The world financial crisis what is the solution.
Before you read on expecting this article to have contained within it a solution to the world’s
money problems, STOP! Unfortunately I haven’t got the answer, and only over time will we all
discover the true cure for our global financial ills. All I can do is speculate for the future and
examine some of the ideas being circulated at the present time, and perhaps offer up my
humble opinion as what could be the way to go.
If you did not already know, though I cant think how you could not possibly be aware, the world is in the grips of a global financial crisis of proportions that we have never seen before. Now I can hear some of you saying what about the great crash of 1929? Well yes I am not trying to trivialise that, it was indeed a large issue at the time, but today money is just, well, greater. The sums we are dealing with today can be measured in the hundreds of billions in some cases trillions.
So what exactly is it that we are talking about here? Why has the world become so far plunged
into debt? In a nutshell, we are dealing with liquidity, that is to say, the money moving in the
markets. Money is as essential to the economy as air is to humans, and so without this life
giving air, the economy is choking, and choking badly. What has been happening is that global
lenders have been doing their thing and lending money. In order to keep doing business, these
lenders had to keep lending out their money. However, when the good debtors had all the
money they needed, the lenders dropped their standards and started lending to people with
less rigorous checks. Of course once one did it, in order to compete, the rest of the lenders had
to follow suit. The rules of the competition meant that all the lenders then lent to less than
ideal clients.
How exactly has this resulted in the situation we have today? Well the obvious result of reducing your standards especially to your borrowers is essentially you leave yourself open as a lender to a greater risk. There are reasons why some people should not be granted a loan and that reason can be as simple as they may not repay it. It has to be said that over recent years this has been classed as an acceptable risk to lenders. But years of this sort of lax lending has resulted in lenders with very high risk lending books with poorer prospect of ultimate recovery of the debt.
The result of this is initially other lenders start to lose confidence in them and refuse to lend them money. Now a lender that can’t borrow money itself is useless it is like a bar unable to buy beer for the pumps eventually the customers will leave. A lot of lenders such as banks and building societies also have depositors. People deposit money and in return they receive interest. However the lender uses that money and lends it out to borrowers, the problem is once the lender starts to get into trouble because they are unable to borrow money themselves the depositors also start to lose confidence and they want their money back. This results in a catastrophic failure of the bank itself. If it does get itself into this situation, the stock market starts to get twitchy and they start selling stock in the bank and then the value falls to, again casuing a catastrophic situation.
So now that is all clear, what is being proposed?
One solution derived by countries such as the U.K, the USA, and Ireland was to guarantee the public’s deposits with tax payer’s money. This had the effect of settling the public’s nerve and building confidence in the banking system once again. Now there may have been no real need for a lack of confidence but once the jitters set in the financial welfare of the individual can lead to so much panic that the whole system collapses .But now they were now more willing to leave their money in their accounts and the institutions assets remained unaffected.
Secondly the US and the UK have both proposed major bailout packages the complexities of which I will not be going into here in this article but suffice it to say they are essentially buying into these large financial institutions with large sums of tax payers’ money. Will it work? I don’t know as I said earlier time will decide if any of the ideas are good ones. That said it really does depend on whether the institutions start lending to each other again because the kind of liquidity drought that we are all currently experiencing is dragging the world into what could be the biggest recession we have ever seen.
One thing I can say is we all need to radically change the way the banking system works. I don’t dispute there is a lot of regulation, hey as an independent financial advisor I am subject to it on a daily basis. My concern is I don’t know whether the large financial institutions are actually regulated in the right way. I don’t think anyone has ever turned round to a lender and stipulated what their minimum lending requirements should be, maybe because this would be considered restrictive practice, but lets think for a second if lenders weren’t allowed to lend to such bad risk clients we probably would not have seen the sort of economical growth we have seen over the last ten years and we definitely would not have seen the house price rises we have seen over that same period but the million dollar question is …. Would we be in this mess now? I honestly don’t think so!
