Saturday, July 19, 2008

The Economic Situation (3) - Credit Crunch

The credit blow out is finished. The world is moving into a decade of tight money.

The major effect will be higher interest rates. Money will be difficult to borrow. Many people and businesses will find their loan applications turned down, as banks tighten lending criteria.

The credit crunch will affect several sectors of the economy.

The financial sector is already under tremendous pressure. The sub-prime crisis is just the beginning. Losses will increase and more banks and finance companies will collapse.

When banks have to write off bad loans, their capital is reduced. This means that most of the pain will be felt by the shareholders of the banks. However, they have creamed it over the past decade, so their pain should not be too great.

Depositors are only affected by bad loans, if the bank has to close. This should be rare.

Somes jobs in the finance sector will disappear. Financial consultants have been on the pig’s back over the past decade, so it hard to feel sorry for them.

People who sell bankers their Louis Vuitton bags may face a town turn in business, but the pain will mostly be confined to the finance sector.

Nevertheless everyone will feel some pain, as many superannuation funds have invested in this sector.

The decline of the finance sector will only get really serious, if tight credit conditions begin to affect the rest of the economy. High interest may stifle business growth.


Gene said...

Sounds like 1983 all over again.

We lived thru that too.

Actually, if we can get over the whining, (Phil Gramm was right) we will be a better country for all this. Louis Vitton will suffer.


Ron McK said...

I think that his one is different in a couple of ways. That one was caused by Vockler turning the screws, whereas this one was caused by Greenspan turning on the tap and the financial wide boys making foolish and greedy decisions that are now drowning them. The number of financial institutions in trouble this time may be far greater than then, but it is hard to know, because those who do know do not tell the truth. The other difference is that this time the bankers are screaming out to be rescued, and Banker Ben, or Congress probably will come to their aid, whereas Vockler turned a deaf ear.

Nevertheless, as I said, most losses in the financial sector are just one group of bankers gaining at the expense of another.