A week ago this post might've been a bit more pessimistic, it's been all boom & gloom, we've had bail outs & rescue packages with plenty of anger and un-certainty. An email doing the rounds this week, summed up plenty of feelings :
"If anyone has difficulty understanding the current world financial situation and shoring up the banks, the following may help.... Once upon a time in a village, a man announced to the villagers that he would buy monkeys for $10. The villagers seeing there were many monkeys around, went out to the forest and started catching them. The man bought thousands at $10, but, as the supply started to diminish, the villagers stopped their efforts. The man further announced that he would now buy at $20. This renewed the efforts of the villagers and they started catching monkeys again. Soon the supply diminished even further and people started going back to their farms. The offer rate increased to $25 and the supply of monkeys became so little that it was an effort to even see a monkey, let alone catch it! The man now announced that he would buy monkeys at $50! However, since he had to go to the city on some business, his assistant would now act as buyer, on his behalf. In the absence of the man, the assistant told the villagers: 'Look at all these monkeys in the big cage that the man has collected. I will sell them to you at $35 and when he returns from the city, you can sell them back to him for $50.' The villagers squeezed together their savings and bought all the monkeys. Then they never saw the man or his assistant again, only monkeys everywhere! Welcome to WALL STREET. "
For years we've all enjoyed a credit boom generating as a nation over a billion pounds of personal debt. As the property market has risen it has been only too easy to take out loans, credit cards and of course mortgages. Coupled with low unemployment, low interest and inflation rates, all seemed rosy. We seemed to have learnt from the decadence of the 80's but are we still all about to suffer?
As the American sub prime market has collapsed this has obviously had a knock on effect here, not just because plenty of our banks have invested in this but because they also have lent irresponsibly themselves. We've seen the nationalisation of Northern Rock who themselves famously once had a 125% mortgage, the collapse of Bradford & Bingley's buy to let market, presumably because these landlords over stretched themselves and plenty of banks would've sold you a mortgage between 5 & 10% of your annual salary especially in places like London.
There's an old saying: "when America sneezes the world catches a cold" and as our own government cracks out the Beechams, as in any epidemic you wonder about the vulnerable. I think most of us have little sympathy for the banks and executives who continued to pay themselves excessive wages & bonus's and few of us will have invested that much in the stock market, (my own modest investment of company shares will have lost hundreds rather than thousands) but most of us will see the effect dilute to all of us if not already. For those about to retire they will either have to bite the bullet or keep working, eight out of ten pension schemes are now in the red with a shortfall of 44 billion pounds, house prices are already falling, it's already harder to get the loans and money so readily available only a short time a go. Unemployment is up, food costs are up and as previously mentioned in this blog utility prices are at a record premium, although with the price of oil falling there is a chance we will at least see the price of gas & electric reduce, but when the likes of my beloved West Ham feel the heat you know it's serious! First the collapse of shirt sponsor XL now our beleaguered owner has had his Icelandic bank bailed out and has been sacked from the board of directors by the Icelandic government and he is not alone. Chelsea's Roman Abramovich has lost an estimated $230 billion dollars in the last five months, Newcastle's Mike Ashley's Sports Direct company is now only worth 168m pounds compared to 1.7 billion in February and the FA chairman Lord Triesman has recently warned that the domestic game is 3 billion in debt.
So how much will all this cost? The global bail out is estimated to be reaching 1.9 trillion pounds,(to put in perspective this is 36 times the aid sent by the richest nations to the poorest each year) with the UK tax payer paying close to 40m, which will cost us individually thousands which will have to be clawed back in one form or another. As for how long this will last it could be anything from two to ten years.
I've always joked about being a glass half full kinda guy and the other side of the coin is maybe things aren't quite as bad as some of the media are making out? House prices seem to be dipping rather than crashing, (depending on where you live) and if you've owned your property for more than a couple of years there's a good chance it's still worth considerably more than you paid for it, the same could be said for any shares that you've owned for awhile. Credit is indeed harder to get, but if you have a good credit rating and have adopted a sensible approach to borrowing, it is still readily available at competitive rates. If there's one thing this crunch will force us to do, is review our finances and budgeting.
Cup of tea anyone?
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