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I was talking to a taxi driver on the way home last night.
He hadn’t had a busy day. And it wasn’t just down to the early Easter weekend, and the miserable weather, he said. “Who wants to go shopping now? We’re all skint.”
Of course, he was charging me time and a half for the bank holiday, so he was a little less skint by the time I got out of the cab. But he’s not the only one feeling glum. According to The Telegraph, a recent YouGov poll found that more than half of us are finding it harder to make ends meet than last year, while 70% are at least “somewhat worried” about the prospect of an economic downturn.
And even though people are more worried, they are finding it harder and harder to shore up their savings…
Despite people’s fears about the state of the economy, they are finding it harder to save more. A YouGov poll for The Telegraph found that 40% have seen their savings fall in the past year, against 20% who saw them rise. And a full third said their debts had grown in the past year. So it’s no surprise that nearly half said that they planned to cut back on “big-ticket” purchases in the coming year. Meanwhile, more than 80% believe that official inflation figures are out of touch with reality, with prices perceived to be rising much faster than the consumer price index suggests.
None of this should be particularly surprising. People have got into spectacular levels of debt in the past decade or so, while the costs of essentials, such as energy, housing, and food, not to mention the tax burden, have risen sharply. What is more interesting is who people blame for the current turmoil we find ourselves in.
More than 80% blame banks and “greedy traders” for our economic woes. A spokesman for the British Banking Association told the newspaper “It’s hard to see how British banks are being held responsible for what is a global situation.”
But it’s not hard to see why the British consumer might see it that way. After all, it was a UK bank that went to the wall first, not a
Meanwhile, behind it all, we hear about the financial whizzes who bundled up the mortgages and sold them on and created all these little toxic timebombs which are now detonating throughout the financial system. So it’s not hard to see why people blame the financial sector – they’ve every right to.
Why we all kept on borrowing
Of course, nothing’s quite that simple. After all, people have to take some responsibility for their own actions. No one put a gun to anyone’s head and forced them to take out these loans. But when you have the equivalent of an arms race going on in the mortgage market, effectively forcing people to borrow more and more if they actually want to buy a house, then that’s difficult to resist. Particularly in a country where most people are brought up to believe that buying a home is as much part of your expected lifecycle as having children or getting married.
So the banks created an environment in which it was all too easy to overstretch yourself – and if you stayed on the sidelines and saved, you looked like an idiot, and a whole lot poorer than your property-rich compatriots.
But who was behind the banks? Who made this whole environment possible in the first place? After all, the pushers of debt haven’t had much choice in the matter either. A mere six months or so before the credit crisis kicked off, people were berating HBOS for losing market share. That saw the bank part ways with its new head of mortgage lending, who was effectively punished for adopting a more conservative strategy.
Blame the central bankers
The truth is that this whole thing comes back to central banks. The world’s key interest rates were set too low for too long, with Alan Greenspan, the former US Federal Reserve chief, the main culprit. Cushions of cheap money gave rise to an overly forgiving environment, where investors were given paltry returns for taking really rather large risks. The search for higher returns lead to more and more financial innovation, more and more risk-taking, and more and more accidents waiting to happen at the first sign of a downturn.
And now, what’s the answer to the resulting banking crisis? Why, more cheap money of course. Just because the banks can’t spend it or lend it out doesn’t mean that it won’t have an impact. Ultimately, every new dollar in circulation decreases the value of the
Before I go, I need to draw MoneyWeek subscribers’ attention to an error in this week’s print edition. The Investment Briefing on banks, on page 20, contains a table titled: “% of tangible equity in “toxic debt”. The names of the banks are labelled wrongly – for a corrected version of the table, please click here: corrected table.
My sincere apologies for any confusion caused.
Turning to the wider markets…
US and Asian stocks soar
On the Continent, the Paris CAC-40 closed 22 points lower, at 4,533. And in
Across the
Asian stocks tracked Wall Street higher today. The Japanese Nikkei had risen 265 points to 12,745. And in
HBOS rebounds as execs buy in
Crude oil futures continued to fall this morning and were last trading at $100.44. And in
Spot gold rebounded to $923.80 this morning from an intraday low of $911.50 as bargain-hunters stepped in. Silver, meanwhile, had climbed to $17.32.
Turning to the currency markets, sterling remained weak this morning, last trading at 1.9926 against the dollar and 1.2817 against the euro. And the dollar was at 0.6430 against the euro and 100.56.
And in London this morning, HBOS recorded its biggest one-day gain ever, adding 17% as executives bought 1.4m shares in the bank.
Our recommended article for today…
Turning point for the dollar?
– The falling dollar is fuelling inflation by reducing incomes and depressing spending. However, it could be good news for US exporters. For more from Jeremy Batstone-Carr on why the outlook for the dollar could be about to change – and what it means for investors – see: Turning point for the dollar?