Credit Crunch

[8-bit-micro]

... also know as recession. Someday somewhere someone will need to know. If it could be seen, from long distance, we would know what to expect. At least put into perspective. One only need to look at US economy and US Dollar at low. It could turn out to be worse than imagined however at least there is the hoverboard to contend with.

[Luke-H]

And to top it all off, I'm out of Hob-Nobs

[8-bit-micro]

Hob-Nobs could be a life saver. If one could stock up on Hob-Nobs it would at least sort of the right from the wrong.

[Dr Lobster*]

the thing that gets me is the cost of food. it's getting to the point that it's actually cheaper to get a takeaway each night than to buy the core ingredients in and make it yourself, even the basics like bread - our usual loaf has doubled in price in the few months.

[Luke-H]

No need to stock up on Hob-Nobs, just stock up on Credit Crunch and plenty of milk, then at least you'll have enough breakfast cereal to see you through the 'recession'.

[8-bit-micro]

It's getting stupid now. When there is no food left in the shop, time to panic. Sounds like Spain just recently
Can't believe what goes on now and again. Maybe a change of life is needed?

[Jamez]

I've started getting loads of my food and essentials at Wilkinson and Lidl. I've nearly halved my weekly shopping bill. Who care's if Lidl is seen as a shop aimed at poor and downtrodden - if they're selling quality stuff at bargain prices then I'm definitely having the last laugh.

[Jovis]

I agree - Wilkinsons in particular is excellent!

[Mr Q]

the thing that gets me is the cost of food. it's getting to the point that it's actually cheaper to get a takeaway each night than to buy the core ingredients in and make it yourself, even the basics like bread - our usual loaf has doubled in price in the few months.

I think there are a lot of factors conspiring to raise the price of food, some of them long term, others short term. I think adverse weather conditions have played a large part in food price rises - quite a few countries are experiencing either drought or bad flooding, which has had the effect of significantly reducing supply. Climate change notwithstanding, it should be expected that as we return to more normal seasons in most countries, this particular issue will be overcome.

One of the things that also seems to be driving up food prices is the use of ethanol (from either corn or sugar cane) as fuel. The consequence of this is to increase demand for those crops, with the competing interests of both food and fuel. The excessive subsidies on offer, particular in countries like the US, for ethanol certainly distorts the market in this regard. Moreover, with higher prices in ethanol crops, there is an incentive for farmers to switch from production of other types of agricultural output into corn and sugar cane. Reduced supply of other goods will also lead to the prices of those goods increasing.

I think the greatest issue is the degree to which national governments distort global food markets. Specifically, the protectionist inclination of governments in the developed world has contributed to overproduction in inefficient markets, and underproduction in markets which would in fact have a comparative advantage in agriculture. Trade barriers hurt consumers, and in this case have helped to lock the third world in poverty. Despite politicians' rhetoric, we do not have free trade - not with things like the Common Agricultural Policy (and its American equivalent), which see billions upon billions of taxpayers euros being used every year to subsidise the creation of milk lakes and butter mountains. These contribute to excessive agricultural production, with food then dumped below cost in Africa, such that farmers there have no ability to compete - all this to keep a few French farmers happy. To be fair, things have improved in recent years, but with the Doha round of world trade talks still stalled, we are certainly a long way from where we should be.

[cwathen]

An interesting (not that interesting actually, but anyway) thing happened at work today. A person applied for finance. The application declined. Until last autumn when the northern rock saga kicked off, pretty much anyone who appeared to have the right criteria to borrow money (full time job, checkable address history for the last few years, long time with bank) would almost always be approved for £5000 of finance (even if they only asked to borrow £500). Those applications which did decline almost always involved people who in no way look surprised and so clearly knew they had adverse credit history, or 18 year olds who couldn't understand why they can't buy a few grands worth of gear on interest free just because their bank let them loose with a £350 credit card at a ridiculous rate of interest 2 weeks earlier.

These days however, finance applications almost never seem to be approved. And its not just me - our acceptance rate has fallen by 60% since northern rock (in an area where northern rock has no branches - indeed i'd never actually heard of them until last autumn).

I can't accept that such a large number of people have done such damage to their credit ratings over such a short period of time. So when asking the rep whether or not the company has changed it's scoring procedure so that people who would previously have been approved now get declined he informs me that they haven't - the declines are due to the credit crunch.

So, what exactly is a 'credit crunch'? I ask because, to the the best of my knowledge, in thousands of years of economy, this is the first one.

As far as I can see, it's an excuse. Its a term invented by the media to create a headline, but has now been claimed by the government and the finance industry as some sort of brand name to offer as explanation for anything financially negative to try and stop people spending too much time thinking about what really might be happening.

The present economic climate might be the start of a recession, it might be the result of rising fuel costs, it might be that finance companies have lent too much and now need any excuse to stop doing it, it might be that people simply have less money as the minimum wage (increased by almost 50% in 5 years) forces employers to spread wages more evenly so that there is now less of a pay increment between positions than there used to be (in every day jobs anyway), it might even be that (as I've been predicted for years) the property market is about to collapse as people with relatively good jobs can't afford a mortgage (and many of those who've got one over the past few years now can't afford to pay it).

One thing I am sure of though, is that it is not due to 'the credit crunch' - because no one seems able to conclusively define what it is. If you're happy to continue not being able to afford a house, not being able to afford fuel for your car, paying through the nose for food, and getting declined for finance despite there being no good reason why, then hold on to the 'credit crunch' as an explanation - the people behind it love it because its too vague a term to pin any blame on any individual person, organisation, or general area. If you want things to get better, ignore it for the myth that it is, and start questioning whats really happening.

[/long rant mode]

[Mr Q]

So, what exactly is a 'credit crunch'? I ask because, to the the best of my knowledge, in thousands of years of economy, this is the first one.

Well, I wouldn't say it's the first one, but it is nevertheless significant. What we're talking about here is a crisis of confidence among banks. Banks routinely engage in transactions with one another - for instance, borrowing from and lending money to one another. Ordinarily they do so with little concern - banks are typically very safe institutions which aren't easily susceptible to collapse. Yet since last year, there's been increasing concern about the capacity for different banks around the world to meet their debt obligations. A complex mess of different financial products being sold and resold, some of which turned toxic, was the source of the problem. Criticially, it became very difficult to know how toxic the market had become, and the degree to which each institution was exposed. In such a turbulent environment, and with such uncertainty, banks understandably became less keen to transact with one another - you need to have confidence in your partner in the exchange. This is what the credit crunch is really about, because it means banks find it harder to secure financing. Borrowing costs must then increase, which leads to banks being more selective about whom they will be prepared to lend to.

My understanding is that the market has managed to sort out most (though not all) of the mess. Still, the after effects will be felt for some time yet. The credit crunch has precipitated a global economic slowdown. Problematically, this is occuring at a time of high inflation in most countries, which presents a dilemma for central bankers, recalling the challenging 'stagflation' era of the 1970s. Slow growth would generally warrant cuts to interest rates. High inflation, however, calls for interest rate increases. I tend to view the inflation-fighting objective as being more important, but that might be politically unpalatable.

At any rate, the credit crunch is far from just an excuse, although I can't deny that some businesses might be inclined to use it as a justification for different decisions anyway.