Credit Crunch crisis talks
The faecal matter appears to have hit the ventilation equipment, and governments the world over are falling over themselves in attempts to clear up the mess. The media have been characteristically swift in their dramatising the whole affair as a “crisis”, and one way or another the last year or so has been dominated by stories of impending financial doom. Since ‘panic’ seems to be the word of the moment I wanted to take a moment to reflect on whether things are quite as bad as we’re being told. In classically altruistic fashion, I want to understand how this might affect us. Well, when I say ‘us’, I really mean “us students”, because if we are the jobseekers of tomorrow and there is a global economic meltdown on the horizon, it might be useful to be able to piece together what’s happened, what’s happening now, and what we could expect to see coming over the hill. Is it a monster?
‘We are the jobseekers of tomorrow and there is a global economic meltdown on the horizon’
I was gloating the other day, musing to myself that ‘in no way am I affected by the credit crisis’, and many of you may be thinking the same. But upon consideration, we students could potentially be in a somewhat inconvenient position, credit crunch wise. The ‘abstract’ economy, featuring investment banks, hedge funds and private equity firms has gone nuclear, and much like a nuke, not all the effects are immediately obvious. While Lehman Brothers employees are already smarting from the smack in the face that was their investment bank’s insolvency, the real shock wave has not yet hit the ‘real’ economy in any great way. The issue for most of us is the fallout, which will start to interfere relatively soon. The class of ‘09, of which I am a part, will be spewn out into a job market featuring 40% fewer jobs than the same time the year before. Mortgages to first time buyers – such as ourselves – will be harder to get, and those available will be unfavourable. These prospects are hardly cheerful. The inflation rate of money is high, at 5.2%, but with the UK economy projected to shrink and unemployment to top two million, our problems are only just beginning.
The nervousness of the ‘abstract’ economy necessarily filters through to the ‘real’ economy, if only because the same companies that play around with ridiculously complex repackaged “mortgage-backed securities” and other such devices are also big names on the high street. When they go down, they take the high street with them. In simplistic terms, the loss of confidence in the financial sector has led to a seizure in lending between banks, and as a result, made it harder for both individuals and business to get loans. This loss of spending power and source of investment translates into lower consumer demand, which leads to lower output, directly contributing to a shrinking of the economy, and before we know it, we’re in trouble. The system we have replied upon for generations is splitting at the seams.
Banks are supposed to be as safe as houses. Their failure is therefore somewhat ironic considering that its housing that got the banks into trouble in the first place! The last year has presented us with the uncomfortable reality that far from being sound, grounded and enduring institutions, banks are actually vulnerable getups staffed by people who fail to grasp the fragile complexities of a system with which they are dealing. While I am sure that ripostes to that statement abound, the facts speak for themselves and the market would not have collapsed had common sense won over greed. I put it to you, as unemployed brokers queue outside Jobcentre plus; caveat emptor. Traders bought and sold things they did not understand, at substantial risk to their and our prosperity: eventually the wheels were going to come off. Having come off in style, sending the economy as a whole off a recessionary precipice, banks are refusing to lend to each other for doubt over recipient organisations’ solvency and ability to pay the cash back. Enter the government, swinging a bag of money and generally being utterly ineffectual in the face of economic catastrophe.
‘This is the purpose of the astronomic bailouts: to reassure you and I that a bank is a better place than a mattress to store our money.’
Yes, as a result of global financial irresponsibility and mismanagement, governments are putting up staggering sums in order to prevent the collapse of international financial institutions. Now is hardly the time for anarchistic proclamations about the abolition of banks and their evil capitalist ways – we all depend on them for mortgages, loans, investments, current accounts, financial advice, savings and credit cards – but the sums the authorities are throwing at them, with few strings attached, beggar belief. The numbers are hard to absorb and in some cases are comically absurd. For instance, Iceland as a country is worth 14 billion dollars, give or take a króna, and is reckoned to owe in excess of $100 billion. Did it not occur to somebody, somewhere that liabilities over seven times the value of the nation could pose a potential risk? Collectively, the richest countries in the world are suggesting spending over 3 trillion dollars rescuing banks from their own cock-ups. That’s $3,000,000,000,000 gone in order to prop up money-making systems that have failed in their one and only objective. Notwithstanding the fact that that stupefying sum of money could be better spent, it’s not entirely clear that wildly recapitalising the financial sector is actually working. World stock markets are up and down like yo-yos – though mostly down – as Gordon Brown discovers the hard way that for all his spiel about having abolished the boom and bust business cycle, gravity inevitably takes its toll on airborne pie-in-the-sky economics.
Shelling out the GDP of Africa on gluing together a broken system is an expensive proposition, but the alternatives are unequivocally worse. Universities, charities and county councils all over the UK, not to mention thousands of individual consumers had deposits in Icelandic banks, Northern Rock, HBOS and kin, which have been guaranteed – to a point – by the UK government. This is the purpose of the astronomic bailouts: to reassure you and I that a bank is a better place than a mattress to store our money. 1929 saw a Great Depression caused by bank failures – four thousand at the peak in 1933 – and the world’s governments have learned from this. The cash injection represents a vote of confidence with a view to managing a regrettably unavoidable recession and steering clear of devastating depression. Concerned though we are now, the economy does have a self-righting tendency. To this end, the advice is simple: there is nothing to be afraid of in the long term. We find ourselves in tempestuous seasons, but the seas will be calm again.