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Thread: Global Financial Crisis

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    Hall of Fame Member Goughy's Avatar
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    Global Financial Crisis

    I know we have mentioned it previously, but a new thread is due as the situation worsens.

    Poor politics, poor decisions, poor policy and poor management.

    Apologies for the brevity but here is a brief outline of what happened. There are secondary factors I'm skirting around but I think this is a fair summary.

    I know most will have a good idea of happenings, but this is just a catch-up, in my own words, for some that may not.

    Summary

    By 2005 there was an over supply of houses in the US. Too many were being built and the growth was not sustainable etc. An era of rapid house price increase was looking to come to an end. Rapid growth that was partially feulled by a lack of faith in the stock market and the desire to invest in tangible areas. 40% of US home sales were not for living in by the buyer but as investments or holiday homes.

    As house prices rose, people increased their debt as credit drawn against their homes and consumer spending increased. People borrowed rather than saved at rates never previously witnessed.

    When the house prices started to fall delinquencies increased. Many of these were sub prime mortgages (ie mortgages given to people that previously would not have qualified). There was a Clinton initiated drive to enable more minority and low income home ownership and sub-prime lending was encouraged. However, with the flow of credit available, lenders were irresponsible. Some numbers put these sub-prime mortgages at 6% of the market but nearly 50% of the foreclosures.

    This in itself would have been a problem. Ie a large number of mortgages going into delinquency. However, this problem was compounded by 2 related factors both of which were products of poor management and regulation.

    The thread that connects the two following factors is that banks can only legally lend 10x the capital it has on its balance sheet. Ie if a bank has $10 it can lend $100

    What then happened was that banks found ways to hide these sub-prime loans from the balance sheet. They packaged them and sold them. These loans were still in the system but didn't count on their balance sheet and they were then free to make more loans. This was called "securitisation" and everyone (other banks, pension funds etc) bought them. Basically banks could make many more loans than they were allowed and sell the loans to others. When these loans went bad it impacted every sector that bought them and showed that high levels of bad loans had been made. Billions were lost in what turned out to be near worthless investments.

    There were also other ways to hide bad loans as well as banks keeping some of them on their books. When people started defaulting it hit hard. If a bank lost $1000 then it lost $10 000 of loans it could make. Every dollar lost meant $10 that couldn't be loaned.

    So banks had thousands of terrible loans that were costing them billions which in turn meant that they couldn't loan any money.

    At the same time the housing market is still weakening and more foreclosures in other areas are on the horizon.

    So many billions of dollars of wealth have disappeared and there is no money to borrow. A credit fuelled economy has ground to a halt.

    Obviously many factors play a role. From bad oversight, bad planning and bad policies.

    How does this impact the rest of the world? Well the US wasn't the only country riding a property bubble, the banking industry is quite incestuous and interconnected, the credit boom was heavily financed by large inflows of foreign funds and many non-American investors bought the packages of bad loans.

    So, how is it effecting your lives?
    Last edited by Goughy; 06-02-2009 at 05:59 AM.
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  2. #2
    Hall of Fame Member Goughy's Avatar
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    From my own point of view, Im not directly impacted though my parents and my in-laws both are.

    Im not a fatalist in the slightest. Im always very optimistic about things like this but my (well qualified boss) believes that the global economy is about to fall off a cliff and we are to enter unchartered territory with Britain being the first to go down.

    To be fair, even for those moderately relaxed about the whole thing like myself, I wouldnt want to be retiring after having half my pension fund wiped out or selling a home right now.
    Last edited by Goughy; 06-02-2009 at 03:55 AM.

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    Haven't been affected in the slightest, other than fluctuating petrol prices.
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    World Traveller Craig's Avatar
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    It's bit of a concern for me as it is a bit quiet and they are looking at further job cuts. In saying that, I think within the next few years it will pick up again, but I suppose it will get worse before it gets better. I personally take what any economist says in the press and on TV with a grain of salt, because if humans could see into the future, this never would have happened and nor would anybody would make any money, as nothing would happen.
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    Has affected me indirectly as my mates are finding it hard to get jobs. Not to mention that several thousand Indians have been retrenched overseas, and it's really sad to see them coming back to almost nothing here.

