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wasp

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Okay, in a vain attempt to rectify my drunken thread last night, heres a new one for an interesting read... (I'll keep my input to a minimum so I can't mess it up!). Now, where's the ibuprofen :eek: :cheesy:



£1,300,000,000,000 in debt


By Dan Roberts and Iain Dey, Sunday Telegraph


The day of reckoning has arrived for a debt-soaked nation living for too long on easy credit. And it's going to hurt

Last week in Cardiff, a mild-mannered man called Mervyn stood up, pushed back his glasses and stated the obvious: "It is unwise to borrow so much that the repayments are affordable only if interest rates remain at their initial levels."

Sensible, if unremarkable advice, one might think, from a governor of the Bank of England known for his conservatism. But Mr King's warning to the Welsh CBI marks the end of a decadent decade in British history when many of us have done exactly that: borrowing as if there were no tomorrow, living on the never-never, driven (or reassured) by the ever-rising price of the roof above our heads.The day of reckoning has come for a debt-soaked society that has seen outstanding household loans double to £1.3 trillion in just seven years.

In a deliberate new policy of blunt-speaking, the governor eschewed the normally equivocal language of central bankers to warn that if we don't change our free-spending ways, he will - by pushing up interest rates until the growing threat of inflation is eliminated."It wasn't what he said; it was who was saying it," says Ray Boulger, a mortgage broker.

City economists expect the response to come by August, increasing interest rates from 5.5 to 5.75 per cent. But the real fear is that this will not be enough and that 6 per cent interest rates will be with us by the autumn. This could make for a rocky Christmas, not just for homeowners but also shops and manufacturers reliant on easy credit to fuel consumer spending. Property experts fear the housing market may not be able to cope"A quarter point rise is as much as the market can take. Anything more will precipitate a serious crash," says Robert Bryant-Pearson, of Allied Surveyors, the largest independent property valuer. "Everyone seems to forget what happened between 1990 and 1993: the repossessions, the negative equity. The problem now is that people's borrowing in relation to their income is extremely high."So far, the level of repossessions is a far cry from the days of the early 1990s recession and property crash. Between 1990 and 1993, 247,000 homeowners lost their homes as house prices slumped and unemployment rose sharply.But the Council of Mortgage Lenders estimates this measure of affordability, or arguably unaffordability, reached a 15-year record even before the latest mortgage rises kicked in, this spring.For this reason, others think we have already reached the point where the credit crunch is biting. "I doubt the housing market can even take another quarter point," adds Boulger, one of the most respected mortgage commentators. "Only in London, Scotland and Northern Ireland are house prices still climbing. Another rate rise would choke this off and push prices in much of the rest of the country into reverse."To make matters worse, the biggest impact of higher mortgage rates is still to come for many homeowners.

Analysts at Credit Suisse estimate a million borrowers who took advantage of cheap two-year fixed rate loans at the end of 2005 are about to experience the shock of their lives. James Callaghan, a civil servant in Darlington is typical of those discovering the painful new reality: "If we stick with our current mortgage lender, our mortgage rate will jump from 4.94 per cent to 6.75 per cent." In extreme cases, the repayments on a £400,000 interest-only mortgage would increase from about £1,400 a month to about £2,000, up by 43 per cent.But tightening of the interest-rate screws by the Bank of England is only the half the story.

On the other side of the Atlantic, the cost of borrowing is shooting up even for George W Bush. The world's most powerful government gets to borrow from the world's deepest financial pool: the colossal market in US government debt, known as Treasury bonds.

But the past few days have seen the water draining out with alarming speed. Triggered in part by reckless bank lending to American trailer parks - known euphemistically as the "sub-prime" market - plummeting prices in the bond market are bringing an end to a golden age during which the global economy has been running on a super-charged fuel of cheap money.

