Is it simply a case of treating us like mushrooms, constantly left in the dark and fed on manure in the hope that we will not ask too many awkward questions?
Recently I have been asked by a number of people (usually over a drink) to explain to them what is really happening to us all, and so I decided to commit it to print for others to take in and question, I would appreciate it your views.
THE STATE OF THE UK ECONOMY IN PLAIN ENGLISH (PART 1)
Background:
First of all to understand the mess we are all in now, and how bad things really are, we need to understand how we got into the mess, and also who was responsible for us getting us in the mess in the first place. Basically during the 1990's, and into the early 2000's Banks across the Western world particularly in the USA but also in part in Britain started to relax the rules on lending money to house buyers who were encouraged to take out bigger and bigger loans. In more responsible times people looking to buy homes were usually advised to borrow no more than three and a half times their total single/joint annual income, but all of a sudden banks were giving mortgages out like confetti, in the USA few checks were taken on whether or not people were able to afford to pay back the loans and even benefit (Welfare) claimants were being given mortgages despite their income being far lower than the repayments!The Banks then sold that debt (they would package 100's of mortgage loans into one bigger debt) onto bigger financial institutions to try to reduce the risk to their own bank. And then the bubble burst as the financial institutions who now were left holding the risk suddenly found out that the people living in the homes couldn't afford to pay back the mortgages and as a result repossessions rocketed. As a consequence some of the Banks and the super banks went bust and no one had any money to lend out to anyone. This of course had a massive impact on other businesses who now couldn't borrow from the banks to either expand or even cover short term cash flow problems, so the economy started to slow down, people were laid off, who then couldn't pay the mortgage and the whole cycle went around and around. Meanwhile the value of peoples properties were also falling meaning people owed far more than they could ever sell their homes for, but even if they could afford to sell them potential purchasers also couldn't anymore get a loan from the banks. During the boom banks would lend couples 100% of the cost of the house and even more on top in some cases, but now the banks wanted deposits and restricted total loans down to 70% to 90%. First time buyers couldn't even afford the deposits and the housing market stalled.
The crazy thing here though thing is that the big financial institutions were so tied into the world economy, that they knew that they could take such risks with other peoples money and homes in the faith that the governments will come to the rescue with billions and billions of pounds in order to avoid financial meltdown within the stock markets. These people are still flying around in their private jets and driving Bentley's whilst many who now live on the edge through in some cases bad decisions but others through necessity whilst the banks continue their casino style gambling on the worlds banking roulette table. Traders even glout on the TV as to how wonderful the reccesion is and how every new collapse brings them more opportunities to make money.
The Labour Government:
They failed to implement any guidance to or legislation on banks restricting the amount of lending to avoid bad debts. They also let the finance institutions act exactly how they wanted without any meaningful intervention. The former Chancellor, Gordon Brown and to be Prime Minister at the time took his eye off of the ball and stood aside as the sub prime mortgage debts were being resold as good business.
Having given the Bank of England almost total independence he had no room to manoeuvre even if he wanted to, that coupled with a desire to keep his new job meant the country just drifted into more borrowing and less action.
The government also had left social housing projects solely within the private sector which would never fill the demand of such housing. A boost in public sector house building at the time in my mind might just have saved the day, but the lack of supply fuelled house price inflation to ridiculous levels.
Joe Public:
The other player in this sorry affair was the public at large who had become obsessive about house ownership, home improvement, buying things we didn't need and whacking everything on the plastic, as a result personal debt spiralled. The feel good factor from the pre 1998 prosperity made a lot of people completely forget the self restraint of managing their debts sensibly. A must have, will have it now society, not even embarrassed by taking on extra debt they cannot afford. Now we are all paying the price. Housing costs had also rocketed and now took up more and more of the monthly salary as a % of income. We were all trapped in the credit card debt zone and unprotected against the ill wind that was blowing.
In part two (to follow very soon) we take a look at the Country's income and expenditure over recent years and try to make sense of the economy from a Mr Micawber (Charles Dickens) point of view
"Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery."
in order to get our head around just what the country is earning, what we are spending and how we close the gap.
You will never be able to get away from the absolute fact that the Labour Party were spending shed loads of money that wasn't there.
ReplyDeleteBrown was proven to be anything but 'prudent', a tag that was stuck on his 'best chancellor ever crown' by many when things were chugging along comfortably. It was when difficulties became obvious to the man on the street, that Brown, Balls, Milliband an co were found seriously wanting. They were an unmitigated disaster. They are, even now peddling the same policies. No lessons learned there then.
What was their answer? Spend more!!! We're now all paying the price and will be it seems for years to come.
Yes, the Banks were running loose but the Government either didn't want to see what was happening or were indeed too thick to comprehend the consequences of inaction. Boy, did they talk some tripe?
This present government are still talking plenty of tripe but in conjunction with an attempt to rectify matters. Only time can and will tell us if that attempt is enough.
Now that's called plain talking.
This is not a politically motivated message but a viewpoint from an ordinary person. I believe there are many people who have very similar views.
Anon, hopefully after reading parts two and three you may reflect on some of the above , prior to 1998 we as a country were earning far more than we were spending, and spending to encourage growth increases the governments income in the long run, any how your views are very welcome.
ReplyDeleteI agree with investment but "spending for growth" must be done in conjunction with keeping the household accounts in order. Remembering the 'rainy day' no matter how much money we 'appear' to have is always a 'prudent' ploy. We had many 'debts' even through those 'hazy' days of supposed plenty. For instance the replenishing of ravaged pension funds should have been a huge priority. We might just have avoided all the discontent in that event. You must never spend what isn't yours.
ReplyDeleteThat's a very simple and HONEST rule to adhere to.
I've mentioned the H word but very sadly there is very little of it about.