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    Hall of Fame Member Goughy's Avatar
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    Quote Originally Posted by Craig View Post
    It's bit of a concern for me as it is a bit quiet and they are looking at further job cuts. In saying that, I think within the next few years it will pick up again, but I suppose it will get worse before it gets better. I personally take what any economist says in the press and on TV with a grain of salt, because if humans could see into the future, this never would have happened and nor would anybody would make any money, as nothing would happen.
    It will certainly get worse. How bad though? That is the question.

    Will we see a major Western European country do an 'Argentina'? If we will, who will it be?

    Of the major nations Britain is probably most at risk. Massive government debt, a global financial captial that has all but collapsed, a generation long destruction of key strategic domestic industries, a complete reliance on imported goods and a falling currency.

    Its a bad time to be British right now as poor long term policies have made the country very vulnerable to this type of problem. Moreso than countries like the USA or France.
    Last edited by Goughy; 06-02-2009 at 05:02 AM.

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    Might see Britain finally falling into the hands of Eurocorp... Not a bad thing to happen imho. And in case of US, Prez Obama is giving none confidence with his repeated warnings of a major economic slowdown.

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    I've been lucky in chosing a good time to return to South Africa, due to our past isolation from the rest of the world we are not quite so dependant on the rest of the world for our finance and credit, we continue to be relitively self sufficient, our economy is still growing and times don't look quite so bleak as they do in more developed countries. Our finance minister who is no mug and has presided over years of growth predicts a slow down but not a full blown crisis.. We are also benifitting from a culture that does not borrow and spend but one that earns and saves, it is for example a lot harder to get a credit card here than other places where they are literally forced upon you.. Our brain drain where we have lost a lot of skilled labour to the UK and other countries appears to be reversing into a bit of a brain gain, professionals are realizing that the grass isn't necessarily a lot greener overseas now, and many people are struggling to find places overseas.. Cranes are all over town, a lot of building is going on, the VW factory in Uitenhage has announced cuts, but I think that is about it, these are still tentitively good times here.. I hear absolute horror stories from the UK, 1600 job losses a day, entire streets with shops boarded up and even snow..
    Last edited by Langeveldt; 06-02-2009 at 05:32 AM.
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    Hall of Fame Member Goughy's Avatar
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    Quote Originally Posted by Langeveldt View Post
    I've been lucky in chosing a good time to return to South Africa, due to our past isolation from the rest of the world we are not quite so dependant on the rest of the world for our finance and credit, we continue to be relitively self sufficient, our economy is still growing and times don't look quite so bleak as they do in more developed countries. Our finance minister who is no mug and has presided over years of growth predicts a slow down but not a full blown crisis.. We are also benifitting from a culture that does not borrow and spend but one that earns and saves, it is for example a lot harder to get a credit card here than other places where they are literally forced upon you.. Our brain drain where we have lost a lot of skilled labour to the UK and other countries appears to be reversing into a bit of a brain gain, professionals are realizing that the grass isn't necessarily a lot greener overseas now, and many people are struggling to find places overseas.. Cranes are all over town, a lot of building is going on, the VW factory in Uitenhage has announced cuts, but I think that is about it, these are still tentitively good times here.. I hear absolute horror stories from the UK, 1600 job losses a day, entire streets with shops boarded up and even snow..

    Yeah, SA will be pretty unscathed, though by luck more than good judgement.

    There is already near 40% unemployment, there is no manufacturing base to speak of and what there is is declining and only 12% of the population have access to financial markets.

    SA has bigger fish to fry with the crime rate, HIV epidemic and ensuring a stable political system before it needs to worry about the crisis. Though it will still hurt a little.

    SA is also helped by its raw material deposits.

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    Quote Originally Posted by Goughy View Post
    It will certainly get worse. How bad though? That is the question.

    Will we see a major Western European country do an 'Argentina'? If we will, who will it be?

    Of the major nations Britain is probably most at risk. Massive government debt, a global financial captial that has all but collapsed, a generation long destruction of key strategic domestic industries, a complete reliance on imported goods and a falling currency.

    Its a bad time to be British right now as poor long term policies have made the country very vulnerable to this type of problem. Moreso than countries like the USA or France.
    We're most in the plop of the G7/8 countries, but obviously Iceland has basically gone to the wall already and the once envied Celtic Tiger economy of Ireland is even more screwed than us. They owe far more as a country than the national assets are worth, so if the debtees start to call back the loans they're ****ed & will be the next destination for the guys from the IMF.
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    I work in a recession-proof industry (unless it's a major, major depression) so hasn't really affected me that much. Would love to get permanency though, would make matters a lot easier.
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    Eternal Optimist / Cricket Web Staff Member GIMH's Avatar
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    I'm hugely affected in many ways, don't wish to go into any specifics, but the 'current economic climate' is a phrase I am growing to despise
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    Hall of Fame Member Sanz's Avatar
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    Quote Originally Posted by Goughy View Post
    I know we have mentioned it previously, but a new thread is due as the situation worsens.

