BOOM!!!! Financial Meltdown!

[Spatial]

I think there's been a growing gathering of awareness that this was coming for some time amongst anyone who really cared to look. I've been following the economic situation on and off since I started looking at moving house but prices had gotten so insane.

If you read around places like housepricecrash.co.uk for long enough you get to weed out the pious attitude of some of its members and realise which ones are talking the really scary truth about a financial crisis that had been on the cards for some time.

Some people knew. Seems some people (including the Government and Banks) didn't want to know.

Either way it's the totally ignorant sheeple that are going to be caught by this. The ones who think endless credit is for buying everything they want and they don't ever have to pay it back. The people who `need` Plasma TV's, mobile phones and have to drive a Chelsea Tractor to keep up appearances. Those who jumped in to property because everyone else was doing it and told them it was a great and easy way to make a fortune.

In short, people have short memories, markets tend to be cyclical and it's going to be a rough ride.

[Brats]

They say that all the money in existence is created in this way and the only thing of value to back it up is the loan agreement that the customer has signed, not gold reserves or other peoples savings.

Also as all money is created through debts, the interest paid back on top of the initial loan has to be found and created through new debt.

It sounds like a really ****ty system that is destined for a catastrophic collapse, is it for real?

As abigsmurf says, that's not quite right. Another way to explain it is:

Person A deposits ?100 in a bank. The bank can now lend that money to someone else. However it's wise to keep a small amount back to handle any withdrawals, but only a small amount as most people don't withdraw all at once. So they can loan out ?99 of that ?100 to person B and keep ?1.

Now the have lent out that money, that loan has a value. Not realised value, but a potential value, given that it's very likely (in normal circumstances) that person B will pay the bank back.

So they can 'swap' the loan for more cash with another bank. The other bank will want something though, so they might get ?98 cash for their ?99 loan. They can then lend this ?98 out to Person C. This creates another loan worth ?98 and so on it goes. This actually creates wealth amongst individuals. The money does exist because it is borrowed from other banks, but it is true that everything springs from person A's initial deposit of ?100.

It is actually a great system and without it the world would be a much poorer place. The problem is when you start lending to people who can't pay it back. Then the loans lose any potential value and the system falls apart.

[ItsThere]

Brats - just a quick question. Aren't the capital adequacy requirements (as you refer to above) at a higher rate than 1%?

I thought it was more like 15% in the UK to prevent the very market conditions that imho have led to Lehmans collapse.

[ItsThere]

Oh and conversely factoring these debts to the sub prime banking sector has the knock on effect that the smaller banks are more likely to go under.

HSBC will sell their debts for 90% of their worth so that:
a) they can realise cash right now; and
b) they can make further loans (hopefully to those who are more likely to pay it back!

[Brats]

El Leone, if 5% is not inflation, what is? Remember inflation figures are based on the prices of LOTS of products, not just the fact that the price of cod has gone up.

Absolutely. Food and energy prices have gone up, but the price of stuff like mobile phone contracts, broadband, new PCs and DVDs etc have tumbled. People seem to forget about this.

Reading around on the web, there seems a total lack of sympathy for bankers in this and it is understandable. It seems modern capitalism is based on passing risk on to the public sector and taking profit (with a little bit of joyous tax evasion - yes I said evasion - thrown in) to the private sector. I am sick of the way that the corporate sector is set up to take money from the state again and again and used for selfish means. The US corporate sector has been morally bankrupt for some time and I am sure that the people that have had their lives destroyed by the banks profit motives will allow themselves a little schadenfreude.

Modern capitalism is fantastic - provided you regulate it properly. A completely free market leads to too much greed and major cock ups. The twentieth century saw two major world recessions, the depression of the thirties and the end of eighties. Both were caused by the same thing - a relaxing of regulations in the financial sectors that led to a huge amount of wheeling and dealing. This caused an initial period of fantastic growth but both were followed by a period of dire recession. Once the regulations were tightened up, things got back on track.

