Maxyboy Posted March 15, 2008 Report Share Posted March 15, 2008 Sorry if this is a really stupid question....but....what is this credit crunch i keep haering about? Link to comment Share on other sites More sharing options...
Ritey Posted March 15, 2008 Report Share Posted March 15, 2008 Too much borrowed money not being able to be paid back causing a chain reaction of people/companies/banks owing money to lenders causing the ripple of borrowing to become increasingly difficult thus slowing the economy. Or at least that's what I understand it to be. Link to comment Share on other sites More sharing options...
cruiser647 Posted March 15, 2008 Report Share Posted March 15, 2008 I think it is where all the major money institutions have basically closed shop by putting up their inter-bank lending rates. And also by only lending to institutions that are properly AAA+ rated. Anyhting less and they don't get the loan. Northern Rock was not AAA+ rated, so the rates that they borrow money at has shot up. BUT the rates at which they lend to you and I are still at 5.** (or whatever the mortgage rate/loan rate was at the time). So, NR make a loss on every loan/mortgage as they are paying 6% (for instance) on your 200K mortgage, but only getting 5.**% back from you. Because NR's business model was to basically borrow from big institutions to finance their lending, they had, in banking terms, feck all in reserve - enough to cover all savings This has not just affected NR, it has affected many other financial institutions, just they are more robust and able to survive better. Because of this, businesses have reigned back some of their investments. The reason it all started:- The selling of dodgy home loans/mortgages to non-ABC1 status customers in the US. For some reason, many loans companies lent to these bods (mis-sold even) which was fine, until US interest rates went up and the customers variable mortgages could not be paid - so the banks kicked them out and repossessed the homes. Having the home repossesed by the bank means the bank then has to sell it - which they could to start with at a good price until their was a glut. Now, the homes are empty, the bank has no income from the mortgage and is sitting on a house that is loosing money fast as it deteriorates/gets looted etc. If they were clever, the banks would negotiate with the customer to carry on paying the home loan and live in the house. Once interest rates improve, the bank could up the money again. But no, short term gain wins every time. I think that is it in a nutshell. Scooby_Simon would/will be able to tell more. Read this about the American Bear Stearns Bank doing it's impression of Northern Rock. America's Northern Rock Link to comment Share on other sites More sharing options...
Maxyboy Posted March 15, 2008 Author Report Share Posted March 15, 2008 Cheers guys. The reason i ask is i may part finance the purchase of my next car, tomorrow maybe, and wondered if this would affect me. It doesn't sound like it though. maybe? Link to comment Share on other sites More sharing options...
cruiser647 Posted March 15, 2008 Report Share Posted March 15, 2008 It might do. Depends upon your credit rating and stuff. Some institutions will do more careful checks, others won't. You might not get the advertised % rate. However, seeing as it is part financed, you should get a good rate. Booster might be able to advise and/or look about? Link to comment Share on other sites More sharing options...
scooby_simon Posted March 15, 2008 Report Share Posted March 15, 2008 cruiser647 has fairly well covered it. Essentially credit has got more expensive and so some people / companies are either struggling to repay debts, or cannot afford to borrow money to finance expansion / speculation. Thus "business" slows down as there is less money around as the "lending organisations" are less inclined to lend to each other and the spread (the difference between the rate money is LENT and interest paid on deposits) has widened. Consider the following examples a, last year everything was OK. 1, Nat west lend money to HSBC to finance a large trade or trades they want to make; They might pay a low rate that is usually called the London Interbank Offered Rate or "interbank" rate ( LIBOR ); in a nutshell, this is the rate larger organisations will lend to each other as it is (almost) certain that it will be repaid. 2, Nat west lend to small-bank at LIBOR + 0.01% (or +1 Basis point, +1BP); thus, the increased interest payments are a reflection of the slightly higher risk that the money will not be repaid. 3, Nat west lend to might-be-wobbly bank at LIBOR+10BP. Get the idea, Interest reflects the default risk. Now, the LIBOR is set by the BBA each morning (by reference to a collection of the bigger banks). LIBOR rates are available from 1 day to one year. There is also the LIBID which is the deposit rate, i.e. what the bank will pay. b, the problem is... That some banks are just not lending to the greater risk groups. As stated above NR's business model was to go to the credit markets, borrow money and then re-lend it at a slightly greater rate. Problems in the states “sub-prime” mortgage market where loans were made to people who should not have them; people started to default and so rates rise.....Property prices move south and the spoblem can spiral. However, NR got into trouble when people lost confidence in them and took out their money, thus causing the liquidity of NR to drop. Thus NR had to go to the market to borrow more money, but at a greater price (interest rate) and so they have loans at higher rates than they were planning to pay. Thus problems. So, confidence in the market goes down, so spread (lend vs deposit rate) widens (as there is greater risk of default) and so the cost of credit rises, IF the organisation (or individual) can get credit. Link to comment Share on other sites More sharing options...
Rachel Posted March 16, 2008 Report Share Posted March 16, 2008 So, just like stocks and futures it really all is a house of cards that requires everyone in the game to BELIEVE it is real. When the belief falters, it all starts to behave like it looks - very fragile and requiring confidence to keep it going. Is that a good way to view it? Link to comment Share on other sites More sharing options...
scillyisles Posted March 16, 2008 Report Share Posted March 16, 2008 [ QUOTE ] That some banks are just not lending to the greater risk groups. [/ QUOTE ] It is not just lending to higher risk groups that is being cut back - the banks are keeping the liquidity to themselves to shore up their balance sheets to meet Tier 1 capital requirements and also they don't trust the other banks and think they have liquidity problems because the toxic debt is packaged up all over the place. The rescue of Bear Stearns shows how the problems have spread from sub-prime - Bear Stearns had a reasonably large exposure to Carlyle and suffered a run on it's liquidity as clients withdrew funds to move to other banks.. Link to comment Share on other sites More sharing options...
