Monday, 23 February 2009

Is the end in sight?

There used to be an old man who walked the streets of my home town muttering phrases - 'we are all doomed', 'the end is nigh' and 'repent your sins'. His modern incarnation, the financial and political pundits, are all at it telling us things will get worse and, indeed, they might not get better. The villains are straightforward: greedy bankers, politicians (in the case of the UK Gordon Brown), people who took out mortgages they could not afford and (in the case of the UK) the Americans. There is a violent correction under way but my forecast is quite straightforward: the world will not come to an end. Global growth will recommence in late 2010 and employment will start to recover in 2011.

As blogees will remember I take the view that the credit bubble was started by the desire of both the UK and US governments to create a property owning democracy. The US and UK made sure that the banking sector opened credit to anyone irrespective of their ability to pay. Now I have no objection to governments doing a bit of social engineering but to force financial institutions to lend to those who almost certainly could not repay (the Community Reinvestment Act in the US for instance) was unwise in the extreme. However, how many politicians or their puppet masters in the media now remember their own role in stoking the fires of credit led over consumption? The banks do what they have to do - they take risk and then they try to offload it. But even the smartest securitisation could not prevent disaster following the highly correlated collapse in property values across the US. However, debt doesn't just disappear - the banks could not cope and now governments are having to take it onto their balance sheets. This would deserve a hearty 'serves them right' except that the government's balance sheet is our balance sheet and now it is you, not some bank like Northern Rock, that has lent those sub-prime mortgage holders the value of their house. The problem being that the whole sorry mess has led to those self same mortgage holders being made redundant and guess who will pick up the tab? Not GB(US) or GB(UK) - the first is beyond caring and the 2nd is just itching to lose the next election and get his next job as head of the IMF.

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