Credit Crunch (whose to blame)

Peter Dolman · Credit Crunch (whose to blame)

We shall all be impacted by the current financial climate but who do you think is to blame?

Attrebates

A damn fine question to which the answer has to be ALL OF US.

We all want houses, cars, investment portfolios, etc, etc. The "professionals" have fed this demand as well as making demands of their own.

30 years ago it was virtually impossible to get a mortgage for any more than 3 times your annual salary. Personal greed fed by estate agents and the banks met the need.

How long have experts been saying the housing bubble will burst ?

The more important question is "Who is going to pay for it all?" and I think I might know the answer to that one.

Peter Dolman

A good base to start this debate but I believe that the origins of this current position goes back to 1979 when a certain Margaret Hilda Thatcher was elected leader of the Conservative party.
In those days, if you are old enough to remember, banks were not that keen to lend to anyone. There were "control orders" which stipulated minimum deposit and maximum repayment terms for HP and 2 1/2 times the husbands earning for mortgages. If you dealt with a progressive Building Society they may include once time the wives (no co-habiting!!!!)

Banks would only consider a loan for an account holder. The majority of workers were still paid weekly in cash so many did not have bank accounts.

This restriction of credit did surpress the housing market as well as high street sales.

This all changed (for good or worse) in 1981 when Maggie recinded the controll orders releasing a flood of pent up demand for credit. This was encouraged by the then government and as they say the rest is history.

Attrebates

Oh Peter! Such a pity! You start of an interesting thread and on your second post you start bringing in party politics with big boots on. I am disappointed as I was beginning to think you were above that. In the words of Al Murray " Shame on you !"

I think it totally inappropriate to blame any one group of people. We are all to blame ! Every one has been greedy either by borrowing above their means or by being encouraged (or forced) to do so.

Maybe politicians (of all colours) over the last 20 years should have seen the situation developing and done something sooner. Certainly, the Merchant Bankers (I use the term advisedly) and financial traders should have forseen the situation arising and warned the government. Maybe they did.. I don't know. I'm pretty sure that their obscene levels of bonuses would have been reduced if they had have done.

Governments do not like negative news and have not risked unpopularity which financial restrictions would have imposed.

Maybe they should have put a little away for a rainy day. (as we should all have done.)

I do not see how any action 20 years ago by a British politician could have precipitated the situation in the American housing markets. They managed to screw that up all on their own for the very same reason ...... greed.

There is no one person, group of people or even government could have achieved this on their own. BUT succesive goverments (of two different colours) have sold off all of the family silver to finance our lifestyles for the past 30 years. Latest and possibly the last is the Electrical Power Generating Stations

And with the world on the brink of financial meltdown, is there any point in discussing what went wrong and who is going to be the whipping boy ? Later maybe. but for the moment ...

Local lass

whos daft though the people lending it or the people borrowing it.
even ewen blair who is on 30 k a year has a 550 k flat.
people are far to easlily giving credit.
although its the apr what is the kiler.

Attrebates

Peter Dolman

I certainly was not trying to score any political points just laying out the basic facts. It is true to say that every goverment since 1979 have promoted greed and avarice as a virtue.
The commissions paid within the financial sector grew like "topsy" and was an early indication that the house was built on sand.
In the early 80's endowment mortgages were being touted as mortgage to have. The commissions paid to building society and salesmen were enormous and look what happened with endowment mortgages.

No I am in agreement with you apart from I blame Thatcher and Regan for being parents of our current problems.

I am though interested in other peoples thoughts on this issue.

Attrebates

I suppose it depends on where you wish to start but does not the period you indicated co-incide with the completion of repayments to the US of WW2 war loans.

I know when I've finished paying off a loan and I have a little spare cash I might go for a bit of a cashsplash. But I do monitor my bank account and if I see I need to transfer cash into or out of savings.

