So how did this world recession start?

[graduate_owner]

Hi everyone,
we all know there's a world recession, but what puzzles me is - how did all this start? The present government has blamed the country's troubles on their inherited debt, and that may well be correct. (BTW I'm not a Tory). However, I thought the problems during the last government started when greedy bankers made money by arranging loans which were not properly secured - hence the expression 'toxic loan', and many of these loans were for property in the USA which were not paid off. (Perhaps I'm being over simplistic here, or perhaps I'm completely wrong). So why did these loans end up as toxic loans? Is the American real estate business to blame?

What about Northern Rock - I can't believe just one bank (and not a major high street bank at that) in the UK could be responsible for our current recession. It's not as if Great Britain is that great any more, especially when compared to the big players like US and China. So I find it hard to believe that the actions of bankers or speculators in the UK could make much more than a ripple on a global scale.

So, how did it all start?

And while I'm on the subject, what causes the occasional hikes in property prices that we've seen in the last 50 or so years? What market forces can cause house prices to spiral overnight? Or are these rises 'engineered' by those in positions of power? I don't buy the argument that building societies are to blame because they loaned money too readily.

Are we being controlled on a global scale?

K

 

[Russ]

Easy. The bankers started it all and the taxpayers have to bail everyone out.

Russ

 

[WandrinAndy]

Are we being controlled on a global scale?

Not sure on a global scale, but having first arrived in the UK a decade ago, I'm totally amazed at the extent to which the British public is controlled by, and beholden to, the ruling class.

 

[Random Orbital Bob]

Obviously it's extremely complex but to boil it down to lowest common denominator.......consumption has been driving demand for goods and services for a long time. Business confidence coupled with poor Government regulation in the first world has allowed debt of all levels to spiral out of control

It's basically reached the point where a lot of the first world is struggling to make the repayments on all that debt. This includes households, corporations and of course Governments. Only the strong exporters are still in surplus, eg Germany, China.

Other factors which contribute to the woes of the first world are our labour markets are bloated with the expectation of high wages and living conditions, all of which our countries income can no longer afford

The bankers are just another symptom of the underlying cultural problem which is basically that we've switched from what our parents believed ie earn the money first then spend it, to a stick it on credit and be damned attitude.

The first world has lived beyond its means or too long. Whilst business confidence fuelled investment and associated GDP growth ie consumption, that was fine. When consumption ( and growth ) stops the debt becomes difficult to service

So countries like Greece and Ireland etc....have to have "dad" bail them out

 

[Cheshirechappie]

Russ says it's all the fault of the bankers - not that simple, unfortunately.

For a start, it's not a world recession. India, China, Brazil and many others have economies that are growing. The countries in, or close to, recession are those of the West - America, Europe including the UK. Others such as Australia and Canada are doing OK-ish (I think).

There are many factors. The banks, and their somewhat rapacious chasing of profit from complex financial instruments, is one factor. The utter failure of bank regulation in the UK is another. The chasing of dubious economic management by the EU, notably the Eurozone, with the political goal of federalism in mind is another.

Banks forgot that they are a service to the wider economy; managers of money on behalf of wealth-creators and individuals. They chased financial gain through speculation and by charging fat fees for such tasks as advising on mergers and take-overs of companies. How much real benefit there was to the companies in this, they ceased to care provided their fees rolled in. They were encouraged in this by the government of the last decade, who were desperate for tax revenue to support massive public spending programmes. Government also made a spectacular mess of bank regulation by taking responsibility for that off the Bank of England, and dividing it between the newly-created Financial Services Authority, the Treasury and the BoE. Result - nobody knew who was in charge of what, so when things started to go wrong, they all assumed it was somebody else's responsibility. Ultimate responsibility for that mess has to lie with those who created the failed system - the government of the day.

As receipts from banking taxes rose, government drastically increasrd public spending. Rather than regard the bank taxes as a windfall, they also increased public borrowing - we had a deficit before the 2008 crash, we didn't pay down national debt. The receipts were committed to long-term expansion of the public sector (the number of people on the public pay-roll rose from 5 million in 2000 to 6 million in 2008). That committed the public purse to paying not just their wages, but their pensions in due course as well.

When the banking crash happened, tax receipts from the banks dropped sharply as their profits collapsed. The public purse was already committed to expenditure that was to have been funded by those bank taxes, so that expenditure had to be funded by either raising all other taxes to make up the shortfall, or borrowing to make up the shortfall. Government chose to borrow, and the deficit therefore shot up drastically. It remained high during 2009 and 2010. It is still high, though has been brought down slightly in 2011 and 2012.

