by The Investor on April 21, 2008
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Remember when Mervyn King, Governor of the Bank of England, was all about applying ‘Moral Hazard’ to the banking system? You know, the idea that some banks had to fail to teach others not to make dodgy lending decisions? You can be sure King remembers making statements on risky lending like this:
“The provision of such liquidity support undermines the efficient pricing of risk by providing ex-post insurance for risky behavior. That encourages excessive risk-taking, and sows the seeds of a future financial crisis.”
Ah well, six months is a very long time in a credit crisis. One winter of discontent later, and Merv the Swerve has done a U-Turn, with the Bank announcing today its much-mooted Bring-and-Buy-a-Bond sale.
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by The Investor on March 25, 2008
We can’t wish away the credit crisis. However sensible you or I have been with our investments, borrowing and spending, we can’t wind back the clock and stop bankers throwing money at poor people who’ll never be able to pay it back, and who are often now paying a far higher price – repossession, dislocation, or even bankruptcy.
The bankers did it, everyone got cold feet, and now we all have to live with the consequences.
However rather than putting on The Smiths, pouring myself a large gin and tonic, and turning to Sylvia Plath, I thought it’d be more useful to assemble a checklist to help you avoid suffering too much fallout from this banker bungling. Who knows, you might even come out of the credit crunch richer! Personally, I’ll be happy with older and wiser – and not much poorer…
Today I look at personal finances. Tomorrow I’ll offer quick checks on investment, your income and more, so please be sure to subscribe to my feed.
1. Get out of debt
Because of the credit crunch, money is becoming more expensive.
I’ve written before about why you must get out of debt. But with the credit crunch being described as a great ‘deleveraging’ (in human speak, banks are reluctant to make new loans, and may even be calling them in), borrowing money instead of saving to buy things is getting even more expensive.
What it means for us
- If you’re already in debt, I’m not saying your bank is going to call you up tomorrow and demand all it’s money back. Rather, the climate is turning against borrowers for the first time in years.
- Banks are increasing loan rates where they can.
- They are less willing to enable customers to shuffle debt using cheap balance transfers.
- They will look much more carefully at impaired credit records, which will be a factor if you’ve been missing payments.
Action plan
Get out of debt, ASAP. Normally blogs work best when writers tell you personal stories, but I hate debt with a passion and have avoided it ever since I left college. If you’re struggling with debt, one of several good blogs on the subject is Blogging Away Debt. (But please comeback soon!)
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by The Investor on March 14, 2008
Am I the only investor sick of hearing financial industry insiders bleating that the US Federal Reserve must do more to ease their pain? Am I the only stock market investor who would like to see the world’s major indices fall hard to purge and punish the companies – and polices – that set the stage for the credit crunch?
Apologies to my regular readers for what really will sound like a rant. But responsible investing for the long-term by implication means taking an interest in – and having faith that – the market system will not destroy itself during your lifetime through greed and incompetence.
This current debacle is the most serious threat to Western capitalism since the Berlin Wall came down. So please, let me explain why I’m angry.
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by The Investor on February 17, 2008
After five months of tough talk, roundabout action and general chicken-sans-headery, the Government has ‘decided’ to nationalise Northern Rock. (Yes, in the same way that I ‘decided’ to start losing my hair).
The authorities responsible for dealing with the Northern Rock’s collapse have been making poor precedent-setting decisions since day one of this pantomime. None are so significant as nationalisation, however.
As Robert Peston says on his BBC blog, nationalisation is supposed to be the preserve of the doomed industrial dinosaur industries of yesteryear, not our go-go financial services. It’d be scarcely more shocking if Wall Street’s bankers stopped illicitly smoking Cuban cigars and started getting behind Fidel Castro’s ideas on redistribution. Harry Enfield’s Loadsamoney of the 1980s is morphing into 2008’s Tonnesadebt before our very eyes.
Unsettling consequences for UK tax-payers of Northern Rock’s nationalisation:
- We’ve each got between £2,000 and £3,500* of exposure to Northern Rock’s mortgage book (depending on who you believe and how the final count is tallied)
- We’ve also got about £100 billion in assets (the same loans will keep churning out cash, provided mortgages don’t default)
- We’ve thus now all got a vested interest in the housing market not collapsing
Yes, even bears on UK housing like myself have now become mortgage lenders at the peak of the UK’s biggest ever housing bubble. Some days you wish you hadn’t gotten out of bed.
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by The Investor on September 18, 2007
Last night Alastair Darling, the UK Chancellor, guaranteed 100% of savings in Northern Rock – and indeed the Financial Services Authority has since gone further, stating this guarantee extends to other troubled financial institutions that might emerge in coming days.
Given the scenes we’ve witnessed since Thursday’s news that Northern Rock required a lifeline from the Bank of England, many will think it’s a good move. And sure, the decision will probably quieten the recent financial upheavals. It will certainly get the government off the hook for now (and to be clear, I don’t believe the government was responsible for the problems in the first place).
But it is without precedent in the UK, and has potentially serious consequences that sound academic but which in extreme cases have previously led to unpleasant upheavals of the blood and barricades variety. What’s worse, the guarantee has for now come without any balancing regulation to ensure the banks do not abuse the facility for their own ends.
At the very least then, a move designed to bring short term confidence to the UK banking system will prove embarrassing for years to come, with consequences for all of us in Britain who save, borrow and spend. Everyone, in other words.
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by The Investor on September 15, 2007
As I write, people are queuing outside a major British lender, Northern Rock, to take all their money out. Only in Britain would a run on a bank see customers forming an orderly line from the back.
Reading comments in the press, it’s clearly something that many people never expected to see in their lifetimes. Certainly, frightened customers demanding their money from a bank they fear is going bust is a scene you’d more expect to see in black-and-white images from the 1930s
rather than on the Six O’Clock News on a flatscreen TV. But that never meant it couldn’t happen.
Indeed, the belief that instability and crisis is something that only ever occurred in some unreal yesterday is exactly why financial markets turn in cycles (if you wait long enough) and crises repeat themselves (if you read back enough).
Is it blind panic to take your money out of Northern Rock? Not necessarily. Perhaps many Northern Rock savers are panicking, but taking your money out is also a perfectly rational choice.
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