This cheap money has powered the inexorable rise of private equity takeovers, a phenomenon that is now causing political uproar and has seen many household company names sold to overseas buyers. Cheap money has also been the hidden force driving investment by British companies, allowing them to invest and create new jobs, as well as contributing to a bonus boom in the City.

Cheap money has kept the stockmarket powering to new highs. And cheap money, supplied by the bond markets, has played a part in the consumer debt boom, allowing personal debt to balloon while keeping Britain's shopkeepers busy.

Most of all, it has been the real force behind the steady flow of cheap mortgages that have been stoking the fires of the British housing market. Roughly 70 per cent of mortgages sold in Britain over the past few years have been fixed-rate deals. In fact, the switch to fixed-rate deals has been one of the single biggest shifts in the UK's financial system of the past decade.

"The movements in the bond markets will affect the man in the street," says David Miles, the chief UK economist at Morgan Stanley, who has previously written reports for the Treasury on the British housing market. "The pricing of those mortgages moves closely in line with the bond markets.

And those rates have become more expensive in the past few weeks." After turmoil in the US Treasury market, the prices that Britain's banks pay to fix a mortgage for two to three years have soared by about 20 per cent since the start of the year.
A handful of smaller mortgage lenders have already stopped offering fixed-rate mortgage deals altogether since the start of June, according to Moneyfacts, the internet money site. Major lenders such as Abbey, HBOS and Royal Bank of Scotland have hiked fixed-rate mortgage deals far enough to make them unappealing to consumers.
But the end of the era of cheap money will be felt far beyond the housing market. George Bush is not the only one soon to find borrowing more expensive.

Gordon Brown has also been living on the never-never, allowing UK public borrowing to climb and hiding even more government debt in such schemes as the private finance initiative, which store up liabilities for future generations. Unfunded public pensions and student loans (estimated to leave those graduating in 2009 with an average £30,000 debt) are other growing forms of inter-generational borrowing.

Yet for many of those graduates trying to make ends meet, let alone climb onto the housing ladder, debt is not just getting more expensive; it is getting harder to come by. The impending credit crunch threatens to arrive just as those trying to keep the plates spinning need access to flexible borrowing most of all.

The Citizens Advice Bureau says the tightening of lending criteria just when levels of debt have never been higher ever means we are entering unchartered waters. "We are seeing record numbers of people with debt problems and this is in supposedly good economic times," says Peter Tutton, of the CAB. "What no one really knows is what happens when the credit carousel stops."

Of course the Bank of England doesn't want to bring things to a crashing halt. But Government bungling has muddied the waters, making it harder to assess the true state of the housing market by encouraging an artificial spike in activity before the (now postponed) introduction of Home Information Packs.

The move to fixed-rate mortgages has also restricted the Bank of England's ability to influence the economy. When everyone's mortgage was linked directly to the Bank of England's base rate, the consumer economy could be kept on a tight leash.

"In the good old days, the bank would raise rates and you'd get a letter from your mortgage provider about 30 seconds later telling you your mortgage had gone up," says Paul Donovan, a global economist at the financial services firm UBS. "Now what you get is a stepped process where eventually your mortgage rate will reflect what's going on with the base rates, but it takes time."

This is why Mervyn King's caution may yet be overshadowed by the broader credit crunch rippling through global financial markets. "Everyone focuses on interest rates when they think about the housing market," says Alan Castle, a senior UK economist at Lehman Brothers.

"A lot of the strength in the housing markets and consumer spending recently has been driven by people having easier access to credit. It's about the ability of people who would have been considered risky borrowers to get a mortgage."

What worries City economists now is how reliant the economy has become on easy credit. "There has been a cycle where the availability of credit has kept consumer spending high," says Mr Donovan at UBS. "That has supported the economy, which has supported employment, which has kept the consumer confident, which has encouraged him to borrow more money. And so we go round again."

