Sunday, 24 February 2013

The Royal Bank of Mum and Dad

Back in the 1970s the world managed to stop the rot of recession by inventing the credit card. So people without money could spend what they did not have and banks, financial institutions and corporations could continue to amass more and more of the finite resource of money.

Fast forward to 2013. The world recession started in 2008 shows no sign of abating and banks once again do not want to lend money. So to alleviate the housing market by achieving mortgages for first time buyers, money experts are 'welcoming' the contrived intervention of the Royal Bank of Mum and Dad.

From January 13, Barclays Bank launch a product called ‘Family Springboard’, which basically allows parents to provide the financial security that the bank will not. Gone are the days of the 100% mortgage and we should realise fully that the banks are just as uncertain about our job security as we are. Mark Twain was so right when he said that a banker is a person who lends you an umbrella when the sun shines but wants it back as soon as it starts raining.

I am aghast at the sheer blatant cheek of the product. It is being dressed up as a fantastic idea but it is really nothing more than dragging the hard earned savings of parents into the area of risk that the bank will happily snatch away if said mortgage is not paid on time. As the price of everything goes up and savings interest squeezed to the point of pain, mum and dad would do well to remember that their fixed income in retirement may well have to call on the money the bank wants them to lend to their children. The bank wants parents to put their future at risk at a time when they desire to take none. What does that tell you about this so-called wonder product and how the bank sees the short term future?

It is a step too far and must be rejected. Naturally there will be more affluent parents who can quite easily stump up the cash without it having an impact on their financial future but these are in the minority. The pressure on many parents to use what would amount to their life savings or retirement fund is unfair and undeserving. It is the banks responsibility to lend the money and if a young person’s wages does not allow them to find the thousands of pounds required to put down a deposit, then wages will have to rise, or house prices will have to fall, or banks will have to offer 100% mortgages.

The problem is that economy does not like any of those solutions. To raise salaries will rob employers of profit, which will reduce the value of their company. If the bank of mum and dad behave like all the real banks then they will not lend out the money, which will further stagnate the housing market and push home owners into negative equity - thus stopping them from selling. This only leaves the bank to take the risk but they will only do so with extortionate interest rates or not at all. So why should mum and dad do it either?

Moodys stripped the UK of its AAA rating yesterday (22 Feb 2013) because they also know that the road to economic recovery is no certainty. And this all points to the notion that the capitalist system has hit a bottle neck, where the money most needed is hoarded but the wealthy, the powerful and the corporations seeking domination.

Is it any wonder that the banks want to squeeze every last coin from those who need it most in order to satisfy the avarice of those who need it least. This is the world economic dilemma and short of all out revolution against the money machine, we will be joining those who suffer at the bottom in poverty inside three years (2015 - 16)

To put it bluntly, there has to come a point where the bank of Mum and Dad closes - preferably with some money still left in it.

Monday, 4 February 2013

Living Beyond Our Means

Apparently we have been doing it for years. Successive governments have spent money we didn’t have, while ignoring the debt we accumulated. As a nation we really should be paying more attention to what our elected government is doing.

The UK debt bombshell explains it all without me trying to duplicate what is already a no nonsense presentation. I urge you all to go read it.

But what I would like to emphasise here is the difference that is often unexplained between deficit and debt. It is simply this:
The UK debt is the amount of money we owe.
The deficit is any money above the amount of money we owe.

In short this means that if the government have got it right and taxes are as high as spending, there will be no deficit at the end of the year BUT the debt remains unpaid, untouched, unloved and unnoticed.

It means that the government has a 1.5 trillion pound overdraft that it isn’t paying off. Worse than that is the money it has spent beyond the overdraft. Both Labour AND Conservative have done this.

To spend more than what you have means you have to ‘invent’ more money. The government does this by creating ‘Bonds’ or ‘Gilts’ that it absolutely must pay back to the bearer at a later date.

So if we put this into household economics, it is like having a maxed out overdraft and credit cards ...and then taking out a massive loan. The overdraft is never addressed, the credit cards are paid on interest only and there is a time limit on when we have to start paying the loan. For households that limit is usually only about a month but the government can create bonds that are paid back in 5 or 10 years.

Consequently the national debt is always someone else’s problem and in my opinion is a symptom of very short term politics. In the meantime, successive governments have allowed accountancy firms to invent ways of letting large corporations wriggle out of billions of pounds worth or tax revenues. What a shame they haven't spent as much time plugging those holes as they have tinkering endlessly with income tax and hiking remorselessly the duty on fuel, tobacco and alcohol.

Clearly we cannot trust any political body to deal with our finances. So in the same way that Mr George Osborne, current chancellor of the exchequer, has announced that the banks are to be split between the high street banks and the investment banks, so it should be perhaps that there is a regulatory body that sets a budget for the government, regardless of their political leaning, with a plan to pay off the national debt.

Otherwise our long term financial stability is always just one crisis away from austerity and hard times.