UK Debt Crisis

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I thought I'd go out on a limb and start a thread on the debt crisis and the subsequent emergency budget.

Just found this website through Google and read through it. Anyone know how reliable this information is?
http://www.debtbombshell.com/

Hi Englishinvader,

This website looks to me like a thinly veiled attempt at scaring you sh1tless so you invest in their "gold money".

I dunno. What does everyone else think?

My gosh someone agrees with me! That's nice

Well I have my problems with the economic situation too. I mean obviously if you're going to run a system that's paying shedloads of people shedloads of money for not much, based on profit created from financial services rather "real" stuff, then it's gong to blow up in your face at some point.

I still don't think reading scary websites like the Gold Money one helps

Don't let yourself be misled--financial services are real services, and there is a real exchange of value when they are provided. This has nothing to do with obscene salaries, those numbers are a mere drop in the bucket of the financial exposure.

Here's my take on the British (and the American) circumstance:

You had an unprecedented 16 years of growth. During that period, an individual was only as good as that individual's results in the previous quarter. If you adopted a conservative strategy, your numbers fell, your compensation fell and your reputation fell. So all these hamsters on the wheel kept running in place, doing exactly what everyone else was doing.

Howard Davies sums up the whole mess in one easy acronym: SLUMP

S - Subprime
L - Liquidity
U - Unravelling
M - Meltdown
P - Pumpting

Subprime - Mortgages are the cash cow for retail banks. They are secured, payment systems are regular, government loves home ownership. Everybody wins. But once all the people with jobs and assets have their mortgages, who's left? The ninjas. (No Income, No Job, No Assets)

Now, obviously, these are riskier loans. Does that mean that you don't make them? Not necessarily. There's still the potential for profit, and not all ninjas are going to default. So what do intelligent lenders do? They bundle up their assets (the mortgages that they hold) and they sell pieces of them off to other investors, so that they spread the risk. Now if you buy a bank's bond that is backed by mortgages, and 99 of them are good and 1 is bad, you aren't going to lose much. So the risk gets spread around. But between about 2003 and 2007, the amount of mortgage back securities floating around in the market in Britain went from ₤3 trillion to ₤63 trillion. At that point every bank is holding some of every other bank's risky assets, and nobody knows what the other banks are holding.

Liquidity - Banks fail for one reason, and one reason only: they run out of cash. The largest movements of money on any given day are banks lending money to each other. But suddenly everyone is saddled with junk, and when the first domino falls (Northern Rock) then everyone starts to get scared. The moment that money stops moving between banks, the paralysis sets in. This moves us into:

Unravelling - Lehman Brothers was the tipping point. For some reason, the US Treasury drew a line in the sand with Lehmans. Meanwhile, Lehman's had a perfectly good takeover offer from Korea, but insisted on going to the Fed. I guess the thinking was that the US couldn't let AIG go down (because AIG was so tied up in China), and wouldn't let Goldman Sachs go down (because of the incestuous relationship between the US Treasury and Goldman). So someone bet that the Treasury wouldn't let Lehman go down, either. Wrong bet. A problem that would have cost a couple of billion on Monday wound up costing $700 billion by Friday. There is a school of thought that Paulson (the Treasury Secretary) wanted a bigger crisis, to pry more money out of Congress. Be careful what you wish for.

Meltdown - At this point, it's still just investment banks that are hit, and the people holding the bag are professional investors, who (in theory) know the risks. But once Lehman fell, then the pain started coming down to the retail level. When regular people start getting hit, then the real panic comes. The UK was faced with the first run on a bank in 150 years, and wound up nationalizing Northern Rock, then RBS, and they had to fast track the Lloyd's takeover of HBOS.

Pumping - And now government is stuck holding the bag, injecting bucketloads of cash back into a system.

So why did all of this come about?

Bad loans? Well, in part, but banks were doing good things. They were promoting home ownership, they were contributing to economic growth, and they were mitigating their risk. All sound financial decisions.

