Credit Crunch - a personal view

14 May 2008

My view on the credit crunch is somewhat contraversial and some may say cynical. The American public has been living beyond its means for over 30 or more years now, always encouraged to spend now and pay later.When I first visited America in the 70s multiple credit cards and higher and higher credit limits were becoming the norm even then and the old culture of saving up for what you needed was already extinct.Today they have the lowest ratio of savings to disposable income in the western world and the UK is not too far behind them.

Understandably, [ I myself worked in the financial services industry for 32 years] banks have been able to exploit the change in society values by selling a vast array of lending products.Staff in banks have been target driven at higher and higher levels of intensity since the early 90s and their task was greatly helped by a long period of low and declining interest rates in recent years both here and in the US - making it somewhat easier to sell their products.Bank shareholders have been happy seeing rising profits and growth in their share values for many years and the feeling has always been that we could go always go on and on in the same way - lending more and more against rising collateral wealth,making even higher profits.

In an attempt to make those profits even better, the US and even UK banks considered - where were those previously unconsidered opportunities - yes at the margins of their customer base. Interest rates were low,inflation was low so what was the problem. Lend today,increase those profits and worry about any possible fallout if and when it happened.Those problems and their effects are now with us.

Higher interest rates caused the initial problem with repayments harder and harder to service but increasing world inflation caused by increased commodity prices due to emerging economy demand is now with us also. This may make it even more difficult for debts to be serviced and perhaps just perhaps the credit crunch has worse to come.

The banks were taking a short term view as their customers did - make hay while the sun shines. During my working life.however,whilst I was selling those very same products,I often thought to myself - can this always be a one way bet - I always had my doubts.Now we have ,some say, the worst world financial crisis since world war 2.

The emerging economies have generally had and still have a higher propensity to save than the West and because of this banks there have not as a whole experienced the same problem with loan delinquencies. Their quest for higher living standards and hence a larger proportion of world resources could,I fear, provide an even worse problem for the west for reasons I have already outlined.I hope I am wrong.