20 reasons for the crunch

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20 reasons for the crunch

Postby bigearth » Tue Oct 07, 2008 7:58 am

this is from a uk channel and is somewhat uk-centric, but there's not a heap of difference..

good spread of culprits..!

20 reasons for the crunch

The finger of blame points widely, encompassing greedy bankers, the Iraq war and even Margaret Thatcher

By Sean Farrell and Sean O'Grady
Tuesday, 7 October 2008

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China

The source of the greatest of the "global imbalances" still troubling the world economy. The Chinese government has kept the exchange rate of the yuan low to stimulate exports and build up foreign currency reserves – principally in dollars. These were then lent back to the West, driving down interest rates and fuelling a real estate bubble.

The liquidity bubble

The unprecedented flow of cheap money looking for a home flooded the West's economies. Trade surpluses were recycled in the early part of the decade. This stimulated the "search for yield" and, in turn, the mispricing of risk as investor s imagined the high returns they were offered were safer than they proved.

Search for yield

With interest rates low and money sloshing around the system, investors sought out increasingly risky assets for a higher return. Demand squeezed prices so little premium was paid for extra risk. When sub-prime mortgage borrowers started defaulting, the market rediscovered risk with devastating consequences.

Sub-prime lending

With interest rates low and liquidity in plentiful supply, lenders threw caution to the wind, lending billions for high margins to people who found they could not afford repayments when rates rose. Often seen as the cause of the crisis, but in fact the most visible symptom of a 10-year debt binge.

Leverage

Cheap money caused the world to go on a leverage spree. Individuals borrowed to invest in property or buy goods; investors used cheap debt to invest in higher-yielding assets, or borrowed against existing investments; bank lending outstripped customer deposits and activities were kept off balance sheet. The shortage of credit as the debt is unwound threatens to bring the economy to a halt.

Originate and distribute

The craze for higher yielding investments allowed banks to parcel up loans through mortgage securitisation, packaging of corporate debt and other means for sale to investors. This was meant to disperse risk, but when confidence collapsed banks were left with billions of pounds of loans they had not offloaded. No one knew where the debt was, causing further market seizure.

Alan Greenspan

One of Mr Greenspan's predecessors, William McChesney Martin, said his job was to "to take away the punch bowl just as the party gets going". Alan's legacy was less happy; the Greenspan put, the idea that whenever the markets took a tumble the Fed would be along with an interest rate cut to get the party going again. Now only the most dramatic cuts in rates can restore market confidence.

The Democrats

A Democrat president, Bill Clinton, oversaw the repeal of the Glass-Steagall Act in 2000, which had separated commercial and investment banking since the last banking crash in the early 1930s. Although sponsored by Republicans and the banking industry, the administration let the move get off the ground. Later the Democrats also blocked reform of Fannie Mae and Freddie Mac.

The Republicans

Nobel economics prize winner Joseph Stiglitz famously called President Bush's adventure in Iraq "the three trillion-dollar war", a third more than the Vietnam war. Like 'Nam, its effects have been economically devastating, fuelling America's long boom and her appetite for imports and credit.

Regulators

The watchdogs argue it is not their job to run banks, but from London to New York and Reykjavik regulators failed to rein in the excesses of the financial industry. Competition between financial centres for business added to the belief that the market would operate efficiently, producing laissez-faire policies that were exposed in summer 2007.

Credit rating agencies

Regulators left judgements on the quality of debt sold to "sophisticated" investors to Standard & Poor's, Moody's and the like. But the agencies got too close to the issuers of debt, slapping top-notch ratings on batches of structured credit containing risky loans. Investors chose to believe them until things were too late.

Financial Services Authority

Britain's main financial regulator is sticking its nose in to all aspects of banks' affairs now, but only after a humiliating admission that it failed to keep a check on Northern Rock in the months before the bank's near-implosion.

Greedy bankers

Many in the City losing their jobs will have made millions from short-term bonuses for market speculation. Traders' bosses in the boardroom let the casino continue because their pay was also linked to short-term results. The authorities' price for bailouts will be attempted curbs on bankers' pay.

Consumers/housebuyers

It's easy to blame traders, bank bosses and watchdogs, but no one was forcing us to take 125 per cent mortgages or to rack up debts to pay for Caribbean holidays and Jimmy Choo shoes..

Margaret Thatcher

The high priestess of market economics has much to answer for; the deregulation of the mortgage market; encouraging the demutualisation of the building societies; selling off council housing; and encouraging the national obsession with home ownership.

Moral hazard

An idea that proved all too powerful in the minds of men such as Mervyn King. Fear of the consequences made him, arguably, unwilling to help stricken banks. Erring on the side of caution, he misjudged the greater hazard of systemic risk.

Gordon Brown

Oversaw the biggest real estate boom in British history and gave the impression he had abolished the economic cycle. "No return to boom and bust" was the mantra, but the budget deficits he ran up only made matters worse. Tony Blair watched him do it.

Mark-to-market accounting

"Fair-value" accounting was meant to bring greater openness to company accounts, forcing banks to admit the market price of securities on their balance sheets. But with no market for many of these assets, banks have hadto take massive writedowns, creating a spiralling loss of confidence. Pressure is building for the rules to be suspended or changed.

Basel 2

The Basel 2 bank capital rules did not ensure banks had enough liquidity. Northern Rock and Bradford & Bingley met the capital rules, but that didn't stop depositors getting scared. The rules are said to encourage banks to run with less capital in the good times, leaving them exposed when the market turns.

Estate agents

They were just doing their jobs, but they sold the houses and no one likes them. Going out of business at a rate of knots.

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