if we were to do that tomorrow the pain would be severe, since levels of borrowing have risen to take account of dangerously low rates. So the debt that should never have happened should be written off by 50% to re-balance the economy around more sensible numbers.

Wolfie said...

You may have noticed that the author echoes the criticisms that I have made of Globalisation which I have made in comment in the past.

Sackerson said...

Thank you, both; and a most interesting suggestion, Anon - worth buffing up and submitting to the appropriate authorities?

As to culpability, I've little doubt it suited the government's short-term purpose, but surely banks must be deemed to know the consequences of the lending spree we saw; most borrowers cannot be expected to have the same expert understanding.

sobers said...

While the banks, the govt and individuals are all responsible for our situation, I hold the govt to blame the most. They hold the purse strings of the nation, metaphorically speaking, and could have acted in 2004/5 (or earlier) to damp down the boom in house prices, and to rein in public spending, repay debt and build up a surplus. But for party political ends (don't forget there was an election in 2005) they chose to let it all rip. That is unforgiveable in my view. Anyone with a brain knew the house price boom was going to end badly - the longer it went on, the worse the bust. The Labour party , and GB specifically, put their own re-election above the needs of the entire nation.

The banks are culpable in that they didn't accurately assess the level of risk they were taking on, and individuals were greedy, and when offered free money, took it with no thought as to the future and how they would repay it. Understandable, but still their decision. No-one was forced to have 5 credit cards all maxed out, and to withdraw all the equity from their house.

Banks are paying now - being nationalised, shareholders wiped out, massive job losses. Individuals are paying now - repossessions, bankruptcies, tax rises to come. We must ensure the govt are held to task even more - ideally not one Labour MP should retain his or her seat at the next election. The incoming govt should cut them off with no pensions too. They could count themselves lucky they were not being impeached for abuse of office, or worse.

Sackerson said...

Please say something I can disagree with, Sobers. Except I think the splurge should have been obvious from the M4 figures starting in 2003:

yoyomo said...

Govt officials don't do anything their rich backers don't direct them to; that is where the real responsiblity lies. Soros is the only hedgie lobbying for reforms that would disadvantage him for the greater good of society; all the rest only demand greater advantage for themselves to the detriment of the general populace.

Anonymous said...

"but surely banks must be deemed to know the consequences of the lending spree we saw; most borrowers cannot be expected to have the same expert understanding."

I agree with you that bank managers have above average intelligence and the biggest debtors have below average intelligence. Therefore it is important that the government protect the consumer from the low cunning of bank managers on the make. This government has singularly failed to provide such protection, despite having the painful example of a previous house price boom/bust. It is entirely culpable. Banks will not regulate themselves whilst very short term gain is the goal - and it always will be - the shareholders will see to that.