Jumping off this money merry-go-round is a worry for us all. Georgina Taylor, a European strategist at Goldman Sachs, the investment bank, concludes: "The typical household financial position has weakened dramatically in the past year or so. That has quite a feed through to consumer spending, which means the UK economy is vulnerable - the great conditions we've had in recent years are about to change."


glad I moved personally! :D
 
The UK has now made it very easy to declare bankruptcy and be back on your feet in one year. I have heard of many students taking this option as it makes good sense to them and now days there is no stigma attached to doing it at all.

I also know of one person who was declared bankrupt in 2001 and since being released from that has then still managed to run up £8 Million in borrowings so this pretty much sums up how easy getting credit has been.

Bear in mind that debt is owed to someone in the first place and when economies crash money doesn't disappear it just changes hands. If people are starting to find borrowing more difficult to come by this says to me that the BOE is probably implementing a deliberate policy of withdrawing money supply. Because the BOE uses a "Fractional Reserve" system to issue money it effectively means that money is created out of nothing and any lending given by banks is entirely risk free on their part but they will still call in the loans of those who cannot pay. The withdraw of money supply in itself will cause a major downturn in the economy but it will be deliberate and will probably result in the rich getting even more rich at the expense of those who can least afford it.

Here is a question, who are the BOE shareholders ?


Paul
 
mm, come the next consumer cycle and let face it, these cycles are created , to drive down the prices and shaft everyone, as with markets the cycle starts over.

OK but next time the consumers should borrow all they can and upon approval go to the counter and demand CASH please.

So the consumers withdraw money supply from the banks.... ALL of them... The banks have not got enough actual then what would happen?


SO its vital that consumers are conditioned to borrow and spend electronically as they do to keep the cycle going.. Money is just money.... mans obsessed by it as for the banks, im not sure what the fractional rates are, but they would have had a decent return on their first year of lending.
Heres another one ok what about fractional deposit accounts for the consumer?

OK now if the bank is ok to lend fractioanlly why cant the consumer hvae the same interest rate leveraged on their deposits?

I deposit 10k , you are gonna leverage that lending to 100K mr bank therefore I want interest of base rate say 5% on my 100 K , yes a whopping 50 % return on my deposit of 10k :)

does anyone know what the fractional lending ratios are ? and who controls them etc?
 
I deposit 10k , you are gonna leverage that lending to 100K mr bank therefore I want interest of base rate say 5% on my 100 K , yes a whopping 50 % return on my deposit of 10k :)

does anyone know what the fractional lending ratios are ? and who controls them etc?

Let's say fractional reserve requirement is 10%.
You deposit 10K, the bank has to keep 1K in reserve (10%) and can lend out the other 9K - not 100K!. Bank receives interest on 9K and pays you interest at a lower rate on 10K and pockets the difference.

Of course you can cut out the middle man and lend directly eg. through Zopa.
 
Let's say fractional reserve requirement is 10%.
You deposit 10K, the bank has to keep 1K in reserve (10%) and can lend out the other 9K - not 100K!. Bank receives interest on 9K and pays you interest at a lower rate on 10K and pockets the difference.

Of course you can cut out the middle man and lend directly eg. through Zopa.

Cheers timm i thought they could leverage on their reserves held, kinda like a margin trade? big time :) Ive had a lookie trying to get it straight , from wikipedia again ...

http://en.wikipedia.org/wiki/Fractional_Banking

Ok got it clearer cheers......
 
Open for Biz.

So if i opened a bank, took in small amount from privates say 10 million I could leverage 9 million in the markets and pay the depositors say 10% and if i earnt say 1000% on the 9 million then I wouldnt have to give that back to the depositors?

Tell you what thats like creaming off the surplus gained in pension funds in companies. What a con.

Heres the name of my Bank....


