Monday, April 21, 2008

Crunchy... and sticky

I've just been reading this analysis on the BBC news site, written last Tuesday by economics expert Stephanie Flanders.

I'm no economics expert - I do not understand all the complexities involved in this issue, but I want to understand the gist of it, because this problem is about more than academic numbers and abstract political principles. It's going to affect everyone's daily lives to a massive extent, isn't it? Every one of us, without exception.

They've made it profoundly complicated. The myriad of invented ways of profiting many times over from every possible facet of the same fundamental deal. Lending money to a 'homeowner' in the form of a mortgage. Then immediately selling the loan on to enable them to make more money. Then buying loans in bundles, adjusting them, repackaging them, selling them at auction(?) until nobody seems to know who owns or owes what to whom in the end and it's like a game of poker that's ground to a halt because the stakes went too high and nobody dares to play on.

But they're playing with people's lives. Someone who recently bought a house because the 'expert' estate agent decided it was worth £200k and the 'expert' bank agreed that it was and that, furthermore, such was their apparent confidence in the deal that they were willing to lend £200k on the property over 25 years, is now probably in a position where their house is worth something like £180k. Which is ok for as long as they can afford to repay their initial borrowing on schedule.

But now the banks have lost confidence in house values and so they're plummeting. They're unwilling - or unable - to raise more funds to lend, so people can't borrow to buy. And they perceive their risk to be higher than before, so they want more compensation for that risk, leading to higher mortgage interest rates. Sorry if you knew all this already. (You probably did.) I'm just setting it out to get it clear in my own mind, as much as anything.

So now our recent purchaser who borrowed £200k is seeing the value of their asset shrink while the amount needing to be repaid will grow. If they built a safety margin into their sums when they took out the loan, they still might be ok. But who does? Our tendency, as humans, is to live within our means - just. If that. And to believe in 'experts' and to trust their opinion.

So it's not difficult to see how our new 'homeowner' might, with the best will in the world, end up having no choice but to fail to stick to their scheduled repayments. The normal procedure then would be for the bank to exercise its right to repossess the asset, and the defaulting borrower would then have to move out and to take any remaining debt, after the house is resold by the bank, with them.

In what we've previously accepted as being a 'normal' economical climate, that would work out ok for everyone eventually. The original borrower would downgrade to something more affordable which enabled him to keep funding his old debt from the house. Or he'd go bankrupt and another, more manageable schedule, would be arranged for him while he lived in rented accommodation. (In more recent years he might even have managed to negotiate another mortgage for himself!) The bank would get most of its money back because the house would have held its value.

But that's no longer the case at all. The original borrower might not be able to go elsewhere, having defaulted on his mortgage. Where will he go? Banks can't lend on the same terms as previously, so he's highly unlikely to be able to secure another mortgage. And the cost of renting is likely to soar sky high in response to the increased demand for properties to rent. Also, the original asset (the house) is unlikely to resell so even if it does repossess, the bank won't be recompensed.

If the above scenario happens - as expected - to hundreds of thousands (if not millions) of people in the UK, it's easy to see that the overall situation will not be viable for us as a country - hence the meetings between governments and banks to try to work out solutions.

One of the reasons why I'm so concerned is because it matters - really matters - who owns most of the housing stock and land, because that's where the power lies over our day-to-day lives, isn't it? In feudal times, the lord of the manor owned everything and everyone in his village. They lived and died and ate and worked and rested according to his will. We're supposed to have got past that kind of system now, aren't we? Individual home ownership - or at least, the promise of it after 25 years (and therein lies a whole other blog post,) is supposed to have liberated us from the tyranny of feudalism. We are now, by virtue of home ownership, supposed to be free to live our lives as we choose.

I suppose it depends on your political beliefs. The original socialists saw liberation in state ownership of property. They'd had a long spell of capitalism, by the beginning of the last century, in which landlords (and the term says it all, I think) had abused their tenants as much, if not more than, the old feudal lords did their vassals. Something had to change and it did. We ended up with a strange mixture of state-owned social housing and bank-funded owner-occupied housing, with some still renting from private landlords.

So far, so typically Britishly eclectic.

Then things got really complicated, didn't they? Social housing was either sold off to its inhabitants at knock-down values ( - a good thing, I think) or passed onto "not-for-profit" organisations called Social Landlords. Was that a good thing? I don't know. I can't really see how it's different from outright state ownership and can't really see the point of the change, except to deliberately muddy the waters. I certainly lose the plot from about that point, as regards understanding what's happening now.

