Feeling the credit crunch?
Read how the fnancial world works, byu Anatole Kaletsky in the Times
newspaper.
There is another , structural, reason why financial expectations may be
out of tune with reality - the
hyper finance revolution in the banking system:
In the "old world" before the arrival of "hyper-finance", if a family
wanted a £100.000 mortgage,
they would simply go the Halifax and borrow £100.000.
Now consider what happens in the new financial world:
The family would borrow £100.000 from Northern Rock, which would sell
£100.000 of bonds to hedge funds,
which buy these with £100.000 borrowed from Bear Stearns, their prime
broker, which would rise this money
by selling commercial paper to Citibank, which would then borrow
£100.000 through the inter-bank market from
Halifax.
So now the original £100.000 mortgage transaction has created £500.000
of new debts.
In principle, this entire chain of transactions could be squeezed, like
a concertina, back to the original £100.000
transaction between the householder and Halifax, reducing the amount of
credit by 80 per cent.
This huge reduction in credit would do no great harm to either the
homeowner or the ultimate lender, but ...
eliminating all those intermediate transactions would devastate jobs and
profits withing the banks.
The upshot is that the main people suffering pay cuts and job losses in
the present crisis are bankers, rather than
industrial workers as in previous slowdowns.
Not surprisingly, this gives financiers a jaundiced view of the world.
This is the clearest way anyone has been able to make me understand what
happens when you want a loan,
and the consequences thereof.
Agnes Boddington - Elloughton UK (just glad I don't need a mortgage!)
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