Bankers of the Caribean. :p
 
Cheers timm i thought they could leverage on their reserves held, kinda like a margin trade? big time :) Ive had a lookie trying to get it straight , from wikipedia again ...

http://en.wikipedia.org/wiki/Fractional_Banking

Ok got it clearer cheers......

hi cb,

another way of looking at it is as follows

typical return on assets in the banking sector between 1.5 and 2.5 % of assets. Regulators force them to have around 8% of Equity to Assets, and they typically have more. those ratios give you moreless the typical ROE of banks around 18-30%.

j
 
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"Fractional Reserve Banking allows an increase in the supply of currency available to make loans to purchase investment capital, without increasing the quantity of investment capital or real savings. The quantity of loans will be higher than the actual supply of saved resources available for investment. Investors will assume that the quantity of loans available represents real savings. This misinformation leads investors to misallocate capital, borrowing and investing too much in long-term projects for which there is insufficient demand and real savings. As investors spend borrowed currency, segments of the economy will boom. Later investors will find the prices of their outputs falling and their costs risings, leading to the failure of new projects and a bust."

So the money masters know exactly what they are doing ? creating boom and bust cycles. yes? why the bust cycle? how much will the assets be then ? cheap as chips?

And then it starts over.... genius.
 
Last week in Cardiff, a mild-mannered man called Mervyn stood up, pushed back his glasses and stated the obvious: "It is unwise to borrow so much that the repayments are affordable only if interest rates remain at their initial levels."

It seems simple really. Those that control wealth in the world (This all stems back to the central banks, and the fractional reserve banking system.) profit from the inflation of the bubble, and the collapse of the bubble :D , and control the timing of the whole cycle.

Some people seem to live in cloud cuckoo land - i.e. those people who have stretched themselves to the very limit in terms of borrowing, not expecting interest rates to rise much further, or denying that 1990-93 could happen. Why wouldn't it!!

They may continue to inflate the bubble's (housing, stock markets, dollar devaluation etc.) for another 5+ years, but when it does burst, things will be messy IMO.

Still, its only money, the banks create it out of thin air in the first place! And it seems that it is becoming easier to declare oneself bankcrupt, wipe off personal debt, and start afresh with a clean state.

IMO The UK consists of -
The haves and the never will haves,
Those born into wealth,
Those trying to attain wealth,
Those who don't give a rats ass about wealth,
Those who don't give a rats ass about wealth and are happy to live off the state.

It certainly seems that with the continue expansion of the UK wealth gap, many peoples lifestyles are not being changed much, and rightly so IMO.
Look at how many young and single parents you see walking the streets, many have probably not done a days work in years - happy to live off the generous state handouts, and be owned by the state. I can see that they can be happy and content in their low stress lifestyles - i.e. no job, no physical stress of a long work day every day, nice council house, no mortgage etc. It sound quite appealing.
On the other hand, you have those who care about money, building wealth, paying their own way etc. working themselves to a frazzle, but arguably having a poorer quality of life than the state sponsored young council house family.

What happened to family values, day of rest etc?

IMO The countrys gone, and it will only get worse! through -
Higher taxes on everything
Poorer public services
GW stealth taxes (on road & petrol, breathing, rubbish collecitons etc.)
A continued growth in the population of a small island, jammed into towns and cities, with the rest of the land owned by farmers and aristocracy.

Also, the UK now basically operates 24/7. Just look at supermarkets - open 24/7, with people now accustomed to work the night shift on checkouts! Could such things have been imagined 15 years ago?
Therefore the average person seems to be being stretched further and further, and told its still not enough, they need to do/contribute more if they want to survive (i.e. the rise of the 2nd & 3rd jobs).

Alright property has a finate life-cycle, and it will always be being built, demolished & replaced in any country.
But most towns and cities have new housing developments designed to make use of every last square metre of urban landscape - nice housing estate - but 20 metres from the M1!
Also look at how many of these industrial estates with the big fancy office building are also springing up all over the place. This suggests a continued expansion of industry and employment, but what about quality of life........
 
