extended credit

In the good old days when banks lost several billions of their shareholders money chief execs wold fall on their swords and markets would come tumbling down as panic swept the world. Now it seems that apart from a few days headlines in city pages of the press no one seems to give a damn. As long as we have reality TV all seems well with the world . Strictly come dancing and endless talent shows keep the newspapers happy while consumers go on consuming more and more credit and with on line shopping you can be sure it will beome a major issue next year.

So has the emporer got no clothes on? Or will we all simply have greater and greater extended credit to buy all those new goodies ? It all seems unreal to me but there again I am just a grumpy old friend who probably does not understand the modern world

mike

banking

Once upon a time there was a system under which an organisation called a bank agrees to open an account into which people placed their money. They could put in as much as they liked and take out money whenever they liked or pay other people using some quaint pieces of paper called cheques. It cost nothing to have this account or the services it provided and in return the bank would be prepared for good customers to lend them sums of money for agreed periods of time based on their ability to repay at the end of that time.
The banks worked on the simple principle that no one would want to withdraw all their money at the same time so it was safe to lend out some of it to other people within certain guidelines.
These people who borrowed money in this way were known well to the manager and he understood the nature of their needs. He would charge them a lending rate and with monies generated by this interest plus the interest which the bank could get on placing its surplus funds on many current accounts on deposit with other banks it was able to make a profit which could pay for the overheads.

And everyone was happy with this arrangement. But then came the management consultants and advisers who thought this was all too simple. Lets charge people for giving us their money and lets also lend loads more than we have to lots of people who will hardly ever be able to pay us back. But that's not a problem because we will keep lending them more and give them lots of little plastic cards where the interest they pay is three times what a normal person would ever agree to(but they won't notice). That way will make oodles of money and we can then pay ourselves huge and obscene bonuses.

And so it came to pass and now most of the banks in the western world would be technically insolvent if they tried to recover the dodgy loans they have made to dodgy people in dodgy businesses not even mentioning the dodgiest of all, sub prime!!.

Its a funny world init!!