Credit Crunch Myths Exposed: Part 1
Im a bit sick of the current media elites telling us about the economic crisis and how our politicians can fix it by nationalizing everything. Lets get one thing straight, we are running out of money – fast. Every British child born is now saddled with a debt of £20,000, this cannot continue. In this article I hope to give some straight talking, simple explanations of the current crisis the mainstream media wouldn’t dare!
The free market has failed. Capitalism is bad. Those are just some of the things we constantly hear during this great recession – I think we all need to take a step back and just have a look at what initially caused all of this mess.
2008 was a pretty bad year for Britain. Our financial services went into complete meltdown, the Government had no idea what to do and millions of people slipped into unemployment. The number of dole applications is the largest number since records began and crime is on the up. But how did we get in such a complete mess wherby all of our national budget (and more!) was consumed by bailing out the banks? Why should we paying a penny to a sector that for years showed complete contempt for everyone but themselves? Why did our own Government help suppress true market interest rates?
There are a lot of questions to get through, but here I will try as simply as I can to explain what on earth went wrong. Initially, we have to look to our neighbours, USA, and the Federal Reserve.
In a free market (where prices are determined by supply and demand) interest rates are set by supply and demand of credit. With a central bank, such as the Fed or the Bank Of England – the market is ignored in favour of creating economic stability. For many years now rates have been kept very low – the lowest since these banks were created. This was simply designed to encourage banks to give out cheap money, eg loan it to people at very low rates. This would then enable the Government so claim that home ownerships were up and everyone was doing well – for now.
Having ridden the housing boom for years, things started to go wrong when certain payments on mortgage rates defaulted. As lots of banks had bought up a package of mortgages from eachother, including bad and good, everyone started to panic. All of a sudden, these multi trillion pound (or dollar) packages they had bought from Bank A and sold to Bank C etc could be worthless. Nerves twitching, bills were called in from all sides and things started to get ugly.
Now this is a key point to the whole crisis, artificial low interest rates egged on wreckless lending to people who should never have been looking at home ownership. Thus the key cause of this whole mess can be traced to the Fed Reserve and the Bank Of England.
Hopefully you will join in part 2 when I explain what happened after the banks started to panic!
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