Surviving the recession - naim finance?

er... is'nt this why we are now experiencing a credit crunch. Everyones jobs are in question, so handing out credit at this time is fraught with risk.

Why do you think the banks are not lending?
The only thing to do during a recession is ride it out and cut spending!

Regards, Steve

I read last week that this was the reason the US car industry is in turmoil. They make more on the finance than they do from selling vehicles.

We are experiencing a credit crunch because a lot of ratings companies got it wrong about a bunch of complicated financial products that no-one really understood. If they had been properly rated in the first place the credit crunch would never have happened as they should never have been AAA rated as there was clearly a risk of default.

Banks aren't lending because they don't actually have the money to lend. RBS needs 160BN to fill in its holes so you can see the scale of the problem. What really annoys me is that this is all money that banks pulled out of thin air. Then they complain when its gone when it didn't even exist in the first place!

Not handing out credit creates greater risks as everyone stops spending. If everyone started saving instead of spending then the UK economy would just go into a depression. Our entire future depends on making money out of thin air and spending it willy nilly. We don't make any tangible products and those we do are far more expensive than overseas counterparts so the cheapskate brits just buy the foreign imports instead. The only way we generate wealth is through asset inflation. We can do this quite well. All it takes is a bit of paint and a new bathroom. Much easier than trying to revive a lost manufacturing industry

Hiya,
I started a similar thread to this in September, with not much response.
I must admit that for me it would be great right now due to the weakness of sterling and the very low interest rates. Why use my own money when it is so cheap to use some-one elses
The comment about credit getting us into this mess is interesting, a credit card and a gun are similar, neither of them are dangerous in themselves - until you let some dumb b*****d loose with one
Barrie

The trouble is that easily obtaining credit [as has been possible until the present crunch] is just as risky as easily obtaining a gun - the respect for the risk diminishes.

If someone can afford a thing from currently deposited money then that is fine, but simply taking a certain level of earnings as a basis for obtaining credit is madness, as none of us can be certain that we shall retain emplyment over the term of a finance agreement in the current situation. Anyone who thinks we are approaching the end of the decline would do well to consider the fact that Sterling is still sliding in value ... There might be a good reason for that ...

Borrowing for luxury items is nigh on a certifiable action in good times, but in the current climate is certainly completely bonkers ...

With regard to the financial health of manufacturers of luxury items like Hifi or deluxe cars, then one must hope that good reserves of capital have been built up over the good times in the last 12 or 15 years.

As purchasers of luxury goods, there is absolutely nothing extra we can do to help manufacturers at a personal level. If we can afford a luxury item, and want it then buy it, but getting into financial hock for something we might desire [but cannot afford to buy outright helps nobody if the result is bad debt ...

George

I agree to that borrowing, if you do not have the money to pay it off is not good, however if you actually have the money in your bank, but to choose to keep it and use someone elses cheap money(@3.5%) is sensible ( a bit like keeping your mortgage going when you could pay it off).
It's when you live your life on credit that it is suicide, I must admit personally I don't like to borrow I'd rather save up and really consider who to spend my hard earned cash with.

I also think easy access to money will not be around for a while, which in the long term is a very good thing

At risk of being a dissenter here I think the world would achieve much slower progress if people, organisations, governments don't borrow to finance spending. The huge rise in living standards in the Western world since the 1940's has been due to people borrowing money to invest in things.

As an example I'm pretty sure Dyson vacuum cleaners were financed by venture capital and credit when setting up manufacturing facilities. Their product was bought by a large proportion of customers on credit and the shops that stocked their products probably relied on mortgages and loans to operate.

To deny this system has served us well for 50 years (or longer) seems ridiculous.

However, I am not defending mindless borrowing and lending, but I would have thought sensible borrowing is in the interests of everyone.

I'm not sure Nasa could have put a man on the moon if we didn't borrow to do it and certainly Concorde would never have flown without borrowed money.

Jonathan

So that over the last 60 odd years borrowing has grown till it crippled the economy ...

But that is alright ... we can just leave the next two or three generations to pick up the tab for the last two or three ...

Or did I miss something there?

George

Borrowing and using credit is a smart move when you can put someone else's money to your use to build a business etc... However, when individuals, companies do this it is supposed to be based upon what you expect as either a sensible return on the money or more commonly the profit expected to be derived by your business from the investment of that money and not based upon the rate of return that you "need" in order to cover or finance the loan.

