That's fucking stupid

Posts Tagged ‘cash injection’

Lord Myners, Financial Services Secretary:

There is still the option for Sir Fred to do the right thing

Yes, yes there is. There is also still the option for criminals to hand themselves in, benefit cheats to hand back the cash, Gordon Brown to resign and George Bush and Tony Blair to set themselves on fire in downtown Fallujah.

The term ‘credit crunch’ has been one of the most overused alliterations of 2008 and it would seem that after the turbulence of the last year we should be ready for the promised financial appocalypse. There is a little confusion in some parts about what it is and what it means and endless high brow discussions or dumbed down newsbeat descriptions don’t seem to have helped so here’s a really simple guide to what the credit crunch is, what it means and how long it will be bothering us for.

First off, what’s a credit crunch? Put simply it’s a lack of available credit. A little over a year and a half ago a number of large investment banks realised that the money that they had been lending wasn’t going to be recovered, this was due to a bunch of bad decisions made by a whole lot of people throughout the banking and sub prime lending industry. It’s probably the easiest bit to understand because a lot of banks lent money on mortgages to people who were never going to pay the loan back and they secured it on property that then fell in value. You’d think it would stop there with a few banks reporting losses, city bonuses being slashed but everyone else pretty much getting on with their lives.

Fast forward a few months and the big banks are still shitting themselves about their lack of cash (having lost billions) and their inability to get loans from other banks. Northern Rock did the sensible thing and asked the Treasury for a line of credit in case they needed to borrow some cash in the event that they had to pay out a lot of deposits. News of this broke thanks to the BBC and confidence in Northern Rock evaporated as customers scrambled to get their money out. This ‘run’ on the bank contributed to the collapse and analysts are still convinced that if the news had not been broken then Northern Rock would still be trading independantly.

After the collapse of Northern Rock and a similar crash in the value and confidence in Bear Stearns the banks all battoned down their hatches even more firmly; by the beginning of this year more losses were being announced by the banks and redundancies were being made. Because the banks were reluctant to lend the housing market stalled and house prices began to fall. We are still at the stage where the banks are shitting their pants worried that if they lend their millions to another bank they might not ever see it again.

By spring of 2008 the dip in the housing market and the lack of available credit is putting the stoppers on a lot of building work. Many industries rely on cheap credit rather than holding reserves of cash to invest in new projects. The mentality is that there is no point in a construction company holding millions in the bank to use to build an office block when they can borrow the money, build the office, pay back the loan with interest once the building is completed and sold. By April Persimmon, one of the largest new house builders, effectively stopped work on new projects because housing demand had slumped and credit lines had dried up.

Trouble continued over the summer and then in the autumn there were some high profile collapses of banks, all due to a lack of cash in the system.

So how did banks holding on to their money cause such a problem? The financial system is a great big merry go round. Finance has been modeled in the past using water (for example the Phillips Machine) with pipes to represent the flow of cash and chambers for the banks and institutions. Throughout the system there are leaks which represent payroll, bonuses, tax and operational costs. Money is poured in the top of the machine and it flows around between the chambers with some coming back out at the bottom for customers. When the pipes get clogged up the flow is disrupted but the leaks are still there so individual chambers which rely on a fast flow of water coming in to them may dry up very quickly.

The knock on effect of the lack of credit has been quite startling but not entirely surprising when you consider how many industries rely almost entirely on credit. Over the last few decades the mantra has been that companies should be asset and investment rich and cash poor. Why hold millions in the bank when you can invest that money and get a good return. If you need quick access to cash then the banks can always lend you some. In the water analogy it is the same as emptying your water tank into a shared reservoir that you can take from whenever you need to, the only problem now though is that the valve is jammed shut and nobody can access what water remains in the reservoir.

With no liquidity (yes, that’s why they call it that) available the knock on has been high street shops not being able to buy stock, sofa warehouses not being able to offer interest free credit and businesses across the board unable to invest in new equipment. In a bid to cut operational costs a great many companies have cut staff and that has led to a cut in consumer demand because people are feeling like they have less cash in their pockets or don’t want to make any big purchases when they think they might be next for the P45. With the banks, one of the UK’s main industries, all tighening their belts the outlook for the secondary industries that support the banking industry (IT, office supplies etc) is pretty bleak too and this will just add to the increasing tally of redundancies.

We are not the only country that is having problems, the credit crunch is a global thing, but we may be one of the worst off because we rely heavily on imports and have no discernable industries other than the financial services and banking industry.  France has agriculture and nuclear energy, Russia has fossil energy and China has manufacturing that the world relies on. Australia is teetering on the brink of recession but it will be short and shallow because the last few years, while we have been living the high life, has been spent investing in infrastructure which will help them cut imports and increase production.

The US will pull itself out of the recession with their program of job creation and investment in business, add to this the nationalism that the US and many other countries exhibit, which ensures that they buy locally or from within their own country, and the tools are there for them to work themselves out of the situation.

We don’t fare much better though. The last few decades has seen us do little more than run our infrastructure down and increase our reliance on the cash generated by the City banking industry. Nationally we rely on foreign companies for our power and no longer own our own railways (and the roads are a short hop from privatisation). The campaign to privatise our national industries, once likened to selling off the family silver, has left us with nothing. On top of this our national identity has been eroded to the point where people don’t want to ‘buy British’ for a great many reasons so we can’t hope for the same grass roots consumerism that wil save the French. We would rather buy American, French, New Zealand, Chinese or in fact from anywhere else.

So what’s the solution? Do we inject cash into the banking industry in the hope that the blockages will become unclogged? Of course not. The industry is broken and will take a while to naturally right itself. What we need is a program of nationalisation and investment in our own industries. We need to combine this with a better standard of education in useful subjects and a removal of the emphasis on soft subjects such as those related to ‘the media’. The welfare state as it stands is a broken system and all payments to job seekers need to be conditional of productive voluntary and community work, if the state is paying wages to someone then it’s fair to expect some work for that wage. Job creation will allow the government to move people from the unemployment roll onto state payroll where they can be productive to society. Strategies like this have worked in the past for us but a combination of the unions and the Tories have destroyed it over the last few decades so it’s time to try again.

Amidst all the plans to ‘inject capital’ into the banking systems there is a quiet and understated voice of reason from the US President Elect. While the rest of the world is relying on the banking system which got us into this mess to get us out, President Obama is planning to use the cash that the Fed is busy printing to pay for job creation and infrastructure improvements.

Most governments throughout the world are aiming to drag us out of recession by printing more money and giving it to banks in the hope that they will then lend it to consumers who will take the loans at incredibly low interest rates and spend. It’s a bit like kicking the merry go round when it starts to slow in the hope that it will go on forever.

The idea of using government or IMO funds to invest in infrastructure, create jobs and improve production, will mean that more workers have more money in their pockets and are better able to spend. Injecting cash into the banking system just gets workers into more debt and benefits nobody other than the banking system which got us here in the first place.