I've been made redundant a couple of times but prudence (I wonder where I've heard that word before) stood me in good stead and we didn't starve. Extra notches pulled in on the belt and my family have survived.

Management of the Economy is what we pay our successive Chancellors and Prime ministers for. Over a long period of time they, we now find out, have not served us as good managers.

Joe Public is responsible, but mainly because he has been kept in the dark. Older Joe Public knows that you cannot borrow 5,6,7 times your salary indefintely, particularly when we have had dire warnings about the ability of endowment policies to pay off mortgages.

The people least responsible for the situation WILL pick up the tab.

That's you, me and more importantly our children and Grandchildren.

I think the American economy has been run in a similar way but as some one once said "when America sneezes we all catch cold."

Tissue anyone ?

GTB

I'm going to say that the banking system is to blame. They have targeted the vulnerable and the gullible in their aggressive marketing campaign when they have been literally handing out the cash as bait and then hooking the recipients in with hefty interest payments.

I have two credit cards, both of which have nothing owing to them and are both now past their expiry date - I shan't be renewing them. The first card (mastercard) was opened in 1997 with a credit limit of £1000, this limit soon became £2000 and latterly £8000, all of which was un-asked for and not needed. My second card (MBNA) started off with a credit limit of £1000 and that reached £10,000 - again it was credit that I had not asked for. MBNA have for the last two years been sending me blank cheques so I can "splash out on something" and get myself into debt and pay them some interest. Every cheque ends up in my woodburner! With some people having nearly £20,000 to spend at the flash of a card would be too tempting to resist and would inevitably end them in some sort of financial mire.

This country, and indeed the world, need credit but there really should be tighter sanctions on its availability. The financial world has a self regulatory ombudsman that really should make more stringent rules on who or what sort of credit people should be offered and that guarantors and assets should play a bigger part in how much money is offered.

rosco

Bear

Whilst I have watched this debate with interest and think that it would seem that banks, governments and the public in general should all shoulder an amount of blame one group appears to have escaped our attention and they are the advertisers who push their goods in the media in such away that everyone can see that for example our humdrum lives will be changed dramatically simply by uying this or that electrical gadget that we dont really need. I moved into my current house about 18 months ago. a 1950s semi detached that had not be upgraded very much since then. We have two points in most rooms and only one in some, it has cost me a small fortune in adaptors and extention leads to enable me to plug in all the gizmos that we have and I dont think we are gadget freaks like some people I know so add this to the fact that if somebody wants one of these items they want it now without saving for it first the way my parents did leads us to the keep up with the Jones society we now live in.

GTB

There was a good question on Radio 4 today which went as follows:

"Great Britain finally finished paying off its National debt owing from the second world war two years ago, how long will it take to pay off the National debt caused by this recession where we borrowed heavily whilst in the boom years and we have borrowed heavily to stave off this recession?"

What I can't fathom is why Mr Brown sold all, or the vast majority, of our gold reserves during the boom years (at a rubbish price!) when surely it should have been kept for a financial rainy day like we are having now?

Peter Dolman

The de-regulation of the financial sector by the Reagan/Thatcher goverments began the long slide to the position we know find ourselves in. Yes we the general public jumped at the chance of being able to borrow money and many did not worry what interest rate was charged. So yes we have some responsibility if I am honest.

There is in my mind a responsibilty on those who borrow, just as much as the lender, to ensure that they can make all repayments.
The practise of some lenders such as Northern Rock to advance 125% of a properties was not a viable proposition for either parties, both of which entered freely into the arrangement. If there was no de-regulation then it could not have happened.

There were are many other examples on a similar vein which I could offer to support my arguement. eg mortgages up to 6 ,7 or 8 times salaries being just 1.

The lending industry grew fat while pandering to our greed, now is a time to consider the future based on our mistakes over that last 10years or so.

