The current crisis

I wasn't going to write about this but reading Keith's (Zen Mischielf) post of yesterday (8 October) prompted some thoughts.

I can see the logic of not letting the banks go under but in my opinion they're all behaving a bit like sulky children refusing to play nicely. Banks etc only make money by lending - if they don't lend they will go bust. In the past they've lent too much - e.g. Northern Rock who tried to corner the mortgage market. How do you increase market share? By lending to people who are at higher risk of defaulting on their loans because you can charge them higher rates of interest. In a healthy economy this is fine but the moment you have a down turn in the economy this is a recipe for disaster - as happened in the States.

What did not help in England was the introduction of HIPS packs as it served to slow the housing market. The timing of this was unfortunate to say the least though house prices were getting silly. As a house is probably the most expensive purchase we make, inevitably people not taking out new mortgages or falling on hard times and failing to repay their loans will have a disproportionate effect on the financial sector.

Are people spending less money? There is certainly a trend towards thriftier ways of living -whether as cause or effect for the current crisis no one knows. If everyone suddenly stopped borrowing money in any shape or form we would have a far worse crisis than we have now. But on the other hand I think we need to bring back some form of credit control - 2 years to pay for a car maximum and at least 30% down payment - 50% if it's second hand; only a year to repay a loan for a holiday etc. I can't remember what they all were now, but if we'd retained them I wonder whether this crisis would have happened? If we could only borrow 2.5 times income for a house then house prices would not have spiralled. Easy to be wise with hindsight.