Harringay, Haringey - So Good they Spelt it Twice!
Idiots guide wanted to the credit crises
Am I alone in not really understanding what this credit crises is all about and why we and america are having one?
Are there any clever people out there that can explain it to me. Imagine you are explaining it to a five year old.
Is it because Mr Bush loaned a video sometime back in the 80s when video hiring was at its height of popularity, and didnt return it? He now owes about 700 million dollars.
Are there any clever people out there that can explain it to me. Imagine you are explaining it to a five year old.
Is it because Mr Bush loaned a video sometime back in the 80s when video hiring was at its height of popularity, and didnt return it? He now owes about 700 million dollars.
Replies to This Discussion
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Permalink Reply by finsburypark on
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I give a try...
Anne asks £10 to Andy for 1 month.
Andy says yes, no problem come again tomorrow I give you £10 and at the end of the month you give me £12 back.
Anne agrees, she needs £10 tomorrow.
Andy has no £10 and goes to John saying: if you give me £10 for a month I give you £11 at the end of the month. John says yes and gives the £10.
Anne gets the £10 the day after.
Summary:
Anne has £10 today and needs to give back £12 at the end of the month.
Andy will have £12 pounds at the end of the month.
John will have £11 pounds at the end of the month.
Andy and John will make £1 each on this transaction, fantastic!
The business sounds so great that they expand it, more and more. Next time Anne goes to Andy other 5 are behind each one giving money to each other getting a cut of the transaction.
One day Anne cannot pay the £12. Andy has £11 to give back to John as well.
Andy never cared to put any money aside to pay any default to John. John did the same with others...
Multiple by all the people in the chain... and oops all the chain falls down because anybody put enough cash in the pocket to repay any default.
The 10 people are running out of money and their business close down. All virtual.
This is what I understand of the story and why we are in this state.
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Permalink Reply by RuthE on
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thanks Finsbury Park, that flippin Anne
question: Why couldnt Anne not pay the £12?
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Permalink Reply by Danzigger on
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Anne is paying maybe 40% more for her heating, lighting, groceries and petrol than she was last year.
But in that time her pay has only gone up 3%.
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Permalink Reply by Clive Carter on
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Anne exaggerated her income in order to persuade Andy to believe she could pay it back; Anne lost her job; Anne had spent the £12 on a toy-house that is no longer worth anything like £12. Even if that toy-house were still worth £12, it is currently unsaleable due mainly to nobody wanting to lend money to James, who might otherwise want to buy the toy-house.
In the simplest terms, Anne should not have agreed to borrow the £12; if she wanted to spent it on the toy-house, she should have put up at least £2.40p which would have provided a buffer both for her and Andy if things went wrong. Still, if she'd gone to the Northern Rock, she'd have been able to borrow £15 to buy her £12 toy-house - with a 125% mortgage and she'd have had £3 to spend on dolls.
Likewise, Andy should not have lent her the £12 in the first place.
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Permalink Reply by John McMullan on
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This is the best thing I've seen.
http://www.slideshare.net/guesta9d12e/subprime-primer-277484/
The reference to Norwegian village pension funds was very clever - they were the first big losers but just got a slap on the wrists from their government.
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Sorry, yes, i forgot about that. There is a fair bit of investment banking language in there, but not the worst of it.
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Permalink Reply by matt on
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Bank's used to know you. Now they don't. Banks used to lend you money against your asset and hold that loan on their books or take responsibility. Now they don't. Like 'finsburypark' says, they simply off-loaded it to another loan business. That loan business takes in debt from various sources at various levels of risk. It packages them up sells them on. By this time no-one really knows who the original source is. The banks are happy however because they off-loaded that debt.
Trouble is (and this started in America) financial institutions decided they liked this so much they looked around for more debt to feed the system of financial fees and commissions. They turned their attention to the poor. They literally knocked on poor neighbourhoods doors and said, 'Why rent? Why not buy a house?!'
The person on benefits/low income can't believe their ears but leap at the chance and far enough too. A low introductory interest rate is offered as a sweetener. The loan is valued on the value of the house not their income. A year later the interest rates start climbing after the intro rate finishes and that new home owner is in trouble. They default. Trouble is, so are 1000s of others in a very short period of time.
The mortgage broker has taken their fee, re-packaged their debt, sold it on to this debt re-packaging market and riden their Harley off into the distance. There is so much of this type of re-packaged debt out there, that even the banks that were happy to do business this way originally, find it on their books.
Communications are so fast, so wide spread now and banks so international that this so called toxic debt has become like a bird flu moving around the world. Trouble right now is no bank knows which other bank is about to implode so they won't lend to any other. Hence the term liquidity crisis and they've even stopped lending to small businesses and most home buyers. The system is near collapse which is why America is buying up that 'toxic debt' with tax payer's money. The UK is now effectively doing the same thing by poring £400billion into UK banks or £2000 per tax payer (your money). The tax payer will buy what's called preferential shares of certain banks in return for giving them our billions.
Is it all completely mad? Yes it is but then a lot of people in this country have been enjoying the party that resulted from this sham. New cars, foreign holidays, loft extentions, second homes .... all a mirage.
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The banks underestimated the risk and that is why they are in trouble yes... but their assumption that people would pay their mortgages before their cars and credit cards was one of a few important incorrect assumptions (the others being that property would always go up in value and not everyone would default at the same time... which are much less forgivable).
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Yes, I agree with all of this. The bankers have been reckless, irresponsible and short-termist. They and regulators bear the greatest burden of this fiasco. There is another side to this and that is the borrowers, some of whom seem to have little or no grasp of financial fundamentals.
Two or three years ago, a friend of mine up north took out mortgage that was 125% of the value of the house he was buying. I think the load was initially from the Northern Rock. I thought at the time it was risky but I didn't say so because he was happy to have it. A mortgage on this basis puts both the lender and borrower at great risk: there is no safety margin and in order for it to succeed, every factor has to run perfectly for years.
Credit card debt: this hasn't figured much in present commentary on the Credit Crunch. Those borrowings are an enormous sum collectively and if there is widespread default on those, the banks will face even more stress. It's been another mechanism to lend money, but everyone should avoid running balances at the typical rates of interest they charge. Even the head of Barclaycard admitted as much.
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Permalink Reply by rahman on
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I agree with the comment about borrowers not having a grasp of financial fundamentals.
Working in housing, I see a lot of clients who are losing their homes because they misrepresented their income in order to secure a mortgage from the bank, knowing full well that they would not be able to afford the repayments. And countless people who mortgaged themselves up to the hills just to get on to the property ladder. (and an even greater number of people who prioritise paying credit card bills, internet and sky plus over their mortgage repayments!)
What happened to the principle of living within your means? Its common sense.
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I thought that this from National Public Radio in the US was extremely good.
http://www.thisamericanlife.org/Radio_Episode.aspx?episode=365
It's an hour long, and you can download the MP3 with the "Free Download" link on the page above. It is far and away the most lucid and intelligent explanation of the current financial crisis that I have come across, and puts the dreadful reporting of Robert Peston on the BBC to shame.
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