In These New Times

A new paradigm for a post-imperial world

Milk with your Credit crunch?

Posted by smeddum on October 26, 2008

Milk with your credit crunch?
by MICHAEL CARABOTT Malta independent online

What’s the capital of Iceland? About e2.50. Milk with your credit crunch? What’s the difference between an investment banker and a large pizza? A large pizza can feed a family of four.

These are just some of the jokes doing the rounds in the UK at the minute. But despite the stiff upper lip and the Britons’ uncanny ability to take it squarely on the chin and get on with it, the mood is very bleak.

I was recently in the UK visiting family and friends and it had been a good six months since I was last there. I have never seen a country’s mood change so quickly – the change is massive. No doubt, everyone has read column upon column of text about the crisis… from the sub-prime mess in the States to the collapse of Lehmann and now the meltdown in the UK. It must be said, it is all very boring and despite the best efforts of financial analysts and experts to put the problem into layman’s terms, no one seems to have done a good job at explaining it.

Ok… so, we are headed for a global recession. Experts will tell you that recession is defined as two consecutive periods of negative economic growth… Not very enlightening is it.

So what is a recession? Sky News hit the nail on the head. Think of a factory. Buyers have no money (because there is no credit to be had), so the factory produces less. If the factory produces less, then it has to lay off workers, as they are not needed. If the factory produces less and there are less people with money to spend, the cycle just spirals downwards.

Everyone I spoke to in the UK is extremely worried. With “modern” banking at its height, people were accepting shares in companies rather than the “boring” old interest rates offered by banks. With hindsight… it was a case of mass financial suicide. People across the board have lost thousands of pounds and if we go back to our factory (or property developer, or shop floor, or bathroom fitting company), you can clearly see that the six million unemployed figure by the end of the year is very probable.

People are worried. They do not know where the next pay cheque is going to come from and they don’t know how to pay off the masses of debt they racked up during the “credit no problem” honeymoon period. Make no mistake – the pressure was ridiculous. Just six months ago in the UK, you could walk down a high street and be offered credit cards as if they were sweets. 10k limit… no problem… and that’s where the problem lies. Credit was far too easy to obtain and it just created a habit. People forgot that it was not just the interest they had to pay off, but the lump sum as well.

A friend of mine has a baby on the way and just one month ago, a reputable bank tried to push him into taking out a mortgage that was way beyond his means. When he pointed this out, the advisor told him it was no problem, he could get him an unsecured loan to cover what he could not make up… It’s sheer folly. With hindsight it is easy to see just how the UK got into this mess, but habits are hard to break. Ironically, it is becoming very difficult to acquire credit in the UK now, and they are going back to the system of one third of your take home pay maximum for a mortgage, as well as vetting your income before issuing credit cards (just like we have here). Thank God for Malta’s reluctance to join the financial credit bonanza of the 1990s and early millennium. Our banks are sound, but we will not escape the fallout.

What is perplexing however is Gordon Brown’s brief surge in the polls. He has closed a few percentage points on his rival David Cameron, reason being his handling of the crisis. This truly does baffle. Do the Brits remember that Gordon Brown was the free spending chancellor for over 10 years who “liberalised” the financial markets? Regulatory measures were grossly misinterpreted and even disregarded and these were all due to Mr Brown’s reforms. Spilt milk with your credit crunch at all?

Mr Brown sold half the UK’s gold reserves to boost the credit mania that fuelled what can only be termed as a fake economy. I remember my grandmother imparting a shot of her 79-year-old wisdom a few years back when she said that credit at the levels it was being given out was simply unsustainable and that people would eventually have to pay off their debts. How right she was, and still is.

To close, I would like to sound a warning. Our banks, as we have said, are sound. But what about our economy? Foreign Direct Investment is going to dry up – that is fact. The money is simply not there and businesses are cautious. That means our economy is going to slow down because less money will be pumped into it by the private sector. Luckily, we have a lot of EU funds to spend so the government will be spending on public projects, meaning that work and contracts will still be there to be had.

But, let’s go back to our factory. Instead of looking at fewer orders, let us take the water and electricity tariffs and apply the same principle as before. Electricity and water rates will shoot up. That means the factory has less money to spend. People have less money to spend because they are paying more for water and electricity. Lay offs will be inevitable, as we have already seen, and we will be in a very real danger of going into recession.

Make no mistake, tough times are ahead and anyone who believes that we can be shielded from them is a fool unto himself.

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