    Poor politics, poor decisions, poor policy and poor management.

    Apologies for the brevity but here is a brief outline of what happened. There are secondary factors I'm skirting around but I think this is a fair summary.

    I know most will have a good idea of happenings, but this is just a catch-up, in my own words, for some that may not.

    Summary

    By 2005 there was an over supply of houses in the US. Too many were being built and the growth was not sustainable etc. An era of rapid house price increase was looking to come to an end. Rapid growth that was partially feulled by a lack of faith in the stock market and the desire to invest in tangible areas. 40% of US home sales were not for living in by the buyer but as investments or holiday homes.

    As house prices rose, people increased their debt as credit drawn against their homes and consumer spending increased. People borrowed rather than saved at rates never previously witnessed.

    When the house prices started to fall delinquencies increased. Many of these were sub prime mortgages (ie mortgages given to people that previously would not have qualified). There was a Clinton initiated drive to enable more minority and low income home ownership and sub-prime lending was encouraged. However, with the flow of credit available, lenders were irresponsible. Some numbers put these sub-prime mortgages at 6% of the market but nearly 50% of the foreclosures.

    This in itself would have been a problem. Ie a large number of mortgages going into delinquency. However, this problem was compounded by 2 related factors both of which were products of poor management and regulation.

    The thread that connects the two following factors is that banks can only legally lend 10x the capital it has on its balance sheet. Ie if a bank has $10 it can lend $100

    What then happened was that banks found ways to hide these sub-prime loans from the balance sheet. They packaged them and sold them. These loans were still in the system but didn't count on their balance sheet and they were then free to make more loans. This was called "securitisation" and everyone (other banks, pension funds etc) bought them. Basically banks could make many more loans than they were allowed and sell the loans to others. When these loans went bad it impacted every sector that bought them and showed that high levels of bad loans had been made. Billions were lost in what turned out to be near worthless investments.

    There were also other ways to hide bad loans as well as banks keeping some of them on their books. When people started defaulting it hit hard. If a bank lost $1000 then it lost $10 000 of loans it could make. Every dollar lost meant $10 that couldn't be loaned.

    So banks had thousands of terrible loans that were costing them billions which in turn meant that they couldn't loan any money.

    At the same time the housing market is still weakening and more foreclosures in other areas are on the horizon.

    So many billions of dollars of wealth have disappeared and there is no money to borrow. A credit fuelled economy has ground to a halt.

    Obviously many factors play a role. From bad oversight, bad planning and bad policies.

    How does this impact the rest of the world? Well the US wasn't the only country riding a property bubble, the banking industry is quite incestuous and interconnected, the credit boom was heavily financed by large inflows of foreign funds and many non-American investors bought the packages of bad loans.

    So, how is it effecting your lives?
    Pretty much summed up here. Also, those who bought the houses are to blame as well. Over inflated house prices, the houses that are selling now for 300K (and have no buyers) were selling for 600K(and people lined up to buy them). Those who could logically afford only 200-300K were buying houses worth 500-600K. I never understood how they did that and who was approving their loans. So here we have this mess.

    I am just disgusted that these banks are given taxpayers money to bail them out.

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    Global Moderator Matt79's Avatar
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    Been positive for me so far, selfishly. Work in a recession proof job, and bought a house a week or two ago for a fair slab less than it would have cost me 6 months ago, let alone 12 months. And now they've put interest rates down further, making what was going to be a tight first few months of repayments quite achievable.
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    Hall of Fame Member Goughy's Avatar
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    Quote Originally Posted by Sanz View Post
    I am just disgusted that these banks are given taxpayers money to bail them out.
    Oh I agree but the alternative is unthinkable.
    Without the bailout there would be nothing. No lending and the collapse of the system.

    Im more offended by the fact that taxpayers money is being used to give bonuses to management and the excess pork that is being added to the bill.

    Using taxpayers money is terrible but the clear lesser of two evils. They just have not added enough clear provisions and have not defined the aims properly.
    Last edited by Goughy; 06-02-2009 at 07:17 AM.

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