How does the credit crunch affects the average person?

ali82

I think that is unfair, everybody is entitled to their say, if you look at his signature he is in debt not like that makes any diffrence. I started this thread to get a better understanding of what is going on from all diffrent types of people.

Thanks for sharing your stories

ZTD

Sorry about this - it's long and boring, but the whole situation is long and boring...

There are two separate issues here: One is the credit crunch, the other is rising prices. They are related, just like the crankshaft and the tyres are related on your car. Sometimes they move together, sometimes they move in opposite directions - but one is usually influenced by the other.

Rising prices: When the Government refers to inflation - they are referring to a "wage-price spiral" (actual inflation is something different and always the Governments fault - hence the obfuscation).

What happens in a wage-price spiral is that prices go up, so people ask (and get) more money. This makes prices go up (because there's more money), so people want higher wages, etc etc. The way you fight this, is that you make people unemployed. The "survivors" tend not to ask for wage rises then.

So when the Government talks about "fighting inflation" - they're talking about making a certain proportion of the workforce unemployed, and the other proportion of the workforce unable to buy as much as they once did (because prices have gone up, but not wages).

Credit crunch: This is a euphemism for a part (and only a part) of a general banking crisis. The current form it is taking is that banks are unsure about the survivability of other banks, so the intra-bank lending market has dried up. So banks no longer lend to one another. Big deal. Banks have other sources of finance whether it be repos, borrowing off Central Banks, rights issues or whatever. The credit crunch is like the barking of a big dog. Noisy, inspires fear, but it actually harmless. It's the bite that hurts.

The bite is the survivability of the banks.

In a fractional reserve banking system, banks can lend money provided they have a certain fraction as a reserve - hence the name. So, for example, any bank can lend £100m, provided they have £10m in real money deposited with the central bank (assuming a 10% reserve ratio). All fractional reserve banks start off being insolvent (their liabilities exceed their assets), but provided they don't exceed them by too much (10 times in that example) then the Government allows them to continue to operate. If they exceed that, then the Government should (note this word) close them down.

There is a wrinkle with this, which I'll come to later.

There's only one way that banks can exceed their liability/asset ratio, and that's if the value of their assets goes down. There's two ways that can happen - either the borrower defaults and so the "asset" that is the loan is then valued at zero, or the assets that the banks hold in their own name - such as shares or bonds - are devalued.

The rise in bankruptcies affects the first. "Market conditions" affects the second.

Now the wrinkle. Not all lendings are subject to the reserve requirement. Derivatives for example are not. But *all* losses are taken out of reserves. So losses in derivatives dimish the reserve ratio - but the derivatives were never constrained by the reserve ratio, so could be theoretically infinite. With of course infinite losses.

World derivatives total $660T the last time I looked. They were doubling every few months (again the last time I looked). Global GDP is $44T (approx).

Banks in the US have negative reserves (taken as a whole). Their Government has not shut them down. I see our banks and Government going the same way.

I hope I've explained that well enough.

Snaggles

I work as an underwriter, and am seeing more and more of the 'borderline' credit decisions being declined rather than accepted. My employer is a major high street bank (one of the more/most solvent ones), and our appetite for lending has reduced, criteria tightened up etc. We are checking for reasons NOT to lend, rather than looking for reasons TO lend.

Some banks have basically closed their books and are not taking on any new lending at all.

The general consensus of opinion in the banking world is that we will hit recession next year, but will bounce pretty quickly into recovery, albeit a slow recovery.

One thing I have noticed is that people are grabbing at fixed rates, even if there are huge arrangement fees - people are panicking and asking for fixed rates even when the fees massively outweigh potential savings unless the interst rate more than doubles in the next two years. I have seen a customer with a £35k mortgage paying £1500 to fix their rate for 2 years at 5.99 (and yes, we did point out the fact that it would probably cost them a huge amount more than they will save).....there is little or no chance they will ever recoup the arrangement fee even if rates skyrocket. An extreme case maybe, but people are genuinely scared.

arthurdick

what i have noticed since passing my test, the price it now costs to fill my motor up, is more than i paid for my first car, when petrol was only 70p per gallon..ok ok that was 30 yrs ago, but over the last 3 yrs i have noticed how much it costs to fill up a 5l can, when it nearly hits £7 to get 5l's it makes you think.....we are working more for less money each yr, and it cant go on.. my wages have more or less stayed the same over the last 5 yrs, and its getting near to thinking about downsizing, just to carry on living..its a bleeding joke....oh well, my morning moan over with, time to go and earn enough to fill my car up

emmy05

regarding the car tax, it really doesnt make sense, the family car costs more to run in 2010, so car sharing will just be a load of b0ll0x. best to use more smaller cars on the road now? gordon brown needs to be replaced, and quickly!

Bambywamby

I can see exactly what Siross2203 means, yes the press do paint everything with a doom and gloom brush - reason why I haven't bought a paper for the last three years and just watch the news headlines once a day - any more than that and I would be clinically depressed.

I agree with him that the economy moves in cycles - since the beginning of financial times there are booms followed by slumps and back to booms again. So it's a must that we tighten our belts, think and plan carefully and wait it out. Things WILL get better.

And finally, for such a young man I think he sounds a lot wiser than many people of greater age.

Keep optimistic Siross, it is probably a large contributing factor as to why you are successful at such a young age. Good on you. x x

barnaby-bear

Snaggles wrote: »

I work as an underwriter, and am seeing more and more of the 'borderline' credit decisions being declined rather than accepted. My employer is a major high street bank (one of the more/most solvent ones), and our appetite for lending has reduced, criteria tightened up etc. We are checking for reasons NOT to lend, rather than looking for reasons TO lend.

Some banks have basically closed their books and are not taking on any new lending at all.

The general consensus of opinion in the banking world is that we will hit recession next year, but will bounce pretty quickly into recovery, albeit a slow recovery.

One thing I have noticed is that people are grabbing at fixed rates, even if there are huge arrangement fees - people are panicking and asking for fixed rates even when the fees massively outweigh potential savings unless the interst rate more than doubles in the next two years. I have seen a customer with a £35k mortgage paying £1500 to fix their rate for 2 years at 5.99 (and yes, we did point out the fact that it would probably cost them a huge amount more than they will save).....there is little or no chance they will ever recoup the arrangement fee even if rates skyrocket. An extreme case maybe, but people are genuinely scared.

I have to say the downturn in the housing market and the gloom news is lovely, we managed to afford our first house a few years back but it was less than ideal and we have lots of friends priced out and demoralised, having to move on one short term contract after another, contracts forbidding kids, to put up a shelf, pets etc... the best thing is all those smug baby boomers who did so well out of the boom harping on about using their equity to buy a BTL (that didn't make sense yield wise) that they'd rent out to some young couple on draconian terms constantly harping on about their 'financial sense', 'appreciating assets' etc have finally shut the F&ck UP :T and it's with glee I hear them moaning the rent doesn't meet the mortgage and they can't sell because the tenants in place and the BTL is falling in value :rotfl:

kel123_2

There is also profiteering inflation - today I had to buy a head light bulb, it cost £8 last year the same bulb (oppersite side) cost £4.50. Greedy Brits in rip it off Briton. when we we learn?