Without regulation, the financial sector will take any chance it can to make money. In this country we will be better off than most because our regulation is relatively strong. There will be the odd cock up (like the FSA failing to recognise the vulnerability of Northern Rock despite being warned about it) but generally things are pretty tight.

In the US, the Bush administration relaxed all the rules and now we are all seeing the consequences. There's no way that the sub-prime market would have been allowed to happen over here, but in the US it was all fair game.

So the public sector (i.e. the US government) is partly to blame. Yes the banks must take some responsibility, but the financial system is kind of like a hungry pitbull, it will go where ever there is food. If you allow it a long enough leash, then you have to accept the consequencies.

[Space Monkey]

.....

[Brats]

Brats - just a quick question. Aren't the capital adequacy requirements (as you refer to above) at a higher rate than 1%?

I thought it was more like 15% in the UK to prevent the very market conditions that imho have led to Lehmans collapse.

I don't know what they are, but you're probably right. It was just an illustrative example I remember from my old economics studies.

[Brats]

In answer to my own question about what's next, there will be some more financial sector falings, but I strongly suspect at least one major UK high street retailer will go to the wall in the next six months. Some of them are very highly borrowed and when their bank loans are due, they'll find it very difficult to borrow the money any more. And their competitors margins will be too small to bail them out.

[bangaio]

Person A deposits ?100 in a bank. The bank can now lend that money to someone else. However it's wise to keep a small amount back to handle any withdrawals, but only a small amount as most people don't withdraw all at once. So they can loan out ?99 of that ?100 to person B and keep ?1.

Actualy it is a legal requirement to set aside capital. The issues arise when their capital becomes low, liquidity in the interbank market is low and people default on their debt to a commercial bank. This in affect hits the IBs who have exposure to mortgage/asset back securities where the whole efficacy of the deal is based on people paying back loans. As people do so less, more deals go tits up and default or get wound up so there is even less liquidity = more crap for commercial banks.

Of course banks lend between each other but the bulk of this is because of a huge amount of very heavily leveraged debt going into default.

I remember at my old place the we'd have 2-3 mortgages back or asset back deals closing a week to the tune of about $2-300million + every day i'd close anywhere from 5-30 smaller repackaged bonds into the euro market each would be anything from $10-100million. All of these paid there interest because they were funded by more debt of some sort.
`
There was billions and billions of dollars invested in these and when the dabt backing them defaults they are in trouble.

The people who invested in these were other IBs like say Lehmans or Merrills. This is not to mention the derivatives that are linked to these like interest rate or currency swaps.

When you think about it the amount of consumer and other debt packaged this way something had to give.

[dataDave]

lololol I couldn't resist.

[endo]

Why would the bad guy reveal the whole plot to someone who doesn't share his evil, world domination views? The shadowy Nicholas Rockefeller he mentions isn't even a part of the Rockefeller family. Why would he tell him all this if he wasn't part of their club?
Hang on though, he politely declined the offer to get in on the new world order and then blabbed about it on the internet, and now he's dead... supposedly from bladder cancer... hmm, clearly he was silenced!

I'm not surprised he was pissed off at the government though seeing as he owed the IRS 2 million dollars in taxes.

[Richard.John]

Mass hysteria I reckon. So someone says bank XXXX is going to crash so it does as investors jump ship. Not as simple as that of course but what I mean is the stock market depends upon human perceptions of value.

At least the slippery black stuff will drop in price. Food too.

[vanpeebles]

I think a lot of this is due to Globalisation and mega internationals. A strong national company would have no trouble seeing this out but once you have sucked money out of one company and gambled it in another its looking for trouble.

Also the stock market seems to severly over value a lot of companies. One I used to work for recently had their value drop from 700m to 18m. Things need to be priced on what they are worth rather than bull**** investor potential.

[Nijo]

Looks like the House of Representatives just voted AGAINST the $700bn bail-out plan... stock markets going mental.

Who knows what happens next....

[Spatial]

Oof!

But not surprising since it's so deeply unpopular. Hold on because this could be a very steep slide....