So, how does the ownership of your home determine who has power over your life? In the simplest terms, your lender or your landlord sets the price you must pay to keep living there and you have to get the money from somewhere, so this determines how many hours you need to work and/or other related decisions in your life. But in more complex ways the landlord acts as a kind of corporate policeman - rightly or wrongly. In rented property - even in mortgaged, owner-occupied property, you can be evicted for breaching certain terms and conditions. A friend of mine, for example, has been kept off a property exchange list by his social landlord because of an unresolved dispute with a neighbour. And my mortgage company obliges me to keep up life insurance payments and also to keep up an insurance plan to cover the cost of rebuilding the house should it become necessary. I'm also supposed to seek its permission to take in a lodger, to sublet my house, or even to work from home.

So home ownership is a fundamental method by which populations can exert control over each other - or to rephrase that, it's a way for those who *have* to exert control over those who *have not*.

One of the things that amazes me is the way extended families volunteer - they positively clamour - to be fragmented, when each generation grows up, moves out, and puts itself in the yoke to the banks by wanting to buy another house and borrow for another 25 years. Because of this, we've got the current crazy situation, in many cases, where the old people are either languishing, lonely, in huge empty houses, or they're selling up to fund what's seen as the necessity of care homes. The next generation down - the 50-somethings - are either coming to the end of their loans and spending their newly-found spare cash on helping the younger generation to take out more borrowing(!) or they're still mired in debt. And the 20, 30 and 40-somethings are all, almost without exception, mired in debt. By living away from their parents they kid themselves that they're 'independent'. But really, they've just swapped dependency on their parents for dependency on the state, or their employer and their landlord or mortgage lender.

If the relationship between children and their parents is a very bad one, I can see the attraction of moving out of the family home and being dependent on another body. But why should that be, in most cases? It doesn't make sense. Far more logical to assume that the bonds of family love would make it unnecessary, which then makes all the other requirements of every generation 'standing on its own two feet' - fulltime paid employment, new sets of furniture, paid childcare, paid care for the elderly - unnecessary. Surely, this would lead to more individual freedom? Certainly to better systems of mutual support.

In these meetings between banks and government, I see the symbol of that political dilemma. They are deciding which of them will own our houses. State, or corporation? If the government bails out the banks with taxpayers' money, as the banks seem to be asking for, the old system might be kept in place for a while longer. But, as 'Money as Debt' aptly explains, that system is unsustainable - hence the current problems.

People obviously can't be turned out onto the streets to live homelessly en masse, so the government has to spend its reserves (does it actually still have any reserves??) trying to prevent this. It could bring in a law to take all empty houses into state ownership and then rent them out as social housing. It could even rent them back to the defaulting, dispossessed borrowers who were originally living in them.

Certainly, if it starts paying taxpayers' money hand-over-fist to the banks to try to stave off the crisis, it too will run out of funds very quickly, if it hasn't already.

But politicians won't suffer financially from this. I doubt there will be many sleepless nights in Whitehall. And I don't see any bankers offering to take cuts in salaries, though their lavish bonuses and commissions are definitely at stake and they're shedding staff as quickly as they can afford to.

An amazing 95 per cent of parents reckon they will be supporting their offspring well into adulthood, according to a report by saving specialists the Children's Mutual. Many parents are neglecting their pensions, raiding their savings and even remortgaging to give children a helping hand.
says this article.

I just don't see why people bother with the savings and the mortgages. The banks just profit from them at every turn. Why not just cut out the greedy, bamboozling middlemen and pay off one mortgage, then keep sharing the remaining funds and houseroom with the offspring, until old age brings the deserved repayment?

I can see how we need the state as a safety net for abusive family situations, but I think I'd rather it actually be a safety net. Not a spider's web.

Friday, April 18, 2008

"We've got a problem at the moment with the economy. We've got to explain to people what's been happening."

Our Mr Brown is in America, and I notice from this story:

that he expressed the sentiment: "We've got a problem at the moment with the economy. We've got to explain to people what's been happening."

So, I'm looking forward to him coming home and explaining to us all how banks have been allowed, by governments, to conjure up money out of debt. Because, as Paul Grignon's 47-minute animated presentation of "Money as Debt" brilliantly explains, banks have been creating new money out of debt in exponential multiples.

I wonder if Gordon Brown is about to have a Patman moment.

"I have never yet had anyone who could, through the use of logic and reason, justify the .. government borrowing the use of its own money. .. I believe the time will come when people will demand that this be changed. I believe the time will come in this country when they will actually blame you and me and everyone else connected with the [government] for sitting idly by and permitting such an idiotic system to continue."
- Wright Patman: Democratic Congressman, 1928 - 1976. Chairman, Committee on Banking and Currency, 1963 - 1975.

During which he explains to us precisely why, in this 'credit crunch' climate, we're all having offers of more loans and credit cards pushed onto us at an even faster rate than ever before.

