Current Banking Crisis

Discussion in 'Current Affairs, News and Analysis' started by Tango, Mar 6, 2009.

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  1. I'm posting this in Current Affairs as I'm not really sure where else it would belong.

    Being (reasonably) well informed, and up-to-date with news, and current affairs, I find myself horrendously confused by the banking crisis, so I'm turning to ARRSE for help.
    I have one or two questions, which I hope, I can get answered here. I do realise that these questions aren't exactly making me sound bright, and may very well be a little naive, but I can live with that.

    i) Why are the Government bailing out the banks, surely it is the bank's problem if they go bust?
    ii) If the bank is controlled/aided by the Government, what does that mean for people borrowing from the Bank?
    iii) How did all this start?

    Again, I would appreciate any insight into this, as it seems to be beyond me!

    Best wishes, and good weekend,

    -Tango
     
  2. i) The banks are part of a complex financial web that spans the globe - if they fall apart then everything fails, to the point that there won't be any more food on the shelves.
    ii) Unless you are fond of the tin foil hat, nothing.
    iii) Loans were made against assets without sufficent leway being given for those assets to fall in value, eg. if the banks had lent 70% of the value of the price of a house it wouldn't be a problem, as prices could fall 30% and if the bank repossessed the house they could sell it and get their money back. With 100% morgages they can't do this, and will lose bilions. The follow on is that there is a market for loans as whever 'owns' a loan can make money from the interest payments. These loans were sold by the banks to people and groups who wanted to do that. The problem now is that a).Everyone in the world owns a ton of these loans that can't be redeemed and b). No one is quite sure who owns what. The latter point cripples confidence, which cripples lending, which causes a recession.
     
  3. Ok, seems fairly straight forward (ish!). So now the Government is giving the banks hundreds of billions of pounds in order to pay off these 'mystery' loans?
     
  4. No, they are loaning it them in order that they can ride-out the current problems so in the longer run the loan's owners will get most of these iffy loans paid back, which in the non-Daily Mail headline world they will be able to. Without the government loans there would be no banks to pay back to as they would implode due to lack of short-term capital, and if that happened the economic world would end.
     
  5. Right, I think I've got a much better understanding than I did have. Thanks for the answers, much appreciated.

    Have a good weekend :)
     
  6. Cheers, you too.
     
  7. Biped

    Biped LE Book Reviewer

    Wow - a really simple problem, that isn't really a catastrophe, that is being remedied in a rather neat and tidy way, and everyone's happy . . . . and goes off to have a good weekend.

    Wow!

    Don't know why I was sh!tting myself, honest. I feel so much better - and I'm sure Gordon Brown does too.
     
  8. The only thing that you need to know is that no way is this Gordon's fault. It is all the fault of the Americans (you know, those that gave him a standing ovation last week), He was not involved and is only here to sort out the mess that his predecessor left.
     
  9. I dont blame Gordon at all. I think most of the blame lies with the idiot that was chancellor just before Gordon got the PM job.
     
  10. How on earth you figured me saying that there are billions in loans that no sod can locate or that we risked the economic world ending is a 'really simple problem' is beyond me!
     
  11. I have my own strong political views, but I will try to answer this as neutrally and factually as possible.

    It's a matter of opinion. The fear is that if the some large banks go bust (they wouldn't all necessarily go bust, some haven't taken on such bad debts), then the basic infrastructure which makes hole-in-the-wall machines work and ensures that your wages make it into your account would stop working. This would of course be bad if it happened.

    It's a matter of opinion whether or not the only way to prevent this is to give banks public money to allow them to continue functioning in their current form.

    It means that loan decisions are more likely to be subject to political pressure. It makes it more likely that things the current government disapproves of will be refused loans and things they consider politically important will have loans approved, outside of the normal business considerations. Again, it's a matter of political opinion whether this would be a bad thing or not.

    Different political factions blame different people and groups. Basically, for over a decade, many western populations have been sinking deeper and deeper into debt because they thought it was ok as long as the stuff they bought with the borrowed money went up in price (mostly houses). It couldn't carry on forever, and now lots of people find they have trouble making the payments on the loans.

    This has caused people who loaned the money to be suspicious about lending any more money to the public, and to each other, because they're unsure how much bad debt the other banks have. The thing that was driving up the house prices in the first place was an ever expanding amount of money loaned out, so banks ceasing to lend actually drives prices down, in a spiral.

    It couldn't carry on forever because houses reached a price where ordinary working and lower middle class couples simply could no longer borrow enough money to feed into the housing market at the bottom, and the people already in the market with huge debts were super-sensitive to any increase in interest rates (interest rates couldn't stay low forever).