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If you are reading this article because you think I have come up with the ultimate solution to our current global financial crisis, then I am really sorry to disappoint you. I have no idea, only time will tell us the right solution. In this article I am going to explore the current proposals and some of the ideas that have been put about and just cast my humble opinion upon them, so I hope you find it useful nonetheless.

Now unless you have been living in a cave or a desert island in the pacific you will be fully aware of the financial chaos that has recently been wreaking havoc upon the worlds markets. It’s pretty safe to say that the current situation eclipses the events of 1929, which, although disastrous, is superseded by the sheer volume of money involved at present. We are not just talking hundreds of billions, but trillions in some cases, figures the likes of which would seem incomprehensible in that day and age.

So what is it all about and how did it happen? It is basically about liquidity. By liquidity I mean money in the markets. Money to the economy is like oil to an engine, no money, and the engine will seize and seize it has. Basically lenders globally have been lending money to customers, now I am sure you will have heard the saying a business either grows or it dies well in order for lenders to grow they have to continually lend more and more money. So what happens when all the good clients out there have all the money they want? Well then the lenders lower their standards and then they can lend to more people. The problem is once one lender does this they all have to start or be left behind by the others. Competition dictates that all the lenders then have to start lowering their standards in order to stay in the race.

So how has this caused the problem? The problem with lowering your standards especially to borrowers is you expose yourself as a lender to more risk. There is a reason why some customers can’t or shouldn’t get credit; it is because they might not pay it back. Now normally this is an acceptable risk for lenders to have some borrowers who may not pay their debt back. The problem is over the last decade lenders have lent way too much money to these people and as such they are unable to recover that money back from them.

The result of this is initially other lenders start to lose confidence in them and refuse to lend them money. Now a lender that can’t borrow money itself is useless it is like a bar unable to buy beer for the pumps eventually the customers will leave. A lot of lenders such as banks and building societies also have depositors. People deposit money and in return they receive interest. However the lender uses that money and lends it out to borrowers, the problem is once the lender starts to get into trouble because they are unable to borrow money themselves the depositors also start to lose confidence and they want their money back. This results in a catastrophic failure of the bank itself. If it does get itself into this situation, the stock market starts to get twitchy and they start selling stock in the bank and then the value falls to, again casuing a catastrophic situation.

But what solutions to these problems are being proposed?

To start with, some banks in the US, the UK and Ireland made the first move by guaranteeing
their clients money with tax payers’ money. This move was clever as it instilled clients with
confidence, which is what has been lacking over the past months. There may in many cases be
no need for a bank’s downfall at all, but when people get nervous, they tend to bolt at the first
sign of uncertainty, which can be the cause of a bank’s unnecessary demise. Boosted
confidence means that people are happy to stay put so that the banks’ assets are not
undermined.

As a second move, the US and UK have proposed enormous bailout packages which are too
intricate and complex to be explained here. The simple explanation is that they want to buy
into these financial institutions with tax payers’ money. It is unclear if this will prove an
effective measure, as only time will tell if this move is a good one or not. If this move does
nothing to get the liquidity of the markets moving again, probably not, as the stagnancy in the
movement of money at the moment is likely to put us all in to the worst recession the world
has ever seen.

One thing that is painfully clear is that banking as we currently know it has got to change
radically. There is a considerable amount of regulation at play at the moment, but in my
opinion as a financial advisor, there is not enough regulation being focused in the right areas. I
very much doubt that any of the major large money lenders of the world has been as
rigorously scrutinized as they should have been over the last ten years as this may have been
seen to be restrictive practice. But let’s be honest, if that were the case, would be in the mess
we are in now? If the lenders had been properly questioned when it came to giving out money
to bad debtors, if that money had never been given out, if the lenders hadn’t dropped their
criteria so dramatically, would house prices have gone so ridiculously high and would we be
facing the worst recession in history? What do you think!?

Tags: Money

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