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So if i opened a bank, took in small amount from privates say 10 million I could leverage 9 million in the markets and pay the depositors say 10%
If you started a bank you would deposit some of your shareholders equity with the central bank, this high power money allows outright leverage IIRC (e.g. £10k > £100k). However, with a 10% ratio depositors money of say £10k would back loans of £9k then the £9k may be redeposited with the bank meaning you can then lend £8.1k... and so on until you exhaust the process. It's like a Russian doll.

If you simply operated a bank on the spread between savings and loans without any FRB you'd soon be bankrupt, there wouldn't be enough profits to cover bad debts.
 
It seems simple really. Those that control wealth in the world (This all stems back to the central banks, and the fractional reserve banking system.) profit from the inflation of the bubble, and the collapse of the bubble :D , and control the timing of the whole cycle.

Some people seem to live in cloud cuckoo land - i.e. those people who have stretched themselves to the very limit in terms of borrowing, not expecting interest rates to rise much further, or denying that 1990-93 could happen. Why wouldn't it!!

They may continue to inflate the bubble's (housing, stock markets, dollar devaluation etc.) for another 5+ years, but when it does burst, things will be messy IMO.

Still, its only money, the banks create it out of thin air in the first place! And it seems that it is becoming easier to declare oneself bankcrupt, wipe off personal debt, and start afresh with a clean state.

IMO The UK consists of -
The haves and the never will haves,
Those born into wealth,
Those trying to attain wealth,
Those who don't give a rats ass about wealth,
Those who don't give a rats ass about wealth and are happy to live off the state.

It certainly seems that with the continue expansion of the UK wealth gap, many peoples lifestyles are not being changed much, and rightly so IMO.
Look at how many young and single parents you see walking the streets, many have probably not done a days work in years - happy to live off the generous state handouts, and be owned by the state. I can see that they can be happy and content in their low stress lifestyles - i.e. no job, no physical stress of a long work day every day, nice council house, no mortgage etc. It sound quite appealing.
On the other hand, you have those who care about money, building wealth, paying their own way etc. working themselves to a frazzle, but arguably having a poorer quality of life than the state sponsored young council house family.

What happened to family values, day of rest etc?

IMO The countrys gone, and it will only get worse! through -
Higher taxes on everything
Poorer public services
GW stealth taxes (on road & petrol, breathing, rubbish collecitons etc.)
A continued growth in the population of a small island, jammed into towns and cities, with the rest of the land owned by farmers and aristocracy.

Also, the UK now basically operates 24/7. Just look at supermarkets - open 24/7, with people now accustomed to work the night shift on checkouts! Could such things have been imagined 15 years ago?
Therefore the average person seems to be being stretched further and further, and told its still not enough, they need to do/contribute more if they want to survive (i.e. the rise of the 2nd & 3rd jobs).

Alright property has a finate life-cycle, and it will always be being built, demolished & replaced in any country.
But most towns and cities have new housing developments designed to make use of every last square metre of urban landscape - nice housing estate - but 20 metres from the M1!
Also look at how many of these industrial estates with the big fancy office building are also springing up all over the place. This suggests a continued expansion of industry and employment, but what about quality of life........

This was all planned 30 or so years ago by the global elite.
 
Let's say fractional reserve requirement is 10%.
You deposit 10K, the bank has to keep 1K in reserve (10%) and can lend out the other 9K - not 100K!. Bank receives interest on 9K and pays you interest at a lower rate on 10K and pockets the difference.

Of course you can cut out the middle man and lend directly eg. through Zopa.

There's a misconception here. Banks create new money out of fresh air and lend it out at interest.

The correct answer is that a deposit of 10k is multiplied by 10 times.

Read this
http://www.startupjunkies.org/TheEarthPlus5Percent.pdf
 
i think you are confusing the Multiplier effect of High Powered Money (i.e. new money printed by a central bank) with a deposit of an individual.

j

This is from time ago 1980s but I thought UK banks had to keep 3% cash and 28% in liquid assets to match their liabilities. :rolleyes:

Does anybody know what the true figures now is?