Furthermore, too many people used credit to buy things that they knew they could never afford and had no intention of paying off and expected to just pay the mininum payment and drag it out forever or until such time that they hoped to have the money to pay off the debt. Unfortunately many people also took out additional mortgages and refinanced to capture increased value of their homes and not to use the money sensibly, but just to fund unnecessary purchases of goods that they didn't need.

Many countries also exist on credit - and I don't mean just little ones, God help the US, amongst others, if they had to repay their borrowings.

Ref the re-mortgaging sickness I agree totally, I really feel that it was hyped by the press and carried out by people who were naive or just damned optimistic about house prices increasing forever. We have had these re-alignments every 10 years or so, it is just that this time people had allowed their borrowing to get out of hand and there was actions carried out by some banks and government oversight bodies which can only be described as criminal

I think it will be a more thoughtful and careful world after we get through this. Maybe people will realise, as Gary1 says, that they do actually have to pay there debts back, and they can't rely on good luck with house equity to see them through this.

Barrie

Barrie, I'm not so sure. Three issues really:

1. Entitlement- which will not disappear due to economic downturn. maybe only temporarily until things rebound and people see better times ahead.

2. Bankruptcy and start over again. If people who just overspent themselves , as opposed to people who had real economic crisis events occur, were prevented from deing discharged from their debts this might really change their behavior going forward. If you can be discharged and start with a clean slate then you can styart all over again.

3. How much credit are credit card companies going to allow going forward? Are they going to give people higher lines of credit just to drag out interest payments and increased profit for the cc company or will they act more responsibly and limit credit based upon the usual factors that they should be looking at. Remember during this last "cycle" the cc companies were giving higher lines of credit and cards to people with with little to no assest than they were giving to people who had a track history of re-paying their debts all in an effort to jack up profits and returns. This obviously backfired in a big way at the end of the day or did it? We'll actually never know how much the cc companies really made or lost on what's occurred. Remmember JP Morgan which got a big gov't handout owns one of the biggies (can't remember whether it is visa or mc) which may have covered some/much of those potential losses.

Hi everyone

Over the last 10 years this growth has occurred off the back of increasing house prices i.e people have been using increasing equity in their house as a bank.

Problem is that all of the financial institutions became greedy lending to absolutely anyone - the banks made their money, the lender received their funding for a house and Mr Brown creamed off the stamp duty. It was in nobody's interest to stop this.

Apparently this "crunch" was caused by vast quantities of chinese money flowing into the USA and the banks were lending to NINJAS - NO INCOME, NO JOB or ASSETS.

These people obviously defaulted whilst the reast of the finance industry bought a chunk of debt not knowing whether it was good or bad.

I personally am not against sensible borrowing , but lending someone seven times their annual salary to buy a house with no deposit is financial suicide. Problem is the next person needs eight times as demend further outstrips supply.

My personal view is that house prices have some way to fall yet and it will be painful for many people as unemployment and repossessions rise. You now need at least 25% deposit for virtually any mortgage and banks etc are still rebuilding their balance sheets.

Once people have paid off some of their debt you will probably see the economy pick up, but only if the banks are prepared to lend other than to people with a perfect credit rating.

Trev

Trev, you are correct. As with evrything the correction tends to overshoot the problem. Hence the reason why banks are "hesitant" to lend to less than perfect customers. They are however, overcharging those customers in an effort to make up for some of their losses and to also act as a counterweight against loans that they are unwilling to make to the less than perfect customer. I know of people who have turned down or decided against loans that they qualified for because the banks were raising their rates to unacceptable levels even at a time when banks are getting that money essentially for free.

Hi Gary

Yes , I have heard this too. A problem is the banks' definition of a perfect customer. I have heard stories about people not paying their gas/electric/telephone bills on time, receiving a reminder, then paying. Apparently the banks have access to this information and have been refusing loans/mortgages based on this???

Trev

It will sson be the cases, as in olden times, where credit will be the presserve of those who do not need it.

I suspect that this is the only really sustainable situation ...

ATB from George

quote:

non appreciating assets

That's an oxymoron.

Caused most of the issues to date emthinks!

Yep. I always cringe when I hear someone say that their house is (was? ) "worth" a lot more than they originally paid. Value and Price are two different (but admittedly related) concepts; as was proved so dramatically in 2008.

I would think that basic essentials like a house to live in, a chair to sit on, a loaf of bread to eat, a glass of water to drink, all have inherent value, and the amount of money they might cost to buy really suggests the value of money rather more than monetary costs pointing to the value of essentials.