Wednesday, April 9, 2008

Just pictures of the Queen

A long time ago, in the long and distant past when I had just the one blog, I wrote a post about money. I see, on re-reading it, that it was unnaturally brief of me. (Did I only write that..? I thought there was a lot more!)

But I'm still largely of the same view as I was 4 years ago - money and psychology are intrinsically inseparably intertwined. You are as rich or poor as you think you are, which is usually as rich or poor as you really, deep down subconsciously, believe you deserve to be. So a relatively poor person by UK terms, like myself, can think herself to be quite wealthy. And a relatively affluent person can bemoan and bewail their position, thinking themselves badly done to.

It's all just bits of paper, though, isn't it? Pictures of the Queen.

You can't eat it or wear it. You can burn it, but it wouldn't give you much heat, pound for pound.

As this video [opens Youtube clip] (which I found via Jax and Tim's blog) aptly explains, what used to be lumps of gold became pieces of paper and is now increasingly comprised of minus figures on balance sheets, conjured up out of thin air. That's a brilliant little film actually - it explains better than anything else I've seen or read why the whole world is currently facing serious financial problems. I think.

Because it depends on your point of view, doesn't it? I mean, really seriously, the whole edifice stands or falls exactly according to how much we trust and believe in it. We could, if we chose, just reject the whole concept of believing those bits of paper and negative numbers to mean anything at all, and then they wouldn't. Just like that. Magic. Such power really does lie with 'the people', if only they collectively realised it.

But they don't, which is why we're in this situation of most of the world struggling to make ends meet, while a tiny minority languishes with billions more than it can ever spend and thereby keeping it from being shared out more fairly.

I'm currently (still! nearly finished..) reading Robert Tressell's The Ragged Trousered Philanthropists, written in 1910, which explains very well how very wealthy people deliberately keep poor people poor. The Socialist movement in the UK was supposed to sort all that out, and did it? Well, when it finally came to power the 1945 Labour Government gave us council houses, the NHS and the Welfare State, all of which I and my family has benefited from, but which have had some drawbacks.

Nearly 100 years after The Ragged Trousered Philanthropists was published, most of the world's land, resources and money is still in the hands of the very few, but there's so much clamour, noise, complicated legislation and general confusion about everything that we're not supposed to notice. How many people are in charge of their own lives? Their own time? How many have enough of everything, without worrying about it? How many feel comfortable about their position, without having to stressfully compete with other people in order to maintain it? How many fell for the line that it's ok to live on credit? How many felt that they had no choice?

But I still believe that a decent family home and enough land to live on is every person's birthright. And more than that is too much. More than that, and you're keeping someone else in poverty. The world's resources are finite.

Every generation of a family does not need a new house and a brand new car. Every young adult doesn't need a university degree. Every task doesn't need a top-of-the range labour-saving device and a small army of officials to oversee it and another to oversee that one. We've got situations in the UK now where people's parents are living in comparative luxury on final salary pensions and fully paid-up mortgages, while their adult children feel to be drowning under a mountain of debt. The system wins all ways, in terms of profit, interest and tax. Family life loses hands down.

When I was studying economics in the 1980s, we were told that the *big problem* facing UK governments in the future would be: how to fill all the hours of people's leisure time that were being freed up by the advanced technologies that were coming online, even back then in the 80s? We wouldn't be needing people to work full-time in factories, offices or even in shops. There would obviously be more than enough food and fuel to go around, and vast numbers of people would be idle for much of their time.

Well, it seems that problem was solved by creating a lot of unnecessary work for people instead, and forcing them to compete for that instead of the necessary jobs they used to compete for. Ever-complicated legislation, which would need ever-increasing numbers of people to monitor, enforce and understand it. Perhaps the idea of allowing people to enjoy their free time was a frightening one for the powers-that-be - a step too far. Safer to persuade them to increase their consumption and be ensnared by their own debt.

For a family to work well together, I think its members have to spend most of their time together, working. Learning, teaching, facilitating their lives, producing food, shelter and money, if required or necessary. Otherwise, the strength of the family unit will be diminished and children will grow up to be near strangers or mere acquaintances with their parents. But the mentally healthy members of mutually supportive interactive financial family units wouldn't need to spend, or earn, or borrow, or be taxed so much money as do stressed-out, over-worked, unsupported singletons or even the hoards of people struggling along in isolated nuclear family systems.

Money can provide some things, but I don't think it should provide everything. It should be working for us, not us for it.

Sunday, April 6, 2008

A nice surprise

Our electricity payments have gone up, that's no surprise. What amazed me was the amount. We've either used less electricity than usual (we have been trying to cut down) or the recent price rise per unit wasn't as steep as I thought. I might do some sums, to try and work it out. But doing that just makes me even more impatient to get off the grid...