Soulboy Posted March 16, 2008 Report Share Posted March 16, 2008 [ QUOTE ] The rescue of Bear Stearns shows how the problems have spread from sub-prime - Bear Stearns had a reasonably large exposure to Carlyle and suffered a run on it's liquidity as clients withdrew funds to move to other banks [/ QUOTE ] This will be one to watch. I was at an investment seminar last week and they were saying things are starting to get quite frightening in the US following Bear Stearns. It will be interesting to see what happens next week. Link to comment Share on other sites More sharing options...
steffiraf Posted March 16, 2008 Report Share Posted March 16, 2008 I just read all of this thread and it may as well have been written in chinese! Finance isnt one of my strong points obviously Link to comment Share on other sites More sharing options...
patently Posted March 17, 2008 Report Share Posted March 17, 2008 The only thing I'd add is that the sub-prime mortgages were then sold on by the original lenders to other investors, such as banks. This means that the risk of default passes to the bank rather than the lender who is busy mis-selling more loans. I'm no expert, but I'd guess this would have two effects- First, the lenders will get happier and happier selling ever more risky loans. After all, Wall Street banks are paying them for those loans, so they must be ok? Second, now that it has all come out, half the banks are probably looking at the loans they bought and hoarding cash to cover the risk of default (and hence not lending that cash out) and half of the are looking at the other banks and wondering (a) how much unidsclosed exposure to iffy loans they have and (b) whether it is safe to lend them any money at all. Link to comment Share on other sites More sharing options...
Hopsta Posted March 17, 2008 Report Share Posted March 17, 2008 You've got to love securitisation Link to comment Share on other sites More sharing options...
patently Posted March 17, 2008 Report Share Posted March 17, 2008 love it, or understand it. Choose one.... Link to comment Share on other sites More sharing options...
Ari Posted March 17, 2008 Report Share Posted March 17, 2008 [ QUOTE ] I just read all of this thread and it may as well have been written in chinese! Finance isnt one of my strong points obviously [/ QUOTE ] Steph, short version. The banks have leant billions of pounds to people who can't afford to pay it back and now they're up sh!t creek without a paddle. First one to fall over was Northern Rock, a big bank in America has done something similar, and there's speculation now as to who's next. Meanwhile, since they're all kacking themselves and no one really knows who owes what to who (since loans are packaged up and sold around to each other) no one really knows the true extent of the fall out. As a result, no one wants to lend as much (or as cheaply) as they did so credit (loans basically) is much harder to come by. Meanwhile the central banks which are sort of the countries bank that all the normal banks get their money from (Bank of England in our case) are trying to loosen up this financial constipation by hurling huge huge chunks of money at the normal banks hoping they'll go out and lend it and things will start moving again. No one yet figured out (although many people are finally starting to) that you can't run an economy for ever on borrowed money, any more than you could decide to give up work and just borrow more money whenever you needed to pay your rent or do your shopping or indeed pay the repayments on the loans you'd got so far. You could do it for a bit, but eventually you'd run out. Basically that's where the UK is now. They've borrowed and spent and it's all been marvellous, but now everyone's realised that we're up sh!t creek, starting with the banks (see above). Hope that helps. Link to comment Share on other sites More sharing options...
OliFH Posted March 17, 2008 Report Share Posted March 17, 2008 Is it possible to attach power point presentations here? I have a brilliant one on the credit crunch - really funny but also tells what happened pretty well Link to comment Share on other sites More sharing options...
Ari Posted March 17, 2008 Report Share Posted March 17, 2008 Sadly not I don't think. Be interested to see it though, I'll PM you my email address. Link to comment Share on other sites More sharing options...
Mac Posted March 17, 2008 Report Share Posted March 17, 2008 Change the extension to JPG and assuming it's small enough you can attach it. You'll need to rename it when you download it though. Failing that, print it to a PDF and upload that Link to comment Share on other sites More sharing options...
OliFH Posted March 17, 2008 Report Share Posted March 17, 2008 I've tried - and failed - with the above I've emailed it to Ari though so he'll most likely have more luck! Link to comment Share on other sites More sharing options...
Brabus Posted March 17, 2008 Report Share Posted March 17, 2008 [ QUOTE ] Is it possible to attach power point presentations here? I have a brilliant one on the credit crunch - really funny but also tells what happened pretty well [/ QUOTE ] Tried to attach it also. Too big...very good presentation though Link to comment Share on other sites More sharing options...
Ritey Posted March 17, 2008 Report Share Posted March 17, 2008 If someone ping's it over here I'll host it dave at ritey dot com Link to comment Share on other sites More sharing options...
steffiraf Posted March 19, 2008 Report Share Posted March 19, 2008 Thanks Ari, why did someone just not say that in the first place? Link to comment Share on other sites More sharing options...
Brabus Posted March 19, 2008 Report Share Posted March 19, 2008 [ QUOTE ] If someone ping's it over here I'll host it dave at ritey dot com [/ QUOTE ] Did you get it? Link to comment Share on other sites More sharing options...
Ritey Posted March 19, 2008 Report Share Posted March 19, 2008 Nope, have been keeping an eye out for it in the trash too What file size is it? Link to comment Share on other sites More sharing options...
Brabus Posted March 19, 2008 Report Share Posted March 19, 2008 Sent it to daveatritey.com as in your profile. Size about 2.5Mb Link to comment Share on other sites More sharing options...
Ritey Posted March 19, 2008 Report Share Posted March 19, 2008 Should of come through then, wanna try again now? Link to comment Share on other sites More sharing options...
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