Can't see a run on the banks here. London is the mother of the global financial institutions. The mother of the mother. Even the great grandmother of the mother of the mother. I'm talking super gran here. :cheesy:
 
This is from time ago 1980s but I thought UK banks had to keep 3% cash and 28% in liquid assets to match their liabilities. :rolleyes:

Does anybody know what the true figures now is?

Can't see a run on the banks here. London is the mother of the global financial institutions. The mother of the mother. Even the great grandmother of the mother of the mother. I'm talking super gran here. :cheesy:

hi atilla,

would agree with that one myself.

I dont know if there is any regulation in terms of reserves, etc for liquidity purposes. however, the Basel committee has regulations capitalisiation that imply (or better) induce banks to keep cash

it has been some time since i have been involved with that, so my answers will be 10 years old. but here you go:

premise is 8% capital on risky assets.
a) cash, short term government bonds, and sovereign bonds (investment grade) have 0% risk weighting (i.e no need to tie capital to it)
b) loans: for every pound the bank lends, at the most 92% can come from deposits, and at least 8% from the banks capital.

so as a result, you have a regulation that induces banks to optimise a portfolio in terms of profitability given a capitalisation constraint. therefore there still exists the equivalent of a "reserve requirement". the question is what % of assets that will be.

hope it helps

j
 
hi atilla,

would agree with that one myself.

I dont know if there is any regulation in terms of reserves, etc for liquidity purposes. however, the Basel committee has regulations capitalisiation that imply (or better) induce banks to keep cash

it has been some time since i have been involved with that, so my answers will be 10 years old. but here you go:

premise is 8% capital on risky assets.
a) cash, short term government bonds, and sovereign bonds (investment grade) have 0% risk weighting (i.e no need to tie capital to it)
b) loans: for every pound the bank lends, at the most 92% can come from deposits, and at least 8% from the banks capital.

so as a result, you have a regulation that induces banks to optimise a portfolio in terms of profitability given a capitalisation constraint. therefore there still exists the equivalent of a "reserve requirement". the question is what % of assets that will be.

hope it helps

j

Thanks Jacinto, it does. It's good to know some of the nitty gritty stuff.:)
 
so as a result, you have a regulation that induces banks to optimise a portfolio in terms of profitability given a capitalisation constraint. therefore there still exists the equivalent of a "reserve requirement". the question is what % of assets that will be.
Developments in the form of CDO's have blown most of this out of the water, banks only need to maintain minimal equity in these vechicles, the rest can be returned as collateral for further loans.

I think the new Basel rules have lifted what little restrictions remain, banks can essentially loan whatever amount that can be supported (or appear to be) by the client, which is exactly what we're seeing from private equity to mortgages at x6 multipules.
 
Developments in the form of CDO's have blown most of this out of the water, banks only need to maintain minimal equity in these vechicles, the rest can be returned as collateral for further loans.

I think the new Basel rules have lifted what little restrictions remain, banks can essentially loan whatever amount that can be supported (or appear to be) by the client, which is exactly what we're seeing from private equity to mortgages at x6 multipules.

fair enough, bugbear, i havent been involved or interested in that stuff for some time now. good to know

thanks

j
 
fair enough, bugbear, i havent been involved or interested in that stuff for some time now. good to know

thanks

j
I think the new Basel rules are only just coming in, ironically they may co-incide with a nice credit crunch :eek:
 
i think you are confusing the Multiplier effect of High Powered Money (i.e. new money printed by a central bank) with a deposit of an individual.

j

Jacinto,

I think you are getting lost in the detail.

The simple fact is that banks create new money. Nothing more, nothing less.

They also create new money which is a substantial multiple of a deposit. Again, that is all you need to know.

If you read the pdf, examples are given to illustrate these two points.

Fibonelli
 
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