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Financial Markets – What The Real Crack Is

Posted by | Posted in Finance | Posted on 07-10-2008

If I have two apples, and I give you six apples, how many apples do I have left?

Well I took a look at the house I might be moving into last night, and it seems quite nice. I very much doubt I’ll find a better house round here. And because a family member of mine lived in it previously, there’s a whole load of stuff I can rob from them and use as my own, which saves me the hassle of buying a load of new furniture and guff like that. What with this so-called credit crunch, that’s probably a good thing.

I’ve had some good feedback about Sunday’s mix that I posted, and I’m glad some people are enjoying it:

This mix is fucking mint!

I read this interesting article yesterday that explained a lot about how the so-called Credit Crunch we’re in came about. There’s also a bit of history in there too, for good measure. Although the article goes into some detail about what’s been going on in the financial markets over the last couple of years, there’s a lot of slight exaggerations. Not with the story, but with descriptions like this:

Within the space of six months all the big investment banks on Wall Street had collapsed or been merged with other institutions in one of the greatest banking crashes of all time.

I think that’s quite a strong claim really. Things are pretty bad at the moment (at least for banks and building societies) but I’m not sure I’d describe it as the biggest crash in banking history. Then again, I’m not a qualified investment banker.

It did bring to light some facts that I was totally unaware of, though. It’s almost scary to think that banks lend out money that they don’t actually have. After reading the article, it seems to me that if the banks weren’t allowed to do this, then we wouldn’t be in the financial predicament that we’re in. Still, I don’t run the world (yet) so I can’t do much about it. There is one thing that I thought might help, though.

Everyone is so concerned with the collapse and/or nationalisation of major banks at the moment, but look at the position that Northern Rock was put in because of that exact way of thinking. The media (which I detest, as I’ve explained before) whipped up a fear-storm that made many people think that Northern Rock was going under, and so everyone who had money saved with them decided to withdraw their savings so as to avoid the collapse of the bank, and hence lose all their money. But had they actually left their money where it was, Northern Rock would have been fine. It was a self-fulfilling prophecy.

The way I see it, we shouldn’t be putting all of our eggs in one basket. What that basically means is, we should be spreading our savings across a number of major banks. This will help in two ways. Firstly, it means that more people will be investing in each particular bank. While the investment might not be as much per person, there will be more people investing in each bank, and so this will provide the banks with a more constant, if smaller, income stream. Secondly, it means that should any bank go tits up, people will only lose a small amount of their savings, assuming they’ll lose anything at all. There are certain laws (in the UK, at least) that ensure that the first £35,000 worth of savings are protected by the government, so that if your bank were to go bust, the government would pay you up to £35,000 of your savings. So by spreading your money around a lot of different banks, you’re less likely to have  more than £35,000 in savings in any one particular bank, so if the bank went under, the government would give you back the entire amount of your savings that you had with that bank.

There may very well be downsides to that argument. At the very least, it means that everyone must do a lot of fannying about in order to spread their savings adequately. It also means that certain higher interest rates wont be taken advantage of as much as is possible, but with things standing as they are you’re unlikely to find a high-interest rate savings account anyway. For the sake of a few pounds, it’s worth spreading your money about. As I say, I’m no financial banker, so I don’t know what other repercussions those actions might have, but if a bit of hassle is all that’s required to ensure our banks remain open, and our savings safe, then I think it’s worth it.

A topic for another day – religion. I’ve got a lot to say about religion, but I can’t gather my thoughts in one place just yet, so it’ll have to wait.

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