September 30, 2008
Remember the date – 29th September 2008 – the day everything changed.
In the UK, Bradford and Bingley has finally been put out of it’s misery. The buy to let bubble has finally burst. It wasn’t necessarily a big bang, but I’d imagine that yesterday the value of every UK residential property dropped by several percent.
Stock market falls are more obvious to the eye and the media, but other assets can fall quickly too.
In the US, the story has been for months that the problems are all the fault of pushy financial salesmen and Wall Street insiders selling debts on. This breaks the links between risk and reward.
Gradually, the world has come to recognise that Main Street and a desire to borrow all that ‘cheap’ money was to blame as well. Middle America – you are not blameless.
But now other questions are being asked. Was the area being regulated sufficiently? If it was not, was that the fault of bankers and financiers hiding things? Was it the fault of credit rating agencies that are paid to provide good news? Was it the fault of legislators for not offering good enough laws to enable regulation?
Who can say? It probably relates to a little – or a lot – of everything.
But having squashed the bail out package, US legislators will forever more be linked as a vital part of this collapse. Their plan may not have been perfect, and would have been costly, but it was a plan.
Now the American financial system must wait for another plan to emerge. The question now though, is whether the global financial system will survive long enough for another plan to be launched? Will markets have collapsed completely by the time something else can be agreed? More to the point, should markets even be opened?
The American public may be protesting online in their thousands and that may be the reason for the bill’s failure – but is the general public qualified to understand and judge the options and solutions? I am certainly well acquainted with the financial world, and there is so much happening that I cannot keep up or make accurate assessments.
Perhaps this is Main Street bringing the collapse full circle – back to their own debt laden doors. Perhaps this is the natural result of over a decade of loose lending – after all, debts do have to be repaid sometime.
But what will happen next? When Ford and GM go under? When it becomes clear that car financing, credit cards and personal loans are going unpaid? When the lack of liquidity in credit markets moves from banks and financial companies to the corporate world more generally and all sorts of other large corporations start to fail – every day?
Then we will all be asking, “What were those American legislators doing? Were they mad? Are they fit to still lead?”
Some years ago, I recall reading about the sale of hundreds of millions of pounds worth of gold into the market by Gordon Brown. He announced it as a triumph. I seem to recall that he sold at US$228 per oz. I read a comment that suggested that gold was moving from the “hands of the weak into the hands of the strong”.
That sentiment has stayed with me. I always presumed that the weak were governments and the strong were private individuals. But now it suddenly becomes clear. The strong are the Eastern governments – China, Japan and others that now own the ‘real wealth’ whilst the West is simply saddled with ever more debt.
The Western world – financially at least – is in a death spiral.financialguy