In Europe, a policy of low interest rates across the Eurozone allowed the southern European states to borrow far more than their economies could really sustain interest payments for. When the economy slowed, their interest rates rose, and some could not service their debts - the bulk of their tax receipts went to pay interest on the money they'd borrowed, leaving little or nothing to pay for their public services. They remain in that parlous state, so their economies are in dire straits - Greece is the worst example. Because their economies are stagnant, they aren't buying goods or services from the UK, so our export market is negatively affected. It all really comes down to low interest rates allowing too much borrowing, which cannot now be easily serviced.

In the UK, it's down to government borrowing and spending more than was prudent between about 2002 and 2008, believing that the banking boom (for which it was in part responsible by allowing ineffective regulation) would last for ever. It didn't. We still have the public debts, but not the tax receipts.

The present government has a real problem. It cannot do the usual economic stimulation measure (reduce taxes) because it needs all the tax revenue it can get it's hands on. Economic growth won't happen because overseas markets are either sluggish or in recession, and our economy is being depressed by too much being taken out of it in tax. It can't reduce public spending as fast as it would like because the real economy isn't expanding fast enough to take up the people that would be made redundant in the public sector. Some say that the economy could be stimulated by government borrowing and spending more; others say that's what caused the mess in the first place.

That's the simplified answer. Economists will be arguing about the full answer for decades, and won't reach a conclusion. In short; yes, our current woes are down to too much borrowing and spending, too much individual debt, too much corporate debt and above all too much public debt.

 

[Phil Pascoe]

Political correctness and vote buying in the USA. Freddie Mac, Fannie Mae and banks of various descriptions were encouraged to lend to less advantaged huge amounts of money, that any realist could have seen had a slim chance of being repaid. This then affected other countries, because their banks were caught up in it. That's the beginning - no one knows about the end , it hasn't begun to happen yet.
As far as the national debt is concerned, in 2010 only one and a half percent of it was due to bailing out banks - the other ninety eight and a half percent was debt run up by the previous governments.

 

[Fishandchips]

On a brighter note the sun was out today. Start of spring? Money or no money the feeling of the sun warming your bones is the same.

Loads of outdoor woodworking projects to look forward to too.

Wey hey....... Don't let the ba@@@@ds get you down.

 

[Russ]

Russ says it's all the fault of the bankers - not that simple, unfortunately.

For a start, it's not a world recession. India, China, Brazil and many others have economies that are growing. The countries in, or close to, recession are those of the West - America, Europe including the UK. Others such as Australia and Canada are doing OK-ish (I think).

There are many factors. The banks, and their somewhat rapacious chasing of profit from complex financial instruments, is one factor. The utter failure of bank regulation in the UK is another. The chasing of dubious economic management by the EU, notably the Eurozone, with the political goal of federalism in mind is another.

Banks forgot that they are a service to the wider economy; managers of money on behalf of wealth-creators and individuals. They chased financial gain through speculation and by charging fat fees for such tasks as advising on mergers and take-overs of companies. How much real benefit there was to the companies in this, they ceased to care provided their fees rolled in. They were encouraged in this by the government of the last decade, who were desperate for tax revenue to support massive public spending programmes. Government also made a spectacular mess of bank regulation by taking responsibility for that off the Bank of England, and dividing it between the newly-created Financial Services Authority, the Treasury and the BoE. Result - nobody knew who was in charge of what, so when things started to go wrong, they all assumed it was somebody else's responsibility. Ultimate responsibility for that mess has to lie with those who created the failed system - the government of the day.

As receipts from banking taxes rose, government drastically increasrd public spending. Rather than regard the bank taxes as a windfall, they also increased public borrowing - we had a deficit before the 2008 crash, we didn't pay down national debt. The receipts were committed to long-term expansion of the public sector (the number of people on the public pay-roll rose from 5 million in 2000 to 6 million in 2008). That committed the public purse to paying not just their wages, but their pensions in due course as well.

When the banking crash happened, tax receipts from the banks dropped sharply as their profits collapsed. The public purse was already committed to expenditure that was to have been funded by those bank taxes, so that expenditure had to be funded by either raising all other taxes to make up the shortfall, or borrowing to make up the shortfall. Government chose to borrow, and the deficit therefore shot up drastically. It remained high during 2009 and 2010. It is still high, though has been brought down slightly in 2011 and 2012.

