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.
But what solutions to these problems are 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.
As a second move, the US and UK have proposed enormous bailout packages which are too
intricate and complex to be explained here. The simple explanation is that they want to buy
into these financial institutions with tax payers' money. It is unclear if this will prove an
effective measure, as only time will tell if this move is a good one or not. If this move does
nothing to get the liquidity of the markets moving again, probably not, as the stagnancy in the
movement of money at the moment is likely to put us all in to the worst recession the world
has ever seen.
One thing that is painfully clear is that banking as we currently know it has got to change
radically. There is a considerable amount of regulation at play at the moment, but in my
opinion as a financial advisor, there is not enough regulation being focused in the right areas. I
very much doubt that any of the major large money lenders of the world has been as
rigorously scrutinized as they should have been over the last ten years as this may have been
seen to be restrictive practice. But let's be honest, if that were the case, would be in the mess
we are in now? If the lenders had been properly questioned when it came to giving out money
to bad debtors, if that money had never been given out, if the lenders hadn't dropped their
criteria so dramatically, would house prices have gone so ridiculously high and would we be
facing the worst recession in history? What do you think!? - 15465
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.
But what solutions to these problems are 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.
As a second move, the US and UK have proposed enormous bailout packages which are too
intricate and complex to be explained here. The simple explanation is that they want to buy
into these financial institutions with tax payers' money. It is unclear if this will prove an
effective measure, as only time will tell if this move is a good one or not. If this move does
nothing to get the liquidity of the markets moving again, probably not, as the stagnancy in the
movement of money at the moment is likely to put us all in to the worst recession the world
has ever seen.
One thing that is painfully clear is that banking as we currently know it has got to change
radically. There is a considerable amount of regulation at play at the moment, but in my
opinion as a financial advisor, there is not enough regulation being focused in the right areas. I
very much doubt that any of the major large money lenders of the world has been as
rigorously scrutinized as they should have been over the last ten years as this may have been
seen to be restrictive practice. But let's be honest, if that were the case, would be in the mess
we are in now? If the lenders had been properly questioned when it came to giving out money
to bad debtors, if that money had never been given out, if the lenders hadn't dropped their
criteria so dramatically, would house prices have gone so ridiculously high and would we be
facing the worst recession in history? What do you think!? - 15465
About the Author:
Mortgage Route gives assistance help and mortgage advice from fully trained mortgage brokers coupled with no obligation mortgage calculators and sourcing tools.