As housing has risen in the number of GBPs required to buy, them all this suggests to me is that the money we are paid for working is worth rather less than previously. If you have to borrow six times your annual salary to buy a house when previous genrations in similar work only had to borrow three times to get a similar house then one might assume that the money has been devalued - and in the current situation distorted in the late credit bubble.

The correction is going to be very painful for those who borrowed against paper monetary valuations of existing real assets, and who still have the repayments to make against distorted over-valuations.

ATB from George

Yes George, absolutely true. It's not too hard to see that prices have gone up much more than the real growth in wages over the last 30 years. When I was a kid almost all of my friend's mothers were stay at home moms and we all lived well with our Dad's single income. This is not meant to be a chauvinistic repsonse in any way just a statement of the facts. Today many/most people need the second income to live the same lifestyle or since the cost of daycare/nanny has gone up so much often the parent with the second job stops working since they actually lose on the equation. Very difficult choices.

I see this situation only worsening. Look at the value of a typical college education. After WWII the GI bill etc.. everyone wanted to go to college and it was a ticket to a good paying job and a future. Now the cost of college has so far outpaced what most people make that you even have to question the "monetary value" of that educational investment vs. your expected income unless you then go on to graduate school which adds considerably to the overall cost. I am a firm believer in education for a whole host of reasons, but looking at just the numbers many people are better off getting a lower cost trade education and going to work.

I'm sure that there are many reasons for this shift and alot of it has to do with the excessive borrowing and spending that all of our govt's have done during the last 30 years without any thought of restraint, cutting etc... This has one direct effect no question and that is the ever increasing "real tax burden" that we all face when all taxes are thrown into the mix. Not to mention currency devaluation etc... Furthermore college education has increased at a rate of 8-10% per year far outpacing inflation or wage growth during the same time period. Anyway you get the idea.

quote:

Yes George, absolutely true. It's not too hard to see that prices have gone up much more than the real growth in wages over the last 30 years. When I was a kid almost all of my friend's mothers were stay at home moms and we all lived well with our Dad's single income. This is not meant to be a chauvinistic repsonse in any way just a statement of the facts. Today many/most people need the second income to live the same lifestyle or since the cost of daycare/nanny has gone up so much often the parent with the second job stops working since they actually lose on the equation. Very difficult choices.

I have to agree with you here, guys. I was a kid in the 1960's people lived in houses, had car's, watched TV, had food on the table and where properly clothed. Most people still lives in houses that where already built in the 1960's! And as you say, most of the time it was done on a single income.

So, what's better now? Not much, the only things we have now, that I can think of, that didn't exist in the 1960's is mobile phones (car phones actually existed in the 1960's) and the internet. On the other hand, in the 1960's we could watching people walking on the moon live on TV and looking forward to super sonic passenger flights! That's gone now and won't happen again during my lifetime.

JohanR

It seems that people expect to own much more these days, everything is a right, and hopefully you don't need to put in too much effort to get anything, it seems saving and looking forward to buying things is in the past, it is a "want it and want it now" society
Business / media/ government has done a fantastic job of creating their ideal consumer groups, buy today and pay tomorrow - however for many people Tomorrow has just arrived with the bill.

quote:

buy today and pay tomorrow - however for many people Tomorrow has just arrived with the bill.

Very well put, Baz!

JohanR

quote:

It seems that people expect to own much more these days, everything is a right, and hopefully you don't need to put in too much effort to get anything, it seems saving and looking forward to buying things is in the past, it is a "want it and want it now" society

So, people expect to own too much eh? That's it set your personal expectations low and don't ever think about having aspirations, jeez.

Get a grip, sure there's a recession on and it will hurt for a while but it will get better and you just ride the waves and take the rough with the smooth.

Last time I looked the end of the world wasn't nigh.

Jim

Thanks Jim,
This is sod all to do with normal aspirations this is about wanting things for the sake of it, without understanding consequences ie you have to PAY for them - please do not confuse aspiration with stupid greed
Barrie

Barrie

One persons aspiration is another persons stupid greed is it not? Who defines greed, the person who is perhaps envious of others progress in the world? Is there a defining line that separates the two? It's an individual judgement call is it not?

Were there corporate excesses in the financial world that equated to stupid greed? Almost certainly but 99% of the people who now take the moral high ground and complain about those excesses would have done exactly the same thing had they been in the position to capitalize on the opportunity.

My apologies for coming across so strongly in my last post - that's what happens when you just bash stuff out!

Jim