Failure to see the fall in the housing market? Typically, mortgages are long term instruments that survive market pressures. But the sheer scope of the growth in mortgage business took lenders into new areas for which old models no longer worked.

Mortgage backed securities? Except for a couple of bait-and-switch manouevers in the US, these were also perfectly rational instruments that did two things: they mitigated risk, and they provided investment opportunities for overseas capital to invest in the US and the UK housing markets.

The problem, as I see it, was that there was nobody at the top of the system who was looking at the overall health of the mortgage backed securities and doing the math about what would happen if the housing market fell.

But let's keep it in some perspective. The UK bailouot was worth about ₤500 billion. But mortgaged backed securities were worth about ₤63 trillion. So the government bailout was less than 1% of the value of the troublesome assets. Also, it bears noting that that the financial services sector was generating over 25% of all UK tax revenue in the years before 2008, so while the sector has been a big recipient of largesse, they have also been a big contributor of public money.

If you want to look at the other side of the coin, though, then look, by contrast, at the Canadian system. We suffered our pain in the 90's. The government ruthlessly cut public spending, and forced the federal government into surplus in the space of two years. We sat hard on the banks, and refused their pleas to diversify into other financial sectors (esp. insurance). We never authorized over-leveraging. And so the sum total of Canadian banks' exposure was the losses that they experienced in buying up US and UK asset backed commercial paper. Losses, sure, but not enough to bring down the bank.

You are just going to have to go through now what we went through 15 years ago. This, too, shall pass.

Canada got away with it to a point because of American growth (the dot com bubble). Britain has Europe going on a deflation binge. Canada had a long "jobless recovery" that was punctuated by stagnant austerity years. Even now Canada, despite its banks not doing too badly, has a high unemployment rate because of right wing economic policies pursued from 1984 until 2004, essentially.

We have a permanently lower standard of living in Canada thanks to austerity and right wing economic policies. Any country that is going to be dosed with such policies will come out with similar reductions.

By the way, though Canada's inflation is 1.5% and unemployment is more than 8%, the Bank of Canada says the economy is "overheating" and increased the prime rate in order to fight inflation, they claim. They predict additional rate hikes. Clearly, they are concerned that 8% is too few unemployed, that reserve army must be big enough to keep those wages down.

I remember the 1997 election. The NDP, knowing that the Bank sets inflation targets and induced unemployment in order to meet such targets, announced that if it won it would set unemployment targets, using fiscal and monetary policy to meet unemployment rate targets by loosening these. The media and the right wing parties claimed that unemployment was beyond solution, that only naive fools would think that unemployment can be solved, even though a full employment policy was successfully implemented for most of the pre-neoliberal era (1950-80)... The Liberals nearly lost their majority.

Canada had very high unemployment through the '90s and this persisted in the '00s.

Canada's deficit crisis was artificial. It was caused in part by the zero inflation-high interest rate policy that caused artificially high deficits. Even so they weren't so high. So business leaders actually petititioned lending agencies like Moody's to reduce Canada's credit rating. What this was was a power grab by the plutocracy.

[img][800:730]http://s3.amazonaws.com/infobeautiful/deficit_budget_live.png[/img]

Can you buy credit default swaps on government loans? If so, I should do it.

The cuts will reduce GDP and put more people on the dole so people should not say that "we're cutting X out of the budget, we'll cut X out of the deficit".

Iceland and Canada were the best at handling the debt crisis. Sending money to the bankers responsible was the worst thing that could have been done. US bankers insisted on keeping their bonus pay even after they were bailed out. The US already had Insurance for account holders, the only people who would have been affected were the bankers. I am amazed at how quickly those advocates of the free market decided that Schumpeterian gales of Creative Destruction would be a national calamity from which The West would never recover . If they had not gotten their bailout.

i'm also in a huge debt. i have to fix it

This debt crisis is an invention of the government. This will lead to economic suicide as planned by Cameron thinking that his friends will profit from it. The debt was far worse in 1932 when Neville Chamberlain promulgated a suicidal and deflationary budget.