Okay, so the leader here may suggest that the answer to financial meltdown the world faces will be contained in this article but I am sorry to have to tell you that this is not the case. What I can try to do though is examine the current suggestions being put forth at present to analyze what might be the best way forward. Hopefully this might cast a light on the way the future events may unfold.
To start off, for those of you who are without television, radio, newspapers or indeed any
contact whatsoever with the outside world, we are currently facing a global financial crisis the
like of which we have never seen before. Of course there was the great stock market crash of
1929, but without trying to make light of that catastrophe, money these days is simply vastly
greater then it was back then. We are currently talking about the loss of hundreds of billions
and even trillions in the case of some countries.
So what exactly is it that we are talking about here? Why has the world become so far plunged
into debt? In a nutshell, we are dealing with liquidity, that is to say, the money moving in the
markets. Money is as essential to the economy as air is to humans, and so without this life
giving air, the economy is choking, and choking badly. What has been happening is that global
lenders have been doing their thing and lending money. In order to keep doing business, these
lenders had to keep lending out their money. However, when the good debtors had all the
money they needed, the lenders dropped their standards and started lending to people with
less rigorous checks. Of course once one did it, in order to compete, the rest of the lenders had
to follow suit. The rules of the competition meant that all the lenders then lent to less than
ideal clients.
So how does this explain the current problem? Unfortunately, when the global money lenders
lowered the bar when it came to lending, they opened themselves up to more risk of bad
returns. Some people should not get money on credit simply because they may be unlikely to
be able to pay it back. If there were true of a few of the customers in question, the lenders
would be able to absorb the debt in interest, but the problem is that the bad debtors are now
in the majority and the debt is therefore very hard to recover.
And so begins the vicious circle. Due to getting their fingers burnt, the lenders are now less willing to part with their money and loans are harder to obtain. With regards to banks and building societies, the money that is at their disposal comes from deposits made by the public for the purpose of generating some interest. Because of the fact that these institutions are now less willing to agree loans due to bed debtors, their depositors start losing faith in the institutions ability to safeguard their money and so they start to withdraw and close their accounts. So now the bank finds itself in the situation where it has even less money to loan out to what they perceive as good debtors. This is recognised by the stock market and in turn the banks stocks start being sold off and the stock value spirals down and before you know it the bottom has dropped out.
But what solutions to these problems are being proposed?
To start with, some banks in the US, the UK and Ireland made the first move by guaranteeing
their clients money with tax payers' money. This move was clever as it instilled clients with
confidence, which is what has been lacking over the past months. There may in many cases be
no need for a bank's downfall at all, but when people get nervous, they tend to bolt at the first
sign of uncertainty, which can be the cause of a bank's unnecessary demise. Boosted
confidence means that people are happy to stay put so that the banks' assets are not
undermined.
As a second move, the US and UK have proposed enormous bailout packages which are too
intricate and complex to be explained here. The simple explanation is that they want to buy
into these financial institutions with tax payers' money. It is unclear if this will prove an
effective measure, as only time will tell if this move is a good one or not. If this move does
nothing to get the liquidity of the markets moving again, probably not, as the stagnancy in the
movement of money at the moment is likely to put us all in to the worst recession the world
has ever seen.
One thing that is painfully clear is that banking as we currently know it has got to change
radically. There is a considerable amount of regulation at play at the moment, but in my
opinion as a financial advisor, there is not enough regulation being focused in the right areas. I
very much doubt that any of the major large money lenders of the world has been as
rigorously scrutinized as they should have been over the last ten years as this may have been
seen to be restrictive practice. But let's be honest, if that were the case, would be in the mess
we are in now? If the lenders had been properly questioned when it came to giving out money
to bad debtors, if that money had never been given out, if the lenders hadn't dropped their
criteria so dramatically, would house prices have gone so ridiculously high and would we be
facing the worst recession in history? What do you think!?
To start off, for those of you who are without television, radio, newspapers or indeed any
contact whatsoever with the outside world, we are currently facing a global financial crisis the
like of which we have never seen before. Of course there was the great stock market crash of
1929, but without trying to make light of that catastrophe, money these days is simply vastly
greater then it was back then. We are currently talking about the loss of hundreds of billions
and even trillions in the case of some countries.
So what exactly is it that we are talking about here? Why has the world become so far plunged
into debt? In a nutshell, we are dealing with liquidity, that is to say, the money moving in the
markets. Money is as essential to the economy as air is to humans, and so without this life
giving air, the economy is choking, and choking badly. What has been happening is that global
lenders have been doing their thing and lending money. In order to keep doing business, these
lenders had to keep lending out their money. However, when the good debtors had all the
money they needed, the lenders dropped their standards and started lending to people with
less rigorous checks. Of course once one did it, in order to compete, the rest of the lenders had
to follow suit. The rules of the competition meant that all the lenders then lent to less than
ideal clients.
So how does this explain the current problem? Unfortunately, when the global money lenders
lowered the bar when it came to lending, they opened themselves up to more risk of bad
returns. Some people should not get money on credit simply because they may be unlikely to
be able to pay it back. If there were true of a few of the customers in question, the lenders
would be able to absorb the debt in interest, but the problem is that the bad debtors are now
in the majority and the debt is therefore very hard to recover.
And so begins the vicious circle. Due to getting their fingers burnt, the lenders are now less willing to part with their money and loans are harder to obtain. With regards to banks and building societies, the money that is at their disposal comes from deposits made by the public for the purpose of generating some interest. Because of the fact that these institutions are now less willing to agree loans due to bed debtors, their depositors start losing faith in the institutions ability to safeguard their money and so they start to withdraw and close their accounts. So now the bank finds itself in the situation where it has even less money to loan out to what they perceive as good debtors. This is recognised by the stock market and in turn the banks stocks start being sold off and the stock value spirals down and before you know it the bottom has dropped out.
But what solutions to these problems are being proposed?
To start with, some banks in the US, the UK and Ireland made the first move by guaranteeing
their clients money with tax payers' money. This move was clever as it instilled clients with
confidence, which is what has been lacking over the past months. There may in many cases be
no need for a bank's downfall at all, but when people get nervous, they tend to bolt at the first
sign of uncertainty, which can be the cause of a bank's unnecessary demise. Boosted
confidence means that people are happy to stay put so that the banks' assets are not
undermined.
As a second move, the US and UK have proposed enormous bailout packages which are too
intricate and complex to be explained here. The simple explanation is that they want to buy
into these financial institutions with tax payers' money. It is unclear if this will prove an
effective measure, as only time will tell if this move is a good one or not. If this move does
nothing to get the liquidity of the markets moving again, probably not, as the stagnancy in the
movement of money at the moment is likely to put us all in to the worst recession the world
has ever seen.
One thing that is painfully clear is that banking as we currently know it has got to change
radically. There is a considerable amount of regulation at play at the moment, but in my
opinion as a financial advisor, there is not enough regulation being focused in the right areas. I
very much doubt that any of the major large money lenders of the world has been as
rigorously scrutinized as they should have been over the last ten years as this may have been
seen to be restrictive practice. But let's be honest, if that were the case, would be in the mess
we are in now? If the lenders had been properly questioned when it came to giving out money
to bad debtors, if that money had never been given out, if the lenders hadn't dropped their
criteria so dramatically, would house prices have gone so ridiculously high and would we be
facing the worst recession in history? What do you think!?
About the Author:
Mortgage Route gives assistance help and mortgage advice from qualified mortgage brokers coupled with no obligation mortgage calculators and sourcing tools.
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