AndyI

Actually Peter prior to the current government deregulating further, banks could not give the high mortgages they do now so Reagan and Thatcher were not to blame. In fact Thatcher cleared the government debts incurred by the previous Labour government just as any future government will have to yet again.

I have been warning of a recession for several years now to my friends simply because the situation we had was not sustainable and was only propped up by consumer spending, government capital projects and housing.

The credit crunch just brought that forward, it would still have happened. We have been sleep walking into a recession for years. Deregulation here and in the US just hastened that. As such you could argue that the current British and US governments are to blame for the current mess in conjunction with the financial sector.

People could only get onto the property ladder if they took 100%+ mortgages because of the huge increase in population of recent years so that partly brought about contributing factors too. Over population has resulted in a housing boom that is just not justified or sustainable or was needed. This has resulted in a huge increase in house building that is destroying the rural communities because the current goverments voting base is not in those areas.

If all of these issues are taken from a position of arguing just facts then the problems have been caused by the current US and UK Administrations. The financial sector just got greedy on the back of it. Ultimately governments cause the problems.

Brown forgets his scathing attack on the Conservative Chancellor back in 92 when we had a hard time with a recession and all politicians in the current government conveniently forget that it was the ERM membership and the tieing of our monetary policy to the Mark and having to adopt the same anti inflationary measures that caused the ERM to fall apart and the pound to go into free fall. There was cross party support to join the ERM.

That's all forgotten when the parties are playing a points scoring game.

They are basically all as bad as each other!

But yes I'm a cynic.

Peter Dolman

Andy I would still argue that Reagan/Thatcher have a lot to answer for. It was Thatcher who remove the control orders in 1981. Before then if you wanted to buy a car on HP you had to have a minimum of 1/3 deposit and the maximum repayment period was 36 months. Within 6 months of them being abolished nil deposit and 60 month repayment periods became the norm.

It was the same with mortgages when I applied for my 1st in 1977 it was 2 1/2 my salary and once times my wifes, prudent for both the lender and the borrower (me). The relaxation through the tory years and then carried on enthusiastically by Blair and Brown lead to 6 or 7 or 8 times joint earnings, self certified mortgages and 125% of cost mortgages.

Allied with endless TV programmes telling people they were missing out on huges gains if they did not keep moving , we all got greedy and there was no one holding the reins. The FSA who should have been more vigilant were run by ex-bankers who did not want to rock the boat.

More and more companies seeing the huge "profits" reported by lenders got into the act so we had Marks & Spencers offering loans and credit cards. This was followed by others including the big supermarkets and utility companies.

I saw it all as from 1975 untill 2006 I worked in that industry, many of us were worried about the future but were powerless to act and the bossess were only interested in there fat bonuses and the potential to feature in an honours list.

So know the chickens have come home to roost and you and me and everyone else are going to have to pick up the pieces. There is no alternative despite what others my say. I just hope that on the other side of the recession we are not only more prudent but we are more caring about those less fortunate than us.

AndyI

It was still 2 1/2 times salary when I got my first mortgage in 92 and my second in 97. Granted things have been too loose for too long but then why did this government and the US one make things worse? because it was politically motivated in order to win votes. That's what sickens me. There should be some oversight of the government to prevent reckless financial decisions.

For example, the current borrowing could be catastrophic for the pound and couple this with the off the book debts of PFI, the true debt is much much higher than what commentators are saying it is. PFI will end up being a disaster and that was politically convenient too because the current government wont have to worry about paying it back, some future government will have to.

AndyI

Brown sold off the Gold in the belief that it was no longer needed as an underpinning of a countries currency because of the Euro and of the Global Economy at a time when it's price was at it's lowest in a long time because he wanted the money quickly to pay for ambitious spending plans and could not borrow anymore because of his long standing Prudence claim and that the government had already borrowed close to thier self imposed limit.

The current crisis has given them the perfect opportunity to borrow outside of that limit and repair thier books in time for a future Election or hide under the current crisis and blame that to get through an Election.