In Europe, a policy of low interest rates across the Eurozone allowed the southern European states to borrow far more than their economies could really sustain interest payments for. When the economy slowed, their interest rates rose, and some could not service their debts - the bulk of their tax receipts went to pay interest on the money they'd borrowed, leaving little or nothing to pay for their public services. They remain in that parlous state, so their economies are in dire straits - Greece is the worst example. Because their economies are stagnant, they aren't buying goods or services from the UK, so our export market is negatively affected. It all really comes down to low interest rates allowing too much borrowing, which cannot now be easily serviced.

In the UK, it's down to government borrowing and spending more than was prudent between about 2002 and 2008, believing that the banking boom (for which it was in part responsible by allowing ineffective regulation) would last for ever. It didn't. We still have the public debts, but not the tax receipts.

The present government has a real problem. It cannot do the usual economic stimulation measure (reduce taxes) because it needs all the tax revenue it can get it's hands on. Economic growth won't happen because overseas markets are either sluggish or in recession, and our economy is being depressed by too much being taken out of it in tax. It can't reduce public spending as fast as it would like because the real economy isn't expanding fast enough to take up the people that would be made redundant in the public sector. Some say that the economy could be stimulated by government borrowing and spending more; others say that's what caused the mess in the first place.

That's the simplified answer. Economists will be arguing about the full answer for decades, and won't reach a conclusion. In short; yes, our current woes are down to too much borrowing and spending, too much individual debt, too much corporate debt and above all too much public debt.

So it was the banks then!

 

[Cheshirechappie]

Russ - Not entirely. The banks were greedy and incompetent, but they were never responsible for runaway public spending. They were als allowed to be greedy and incompetent by a government that wanted the tax their profits generated, and which failed to properly regulate them.

In the UK at least, our woes are principally the fault of government, though the banks' greed certainly didn't help.

Edit to add - in short, the banks just did what government allowed them to do, and in some measure encouraged them to do.

 

[Flynnwood]

There are essentially two categories of "banks". The bank you might use and central banks.

Unregulated retail/investment banks (which are not central banks) got greedy through the power of (unregulated) leverage.

Lehman Brothers went bankrupt because it over-leveraged. Around one actual dollar on deposit in the bank versus forty-four dollars out on loan.

The UK government stepped in to prop up the Lloyds/HBSO/RBS fiasco (in conjuntion with the Bank of England - which is a Central Bank) because there were no other options. The consequences would have been much worse ... (think unfullfilled payslips all around the UK).

Then the Bank of England started Quantative Easing - which is an option for Central Banks and the fractional reserve banking system.

Henry Ford said - "It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning."

 

[Dusty]

Am I right in saying that we owe around £178,000.00 per person in this country ?? Dunno what all the fuss is about . just get costa coffee and amazon to pay their tax amongst others and all sorted !!

 

[Cheshirechappie]

Am I right in saying that we owe around £178,000.00 per person in this country ?? Dunno what all the fuss is about . just get costa coffee and amazon to pay their tax amongst others and all sorted !!

Very hard to pin down a figure for debt. The official On-Balance-Sheet National Debt currently stands at just over a trillion pounds (in 1997, the National Debt, the sum total built up since the National Debt came into being in 1696 or thereabouts, was £347 billion, and in 2010 it was about £760 billion, with a deficit of £180bn. Since then, deficits have reduced, but each year's deficit adds to the National Debt.) However, in addition to the officially declared National Debt, there are known forward liabilities (commitments we know we will have to pay), consisting of PFI liabilities, public sector pension forward liabilities, and some bits and bats. There seems to be some debate about how much that adds up to, but probably 'a lot'.

The National Debt (not counting off balance sheet forward liabilities) works out at £16,600 per person in the UK, give or take a bit, up from £5,800 per person in 1997.

Then there's personal debt, and corporate debt. Offset against those are personal assets and corporate assets, quantifying which is just a guessing game. All sorts of different groups, some with political axes to grind, have come up with 'debt' figures, but unless they declare exactly what their calculations are based on, their figures are pretty meaningless.

 

[John Brown]

http://xkcd.com/980/huge/#x=-6400&y=-5248&z=1
Bottom right of the top left box, ratio of average worker to CEO wages.
Explains a lot!

 

[MIGNAL]

Not a lot we can do about the Banks. When they pull the plug, they pull the plug. When they really mess up, they get bailed out. They have to be bailed out otherwise there would be serious civil unrest. It's kind of like nationalised or community Banking but with none of the benefits and all of the risk taken by the tax payer. Iceland had a great opportunity to move to a different form of Banking after their horrendous experience. For some strange reason they chose to stay with the same old untrustworthy mess. Same system just different players.

