Basically it seems the problem began with what is termed the sub-prime mortgage market in the United States. In recent years the U.S. has enjoyed very low interest rates and this has encouraged banks and other financial houses to lend money to people with poor or no credit history. A little foolish you think? Well no not really because the finance houses reasoned that it was expanding their profit base and, should these unfortunates be unable to meet their debts, the financial institutions could simply re-possess the properties and re-sell them. All heart eh?
In more cases than the finance houses now care to admit, they were dishing out what have become known as 'Ninja loans' to people with no jobs and no assets. Amazingly there were an incredible number of 'no-doc' loans where people had no need to prove their financial status - so of course, desperate to get a home, many people lied.
But then interest rates in the United States began to rise quite sharply. The financial institutions, who had provisioned for a certain level of bad debt, suddenly found that their 'generosity' was rebounding on them. Repossessions increased at an alarming rate, the houses couldn't be sold and the US housing market has now collapsed, saddling the financial institutions with billions of dollars worth of bad debts.
So how has this effected the rest of us? Well this is where global capitalism comes into its own. The bad debts within the worlds banks are parceled up into chunks and sold off to other finance houses..in this case not just in America but all over the world. Why on earth would you buy a 'bad debt' let alone millions of dollars worth? Well simply because there is an assumption that the debtor will eventually come good and the higher interest rate for late payment of debts will more than cover the risk of the purchasing bank. For the selling bank it improves the look of the balance sheet if they have taken on too many of these.
Now comes, to me, the incredible and really frightening part. No one, including the major central banks in the worlds capitals really has a clue how much bad debt any individual financial house is currently absorbing. The bad debts are sold on..and on..and on ..as 'collateralised mortgage obligations' and they can be dispersed, collated, bound up..call it what you will into discrete..and discreet..packages of quite incredible complexity.
The capitalist world thrives on debt, paper promises ..and confidence. Much of the confidence has been drained away by the collapse of the American housing market and the insecurity about how solvent each lender actually is in fact. Nobody is sure what is lurking under the paperwork. Some banks have frozen their investment funds because they are no longer sure of their true worth. So individuals and companies have begun putting their money in safe places like government stocks, rather than in fluctuating volatile company shares.
The consequence of this is that billions of dollars have been wiped off the value of companies all across the globe over the last week or so, which apart from the entrepreneur and the professional investor hits the 'little man and woman' in Britain and elsewhere who have never come near buying a share in their lives.
Why? Because these people have invested in pension schemes..and the pension funds themselves rely on a thriving stock market in which they disperse the invested pension funds across a portfolio of companies.
So when those companies hit the skids, all because business confidence has failed those pensioners are facing a worrying future. All because some banks in America saw a chance of a get rich quick scheme by lending money to people who couldn't repay!
And they say there is no better system! Its hard to believe it!!!
No comments:
Post a Comment