Tuesday, January 6, 2009

Credit crunch conundrum

Yesterday, I noted the ironical plight of savers, who are totally blameless concerning the credit crunch, and not responsible for the borrowing that caused the current financial mess, yet they are being punished by having their interest payments severely slashed.
Thus, the prudent are paying for the ways of the naughty debtors.
And of course, government encouraging debt by lowering interest rates hardly seems the way to get out of a mess created by too much debt in the first place.
Anyway, here's another ironical contradition.
The banks are moaning that they cannot get finance. It seems the UK may need another government bailout to keep them afloat.
But perhaps the reason they cannot get finance is because of the pitiful interest rates they are now offering.
I have a tidy sum in Barclays that used to pay 5% or so a year ago, but this is now down to 0.8%!!
Thus, I am now in the process of taking the money out and putting it into other accounts still paying 4%. Though interest rates are set to fall yet again this week.
What with all the talk of business failure, an extra million unemployed by the year end in Britain as a tenth of the workforce are laid off, I bet there is more than a few per cent of risk in lending money nowadays to anyone. So no wonder the banks cannot get the money they need.
In such cases, with the greater risk involved, then you might expect interest rates to actually increase, even if that would deepen recession further.
But can you see the contradiction here? In pushing interest rates down to problematical levels where banks cannot obtain funds, governments have now created a new problem for themselves and their central banks. Thus, we need yet more bailouts and the spiral of doom continues.
We are in one helluva mess and I see no easy way out. Is there one?


Psycho Milt said...

My money's been in the bank for a while now because interest rates have been up around 8%. But anyone who imagined that was likely to continue long-term is just plain stupid - under normal conditions, if you want a good return you have to take some risk. And normal conditions were always bound to return once the bubble burst.

PhilBest said...

There is no easy way out. The only way out, is called "just having the recession". And, Psycho Milt, I couldn't agree more. As I have been saying on Kiwiblog:

The more I look into this, the more guys I find were talking common sense from way back, and were being ignored. (Peter Schiff; Nouriel Roubini; Paul Kasriel; Max Steiner; Tim Congdon; several of the "Ludwig Von Mises Institute" economists......etc, etc, etc)It is just sickening that so many people now talk about “failures” resulting from “deregulation”. BALLS. Everyone knew that “collateralised debt obligations” and all the rest of it, were based on mortgages, and everybody who bought them, bought them not because they were deceived by investment advisor hucksters or a lack of regulatory requirements for transparency or all the rest of it, but because “everybody” thought that house prices could keep going up faster than incomes, forever, indefinitely; and “everybody” regarded securities that were based on mortgages as both “safe” and “high yielding”.

This whole thing is a failure of wisdom, a failure of imagination, a failure of learning. It is nothing whatsoever to do with “regulations”. A scapegoat is being made out of all the wrong things, and we are in danger of derailing the whole process by which our economies grow and make us wealthier. We are STILL in denial about the whole underlying cause; we STILL want our precious house prices to stay right up there at the peak of the bubble and we don’t care how much of other people’s money (taxpayers) it costs to achieve that, or how much ruin is resulting for whole economies as a result of this massive distortion. We STILL want our investments in Hanover Finance, based on the NZ Mortgage market, to be worth something. Or worse, we still can’t face going into negative equity after having cashed out our house value appreciation and blown it on a world cruise.

The people I do feel most sorry for, are the first home buyers who stretched themselves to beyond snapping point, to leap on board the home ownership train as it chuffed off into the distance far faster than anyone can actually save money. These people actually should have been clubbing together and marching on Parliament, demanding the release of land for building in quantities that resulted in 30 thousand dollar sections rather than 200 thousand dollar sections. But the penny STILL has not dropped; these people are going on TV blubbing their eyes out about how unfair it all was, now that the’ve been foreclosed on; and yes, it was unfair; but they still haven’t worked out the source of the whole bloody shakedown in the first place.

As Robert Bruegmann says in “The Housing Bubble and the Boomer Generation”; there has been a wealth transfer unprecedented in history; from the young, first home buyer, to the old, existing home owner. If you haven’t already read it, Google it, and pass it around to everyone you know.

Anonymous said...

there is an easy way out - although we won't like it.

we can have the depression in NZ for just a couple of years - or for the next 15.

We can max out at 10% unemployment in 2010 or be up to 15% around 2012 and keep rising.

Roger Douglas - and even Treasury - know what needs to be done and how quickly it needs to be done: but (to be fair to him) Key knows if he takes even 1/10th of their advice we will have a Labour government back in 3 years time.

Let's face it: Key started out as a bludger; grew up in a state house, mum on the DPB, went to state schools, and state university, had state healthcare for a long time. So we shouldn't be surprised that even he can't admit the truth to himself: New Zealand simply can't afford any of it any more

Meanwhile, the country's standard of living keeps dropping like a stone; people are heading back to the UK (if they can) or to Aus; those left here find they can only afford secondhand jap cars; cheep chinese clothing; shitty old cold uninsulated houses; (or crap leaky new ones); and on and on and down and down it goes.

Say you were just turning 20. Would you be better of being a doctor in NZ or a plumber in Brisbane?
And that sums up the whole problem of NZ.


Your mention of wealth transfer from young to old is spot on. Something I've touched on before.
Now, I've been around the banks and building soieties again today and to get just 3-4% you have to do it all online and by phone.
That should be fun.
Now the banks seemed very busy today.
Is everyone running around looking for a more acceptable return.
The UK Tories yesterday said they would try and look after savers better, especially older ones, by giving taxbreaks on certain savings.
Gordon brown trotted out his usual line about such taxbreaks would lead to spending cuts from the 'do nothing Tories.'
But surely some basic economics will creep in.
If interest rates are low, there will be no savings mad available to fund loans.
Or will the UK banks be trawling the global finance markets again.
And isn't this where the trouble came from in contaminating the finance markets the world over, instead of keeping sub-prime as a mere local difficulty for the Americans.