The title, above, of John Fogerty's (Creedence Clearwater Revival in
case you had forgotten) 2004 CD, with a song of the same name,
started me wondering about where we might be heading - again!
It is generally perceived wisdom that a major cause of the reason for
the credit crisis in which we find ourselves was due to leverage. To the almost
free availability of credit at cheap interest rates, to just about anybody who
wanted to borrow. Which in turn caused the financial services industry to seek
ever more innovative ways to lend money to more customers, against security
that was at best slim and which allowed little margin for declines in the value
of the security taken. The “health warnings” about repayments in case of job
losses, falls in property values, or rises in interest rates putting a huge
strain on the borrowers, were written in very small print.
I
think I must point out that Asian countries were somewhat more cautious in
their lending policies. This, because of the lessons learnt from the Asian
financial crisis in 1997, the scare of SARS, the Korean credit card problems
and the subsequent overall improvements in regulatory oversight around the
region. The HKMA in Hong Kong, for example, maintained their "guideline"
that lending 70% against a properly assessed value of property was appropriate
- firmly not of the notion that lending
100% (or more) of a rough assessment was in the best interests of the
borrowers. It is possibly also useful to point out that in Hong Kong and other
countries in Asia there is recourse to the borrower in a default situation –
unlike the situation that exists elsewhere.
Today
banks are in difficulty with increasing troubled loans and declining profits.
They need to de-leverage their balance sheets. Unemployment is up and
increasing. Property prices continue to decline and the high street shops are
closing one by one as consumers either have no money to spend or because they
believe prices might fall further. Household spending patterns are changing as
families try to get used, once more, to living within their means. The mood is
sombre and there is no end in sight, this year at least.
But,
say Governments, previously oblivious to the worsening situation that was
unfolding around them, we must spend. We need consumers to buy to keep
businesses going, to keep manufacturers producing and therefore to keep people
employed. This should be easy they say. The banks are full of liquidity, but
they will not lend – not even, it seems, to each other. So, says Government,
particularly to the nationalised or semi-nationalised banks, the money in the
banks is taxpayer money therefore they should be forced to lend it.
Central
Banks meanwhile have been lowering interest rates as fast, and as far as they
can reasonably go, to enable borrowers to lessen the burdens they face in
repayments (ignoring the elderly who were relying on interest income to shore
up their pension schemes).
With
me so far? Look I admit, this is a simplistic view but the person in the street,
or at least the ones I speak to, are puzzled.
Low
interest rates over a sustained period of time, according to banker George Rae
in his book The Country Banker, written in 1885 tend
to lead banks to imprudence, such as we have witnessed around 120 years later.
And Central Banks have lowered interest rates again.
Spending
beyond our means (average US household spending in 2006 as a percentage of
income – 130%) is unsustainable; yet Governments now say we need to spend.
Spend what? Unemployment is rising and people do not have the income to spend,
so what are they going to do – borrow it? Borrow it from whom? Ah yes, the
banks that are now full of taxpayer money. The same banks that are trying to
de-leverage and deal with growing bad debts, and have no wish to add to them
unnecessarily.
I think this is about where I came in: déjà vu (all over again)?
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