Where Does It Go? – UK Money Blog £

Carrying on with Darling-Brown’s measures to aid the voters before the next election, the Government announced measures to give free insulation to the poorest families, and half price for every one else.  This actually sounds like a great idea, and is another bit of evidence showing the credit crunch may be bad for the banks but actually good long term for the planet, seeing as this move comes in the same week as oil prices dip under $100 a barrel due to falling world demand.  The BBC story is found here.

This won’t do much to lessen the blow for families short term however, with all UK fuel companies putting up prices in preparation for increased winter demand. Its estimated electricity bills are going to go up by £500 a year by 2010, an extra £10 a week. With inflation currently at 4.4% everyone in the UK is finding themselves with less money in their pocket.

Why did the inflation leap so much?  Its the consequence of UK banks flooding more cash into the bank system in April where an extra £50billion was pumped into the system.  Every note that is printed means the rest are worth less.

Some say money is the price we pay for civilization, but does that mean it has to be fiat money system?  The £ used to be pegged to the price of gold, one Troy pound was equal to one pound note.  In 1844 the Bank of England was made the only bank that was allowed to issue banknotes, with exception for the Scottish banks. At the beginning, pound notes were only printed when there was a surplus in the Bank of England of gold to back it up. This did mean higher interest rates to keep the gold standard supply.

The gold standard was abandoned just before the First World War, which virtually crippled the UK, only exasperated by the Second World War. The UK entered decades of decline, only halted by the discovery of North Sea oil.  Now we employ a fiat money system borrowing is easier, but are we better off?

Aug 30th – 2008 Darling recently had a piece in the Guardian where he told us:

UK Chancellor Alistar Darling

“the economic downturn would be “profound and long-lasting”,
“…has insisted it is his duty to be straight with the
public, after telling a newspaper the UK faces its worst economic
crisis in 60 years.”
“…that voters were “pissed off” with Labour’s handling of the
economy, a key issue at the next election, and said it was “absolutely
imperative” that ministers communicated their intentions better.”

Basically, we’re fucked and going to have a recession.

And now the PR exercise starts trying to educate the masses that it is not Labours fault.
Watch the BBC interview where Darling repeats, 4 times, parrot fashion, the mantra’s the PR men have told him to say. To every question asked him his answer is:

• I’m being honest
• Every other country in the World
• Unique Circumstances
• Credit Crunch
• Rising Oil and Food Prices
• We helped Northern Rock
• Tax Rebate next month
• Helping People getting back into work
• Fundamental of Economy Sound

“Who’s going to win Eurovision this year?” “Honestly, every other country in the world has rising oil and food prices, I remember when we helped northern rock I was going to give a tax rebate next month…blah blah blah…I think they should bring back Cliff Richard.”

I do notice that not having a TV makes you more aware of the repetitious Squealer type announcements. Lets break it down a bit:

• I’m being honest – Why do I get jittery when a politician starts with that?
• every other country in the world - Asia seems to be unaffected thus far
• Credit Crunch – buzzword for people at the moment – basically free credit to everyone will eventually bite you on the arse
• Rising Fuel and Oil Prices - didn’t Mr Murdoch say it was morally correct to invade Iraq for a “$20 a barrel oil”?
• We Helped Northern Rock – Nationalising a bank under intense pressure after failing to find it a buyer, placing £1.3 billion more in national debt.
• Tax Rebate next month – What tax rebate? The one where companies can claim back VAT they shouldn’t of paid in the first place because they overpaid?
  Or the rebate to make up for the blunder of not noticing abolition of the 10p tax rate would put the lower paid workers out of pocket?

A very informative YouTube video on how the sub-prime market rocked the UK, ending up with the nationalisation of Northern Rock.

It includes a very easy to understand guide on how the banks planned out the sub-prime lending scheme, using Collaterised Loan Obligations (CLO).

The Collaterised Loan Obligations bankers used are less regulated than normal banking.

How The Banks Bet Your Money UK & US part 1

Basically bankers borrow money at a low rate from say pension funds, then buy sub-prime mortgages which gave an income greater than the low interest they were paying. This gave an estimated 26% a year return on investments per year. Big figures for a greedy banker.

It’ll be similar if you used a 0% credit card to buy a buy to let flat – whilst you have tenants you earn enough money to pay off your credit card bill and make a good amount of profit – but if for some reason your tenant cannot pay, you’re left with debts you cannot afford.

Of course, it didn’t end up like that. The banks even leant to people with no asset, jobs or capital, so often they had a specific term for them – NINJA (No Income No Job or Assets) – a derogatory term used by high income bankers to describe the sacrificial lambs that would provide their bonuses. When those NINJA’s couldn’t pay their mortgages, the income for the CLO dries up and the banks are left with huge loans to pay off. Ergo – the Credit Crunch.

If you thought that was informative, the other parts of the programme are available here:
Part 2
Part 3
Part 4
Part 5

And so it if that I start to see the credit crunch squeeze on my nearest and dearest.

My girlfriends sister has two kids and a now estranged husband, a divorce pending if they can bear to stay in the same room as each other to sign the papers. 

An emotional time for everyone involved exasperated by the fact their shared house in a pleasant up and coming seaside town is now rolling towards negative equity.  The mother and two children are left in the house whilst the husband who was the main breadwinner has moved into another house with his new girlfriend. 

Only a few months have past, but due to the many memories leading up to the breakup, and sheer un-affordability, mother and children aged 2 & 4 are wanting to move out.  Already a few months behind on mortgage payments, with a secured loan on the house to fix up the house a few years ago, house prices have gone down 10% leaving zero or less equity in the house.  Even moving costs, but faced with the prospect of moving and still owing money to the bank puts pressure on a situation that is grim in the first place.

Bankruptcy is being discussed, and there seems little way out aside from that.  Problem being there, if a voluntary repossession takes place, the council class it as voluntary homelessness and no help will be coming to help rehouse.  Hopefully a visit to the CAB will help find some other options.

A lot of critics in the paper at the moment are saying the credit crunch is welcomed, payback for all those people who over extended themselves looking for easy money.  But that ignores so many real life situations where all that was wanted was a stable and safe home to bring up children. 

The criminals in this venture to my mind are the banks, greedy in their profit margins, gambling even with more information than the average citizen that house prices will carry on upwards forever.

Lets not forget that if all their mortgagee’s can’t pay, the banks don’t lose their money – they get the property. Thats why its called a secured loan.

All the belly aching in by the banks are about their immediate profits – eventually they will make their money back by selling on all their repossessions, ready to capitalise (literally) on the next boom when confidence is high.

Food, fuel and energy prices are spiraling in contrast, decreasing disposable income.  Getting nagged by the girlfriend we haven’t gone out to dinner recently is the consequence for me so far, pitiful little compared to her sister and many others in the real economy.

And so people turn for the scapegoats – the current one in the UK seems to be Gordon Brown and his 10p tax bracket.  Its a little misguided – I’d say its the bubble bursting over house prices which no government could sustain.  Running the country is simple – just keep everyone’s standards of living rising and you’ll coast along.  With all the rhetoric soring about spin, sleaze and making an impact on the world stage, just the money in people’s back pockets being full or empty is what it all comes down to in the end in this country. 

Will this time be the last?  Will a recession turn into a depression turn into revolution?  Maybe not this time, but until then mothers face the threat of repossession whilst banks get guaranteed loans. 

Tags: creditcrunch, mortgage, citizens advice, politics, economy