Saturday, March 21, 2009

Credit Crunch: The Directors Cut

The economy has been running on an illusion of money for years. Subsidised by debt – the good old never never – capitalism's central ethos – growth, more, More, MORE! - has stretched from the unlikely into the impossible. By Mark Reed.

Money is a cruel and unforgiving mistress. In these times of economic terrorism, though, everyone is talking about the current circumstances as a 'credit crunch'.

This is the work of spin doctors, and liars. There is NO credit crunch. No recession. What society is facing now, is that we are reaping what they have sown. They? There's always a 'Them'. But make no mistakes about this, society is currently victim of cruel financial instruments. Words such as 'fractional reserve banking' are more powerful in our lives than blasphemy.

What there is is a credit hangover.
Banks became drunk on money, and we were their date rape victims. They plied us with free booze all night, and now we have the headache. It was a rare week I didn't find a cheque addressed to me for £4,000 or a credit card with £7,000 sent to me unprompted, just waiting for me to spend spend spend. If I took up every offer, I'm fairly sure I could've borrowed £100,000 in a couple of years on an income a mere fraction of that. (Those letters have dried up recently. I wonder why).

In the olden days, geed on by obscene bonuses and outrageous targets, redundant bankers would buy houses because they didn't know what else to buy. Routinely, in the mega-bonus culture, these overpaid investors would buy houses and rent them back to the poor to ensure a steady income. Paying for houses in cash meant that, for the rich, a £260,000 flat would cost them £260,000. For the affluent poor – that is, those lucky enough to get a mortgage – that flat would, including interest cost £520,000 over a quarter century.

That £260,000 flat (probably bought at half the cost years ago), would ensure a relatively steady income of say £80000 per annum for life at a £100k-ish investment years ago. Of course, I see a conflict of interest here. It served the interests of the bankers to push house prices up, in many ways, and the underlying problem that society now faces is fucking outrageous house prices that are slowly being corrected. Because first and foremost, when house prices go up, that steals money directly from the rest of the economy. The money doesn't disappear, but is moved from the incomes of the many (businesses and individuals) into the channels of the few: the Super-Rich.

The proportion of income directed to maintaining something as fundamentally basic as somewhere to sleep leapt up. Where mortgage payments took 50% of two peoples post-tax incomes were commonplace. The other 50% had to go on everything else. Food, water, air, travel, clothes, mad ex-wives/husbands, you name it. And, of course, student debt. The average student – as of a few years ago – would graduate with an average of £30,000 in debt. Society is now geared to seeing debt as not only a legitimate lifestyle chocie, but mandatory if you want a degree or a home. The stigma of debt became marginal. After all, if it cost £30,000 to get a degree, when it came to a mortgage, the fraction of debt – an extra £10-20-30k – was inconsequential. Everyone needs somewhere to live. Why not pay a little more for somewhere you own instead of a little less for somewhere you will never own?

The economy has been running on an illusion of money for years. Subsidised by debt – the good old never never – capitalism's central ethos – growth, more, More, MORE! - has stretched from the unlikely into the impossible. The money never existed, and was all on a promise that they never thought might actually be kept. Even the Bank Of England are printing money now. Crazy, unrestricted, greedy loans and unrealistic targets made banks soft. Banking institution employees are often targeted with making a certain amount of profit per day. That is, selling a loan with a profit margin of a certain amount on it. Take your big bankers and your mortgage suppliers, and they have to make a certain amount of money to remain employed.

The easiest way to remain employed is to target the basic human need: a home. Justified and incentivised by enormous bonuses, the banks became soft. They became stupid, and lax. They relaxed guidelines for a 3.5 factor on mortgages to enable people to borrow up to six times their income. And not only did they allow a six-figure growth, they also commeneced 'self-certificated' mortgages.

A 'self-certificated' mortgage is where you tell someone how much you earn, and they don't check it: they just believe you. To extrapolate it out, let's take some simple maths. Now, this grossly exaggerates the numbers, but it is only a matter of scale, not ratio. For example, let's say I want to borrow £1,000,000 to buy a property. If the bank operates on a six-multiple, I need to earn around £178,000 at minimum to get that mortgage. Let's say my income is £100,000, but it has an impressive title. “Finance Director for Blah Blah Blah Dot Com”. That could earn £180,000. But I still earn £100,000. And I think that in five years I will earn £180,000. Let's gamble on the future. So, I self-certificate. I say I earn £180,000. And I promise myself that I'll just pay – say – 70% of my disposable income to the mortgage. That still gives me a couple of grand a month to live on, and a million pound house. These two factors mean that due to lax financials and careless application, I got a mortgage for ten times my income.