 

[Jacob]

It was the neo-conservative, de-regulation, free market, roll-back-the-state, so called 'philosophy' of Regan, Thatcher and others.
Moronic and doomed to fail.
"India, China, Brazil and many others have economies that are growing" mainly because of state intervention, state investment and so on. It can't be left to the free market.
One of the most amazing mass delusions of recent years is the notion that 'wealth creators" somehow will generate more wealth for all, if they have a free hand and less regulation. What we have seen is exactly the opposite; they have taken the money and run, leaving a collapsed economy behind.
For an economy to work wealth has to be distributed to keep it going. What goes around comes around. It's no different from a Monopoly board game - when someone has too much money and too many properties the game tends to stop. To get it going again it has to be shared out, hopefully by democratic agreement (taxation) , if not, by theft and revolution.

 

[gazza_0208]

Everyone loves to bash the bankers, but you gotta be fair, a vast percentage of the Tax Levy came from the financial sector, in respect to its total employed number. Unlike the private sector, which is near to 30% of the UK workforce, and said to be declining, but they are just shoved into Quango operations to hide numbers, unless of course your defence related then your out. The real effect of Bankers was allowed to be placed into action via selling products that were impossible to regulate, the Body, group, section or select individual that was in place to enforce the control of these products, understood nothing about them, and still does not. It was a train crash waiting to happen, it's a recession I agree, but not really induced via a few hundred people punting markets. Senior people invested large sums of capital in items that no longer exist, we're they penalised, no they were not, because they did nothing wrong in the eyes of the controlling body, and the units that govern them, keep in mind some are self governed, we have seen in my opinion the first, maybe just the second of three waves, the next is to come. One example, tighter lending, I think not, I know a 23 year old single female earning now for nine months since leaving uni, and can get a loan to value of five times her gross salary, great stuff, but does anyone see that when rates go to 5% based on the deal she has, her total "gross" salary will be eaten up again, then people want the "bankers" to come up anther idea. If you allow sales of products to those that have little or no chance of repaying their loan to purchase it, then God help you. The head of department in all associated groups attached to all these scandals should be outed, and banned for life, it seems not, some are promoted and get "paid off", its all about who you know, not what. It's a shame but most talent will be forced out of London, if not already done so, and that's good, because you won't need the Enforcement Departments so at least someone useful can fill that near 400,000 sq ft of office it allegedly uses.

 

[John Brown]

It was the neo-conservative, de-regulation, free market, roll-back-the-state, so called 'philosophy' of Regan, Thatcher and others.
Moronic and doomed to fail.
"India, China, Brazil and many others have economies that are growing" mainly because of state intervention, state investment and so on. It can't be left to the free market.
One of the most amazing mass delusions of recent years is the notion that 'wealth creators" somehow will generate more wealth for all, if they have a free hand and less regulation. What we have seen is exactly the opposite; they have taken the money and run, leaving a collapsed economy behind.
For an economy to work wealth has to be distributed to keep it going. What goes around comes around. It's no different from a Monopoly board game - when someone has too much money and too many properties the game tends to stop. To get it going again it has to be shared out, hopefully by democratic agreement (taxation) , if not, by theft and revolution.

I agree with all of this, but I don't think you should forget Blair, who was almost as bad as Thatcher and Regan. Worse, in fact, as he was supposed to be a socialist.

 

[bugbear]

I agree with all of this, but I don't think you should forget Blair, who was almost as bad as Thatcher and Regan.

Regan only broke the rules to apply justice; he was tough but fair.



BugBear

 

[Random Orbital Bob]

The big mistake all successive governments did was fail to recognise that UK plc needs a diverse portfolio of industry from which to generate its tax receipts. Short term thinking by all party colours created an unhealthy dependence on the city. The overwhelming attraction being short term and very sizeable income to the treasury

Now I'm not decrying assigning some serious importance to Britains world class banking industry and being careful not to damage it with over regulation. But to fail miserably to invest in a balanced portfolio including manufacturing means that every time that industry catches cold......we all get pneumonia

Shame on them, it's naff all to do with rich vs poor, its just incompetent management pure and simple. Look how Germany has continued to invest in manufacturing..it has a high cost labour market yet.....

 

[Jacob]

.....t's naff all to do with rich vs poor, i........

It is in so far as right wing politicians (by definition) are opposed to free education, re-distribution, taxation, public investment, public services, social services, etc etc. All these generate wealth - reducing poverty and creating wealth-making opportunities at the same time.
What goes around comes around.
Having poor people is not good for the economy. Sitting in on a Monopoly board game without any money is pointless for all concerned.
Note the bankers are still paying themselves bonus's even when they are making a loss! Why are we letting them get away with it? And what the pineapple are they doing with these vast hoards of wealth? Nothing useful you can be certain.