THE INTERNATIONAL - International Indian

[ MONEYWISE ]
The Route to Financial
Meltdown
“How did this all start again? Haven’t we learned any lessons from history? Is this
just another boom bust cycle? Or is it something far worse? Finally, what do we do
right now in these tumultuous times?”
[ BY BOB ParkEr ]
Never in 30 years of financial planning
have we in this industry experienced
anything like it. In fact
unless you are over 80 you cannot possibly
remember the 1929 Great Depression.
Louise McKenzie a US citizen now 91 can. She
hears echoes of her past in the economic turmoil
of late, which many analysts have described as
the worst since the “Black Tuesday” stock market
crash of 1929. At the height of the Depression
that spanned the 1930s, unemployment rates
reached almost 25 percent.
The common adage of the time, McKenzie
recalled, was: “Use it up. Wear it out. Make
it do. Do without.” The ethic of conserving
money – and avoiding credit – stuck with
many in her generation for the rest of their
lives. Some have never used a charge card
or rarely allowed a balance due.
How did this all start again? Haven’t we
learned any lessons from history? Is this just
another boom bust cycle? Or something far
worse? Finally, what do we do right now in
these tumultuous times?
It all started in the early part of this
century with the George Bush government
fuelling a consumer led economy. The
whole house price rise excitement led
to more and more unregulated bad risk
lending as lenders chased after a burgeoning
market for mortgages. As the market grew
and house prices spiralled upwards lenders
started to sell mortgages to people with bad
credit histories and started putting products
together that were simply unsustainable in a
crisis. That crisis started in 2007 when this
lending (the sub prime) started to unravel.
But not before a whole new industry created
a new financial instrument known as “Credit
Default Swaps” that took the derivative that
took the derivative industry to new heights
and cloaked the whole mess in secrecy – who
knows who the lender of last resort now is?
In the USA in April 2007 (aptly named)
New Century Financial, disappeared in
a blaze of bankruptcy. This triggered the
crisis which led to losses being reported at
bigger and better banks too.
In September 2007 the crisis crossed
the Atlantic Ocean with the astonishing
news that a UK lender – Northern Rock
was suffering and there was a run on the
bank. The UK government bailed them out
by nationalising the bank. Desperate times
desperate measures.
Then the catastrophe, on 14th March
2008 Bear Stearns falls, but the Fed moved
quickly to arrange a sale to JP Morgan Chase.
To allow Bear Stearns to go under would
have created widespread devastation in the
banking industry and yet on September 15th
– 6 months later the Fed allowed Lehmans
to file for the world’s largest ever bankruptcy
– where was the logic?
If we wind right up to date and following
Lehmans and AIG and other major disasters
its worth taking a quick look at the 10
days leading up to Black Friday the 15th
of October to remind ourselves how fast
things were unwinding and how perilous is
the current situation.
September 30th 2008
The London market opens to carnage with
all the banking shares clobbered following
the Asian markets weak response to the failed
Wall Street bailout.
October 1st 2008
Warren Buffett decides to buy $3bn worth of
General Electric whilst Fortis shelves plans to sell
3bn Euro of its shares as no one wants them.
October 2nd
US Senate votes in favour of the Wall Street
bailout whilst European leaders discuss a
$400bn bailout.
October 3rd
US jobs data are worse than expected and
the UK government authorises an increase
of the bank compensation scheme from
35,000 to 50,000 sterling per depositor.
October 4th
Europeans leaders attend an emergency
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THE INTERNATIONAL INDIAN