Banks didn't just do this for the big hitters. They did it for people on miniscule incomes. Under the 'right to buy' scheme, for example, American Social Housing Tenants took out mortgages for amounts they couldn't afford thinking they could afford it (due to 'trickledown economics', everyone thinks they'll be earning more money in future). They got their mortgage, the banker hit his target and got his bonus, and everyone was happy. Until people couldn't pay anymore.

And so Gordon Brown is extremely fucking clear on it, it is not 100% mortgages that are the problem. If they hadn't introduced a 100% mortgage, people on £40,000 a year would – in all probability – not have been able to get a mortgage on a £160,000 home, as they would have to save – say at 10% - £16,000.

So banks pushed up house prices by relaxing lending, easing controls, and lending high multiples. It didn't increase sales or the amount of homes available (though now there are dozens of abandoned, unfinished land developments and skeleton housing estates across the country). Not only that, but people in arrears find themselves homeless.

Due to the complex and fractional nature of reserve banking, a mortgage may be with Joe Bloggs Mortgages, but that mortgage has been sold by Southern Dock to Jimmy Twizters Investments. If you default, the bank can't simply recalculate the best way to keep the money. The Investment firm may simply kneejerk 'take the house'. The property is then resold at an auction for say £120,000 instead or the mortgage total of £360,000 (due to the loss of value in house pices, and also the loss of interest generated income). So a family lost their home, and the house sold for say half of what they paid for it.

Now, what if say, the family were to offer the bank the average auction price of the home, and the family don't get made homeless? Given the marginalised nature of shareholders, it would be impossible, and impractical to gain consent to revalue the moribund mortgage and enusre a family to keep their house. So you're homeless, someone else bought your dream home for less than you were offering to pay for it, and well... you're still homeless.

In one article, I read how a family said they felt bad for buying a repo auction home and thus 'benefiting' from the misfortune of others. The misfortune is not that the family could afford a house in a repossession auction, but that a family lost their home due to being financially abused by greedy bankers chasing bonuses. They made stupid decisions, lent money on 'self certificated' incomes, and a storm of circumstances made the house prices absolutely fucking crazy. Staff were incentivised to hit targets and took irresponsible risks. Everyone and their dog found themselves pelted with letters by banks granting instant credit limits, and encouraged to spend spend spend. And those who were responsible and able to control this didn't. They failed their responsibilities and have brought ruin on the nation and the lives of millions.

It is not 100% mortgages that destroyed the economy. It was when a normal two-up two-down terraced house in London cost £400,000 that destroyed the economy. The economy was built on an illusion of money that simply didn't and never would exist except as an invented figure on a balance sheet. After a while, a LONG while, it became apparent that someone telling lies would be caught out. This is where we are.

Gordon Brown found £500,000,000,000 to bail out the banks. Comic Relief raised £60,000,000 for the starving and dying of Africa. Imagine, if you will, thirty solid years of Comic Relief. Every night until 2038. Thats how long Comic Relief would have to run, were it Bankers Relief.

Gordon should not have rewarded failure, incompetence, greed and recklessness. Their imaginary bonus-driven economy has rained a flood of misery on us all. The banks gambled on our futures, and when they lost, we lost.

2 comments:

Cruvic said...

Excellent post. So true in every manner and form.

Gordon Brown and his banking cronies should be sitting in prison with Madoff because of them, we are all in the dwang now for next couple of years.

Those that were reckless with their money and borrowing and credit card use, well I have no sympathy for your loss.

Stan Moss said...

Cruvic,

you're so lucky (and obviously righteous) that you didn't have to rely on your credit card to make ends meet.

The amount of people I know who had to fund their dentist appointments and basic shopping with virtual money is basically practically every person.
'Course we probably agree that those cards and loans shoudln't have been dished out in the first place. But that's not the general public fault.
The greatest majority of people were showered with very aggressive marketing offers. If you get a nation in debt to the tune of over £1trillion, believe me, there are industrial-strength strategies involved.

When you receive loan offers and credit card offers every other day. When even people on the dole were offered credit. When part-timers, or casuals, or students, were all showered with "stick your signature here and name the zeros"...how can you blame the general public? Every week we read of "woman with c/c debts o £60,000" or similar. The question is: how the fuck were they allowed to gather so much debt? Where the hell was the regulation? How can people still waffle that "the market regulate itself????"

It's no coincidence the Government AT LONG LAST the other day discussed measures to stop unsolicited forms of credit offers. I twice had to actively ask my bank to NOT double my c/c limit, which they did without me even noticing. That is criminal behaviour. Practically all high street banks until recently included an automatic overdraft to go with each new account.

Criminal bastards who made zillions out of it. Criminal governments that allowed it so that they could lecture the world about Britain's dynamic service economy where in reality one transaction out of two was carried out on money that didn't exist!

It's easy to see why credit in Britain simply became a replacement for what were once forms of welfare support.