There was an article in The Times this week by Anatole Kaletsky. Headlined “A historic crisis, but nothing to worry about”, it claimed that although the credit crunch is a big deal for a few professional City men, it will have no real effect on “ordinary investors and bank depositors”. As proof, Kaletsky points to the fact that despite two months of “lurid” headlines, the FTSE 100 is currently trading at roughly the same level as at the end of July: equity investors have neither lost nor gained from the crisis so far. Furthermore, savers are actually doing rather well out of the whole thing. However, the fact that investors have not started to suffer yet is hardly proof that they won’t.
Consider the fate of UK debtors. Credit is getting harder to come by and it is also getting more expensive. Door-stop lender Provident Financial reports that even they are turning down seven out of ten applications for credit cards; I haven’t had an invitation to take out a platinum credit card with Morgan Stanley through my letter box for at least two weeks (that’s a record); and on the high street, the price of the average standard variable rate on mortgages has risen to well over 7.5%.
Pity the people who took out two-year deals in 2005 at phenomenally cheap rates and are now about to have to remortgage at very different prices. Some of them will find reasonable new fixes, but others will be locked into staying on their lender’s SVR for many painful years to come: on average they’ll see their bills rise by 30%. And while I don’t want to be too apocalyptic, it’s worth remembering that it was precisely the same situation in the US – teaser rates turning into terrifying rates – that kicked the credit crunch off in the first place.
This misery will just have to hit us all in the end. I could fill pages with statistics to explain why, but here’s just one that sums it up well: 8% of UK consumer spending is financed by mortgage equity withdrawal (MEW). With rates so high, we can’t expect it to stay that way. Where consumer spending goes, so does the economy, corporate earnings, and in the end share prices.
That said, I must agree with one of Kaletsky’s points. This crisis, he says, will not in the longer-term stop banks endlessly structuring and distributing “new types of financial instruments”. He’s right, it won’t. There is talk at the moment of a global attempt by governments to regulate the credit derivatives market. I don’t know why they bother. Bankers are endlessly creative (not necessarily in a good way): every time one idea goes belly up – credit derivatives in this case – it only takes them a year or two to think of another winner. If governments were as creative as bankers in finding ways to achieve their own goals, poverty really would be history and the NHS would work. Sadly, they are not.