Beneficiaries of the latest doom

The underlying cause of the credit crunch is really the oversupply of credit to those who ultimately could not service the debt. Banks are in business to profit from interest charged on money lent to individuals. Secured credit (like a mortgage) is normally a no-brainer for banks. For as long as the individual is able to service the debt, the bank makes profit and (normally) if they cease to be able to service the debt, the bank can always seize the asset placed as security (normally the house). So, in normal circumstances, any mortgage to a regular individual is an automatic 'yes' for any bank. If the average an in the street is honest, he would realise that the responsibility considering his ability to repay rests with himself and not the bank. It is fundamentally incumbant on every person to make every attempt to consider his/her ability to fulfill each and every financial committment they enter into.

Now, let's consider who benefitted from the proliferation of cheap credit. No doubt, executives and senior employees of banks, finance houses, private equity companies, and hedge funds alike, made a lot of money from leveraging investments to gain large returns by taking advantage of a high growth/low interest rate economic environment. However, we will get back to that. The other big beneficiaries are the average man in the street. He has been able to borrow money cheaply to buy the dream house and lifestyle that his parents could only dream of. As houses and property changed hands and individuals made money, the overall level of borrowing increased in the economy. People who made money from property spent it and benefitted the economy at large. Now that people are finding that they are over-leveraged and can't service their debt with higher rates, they whole cycle is unravelling.

Ultimately, any public money used to unburden banks of this toxic mortgage debt, is merely paying for the economic benefit the average Joe experienced during the boom period. Thus taxpayers money is ultimately paying for the inability of the average taxpayer to pay for his/her lifestyle over the previous 8-10 years.

We can all point fingers at the fat-cat greedy bankers who tricked us into buying that mercedes or, that villa in portugal, or that bottle of 1999 Cheval Blanc but, in reality, we are responsible for our own excesses and now its time to pay for them.

Start getting used to the bus - you'll be taking it for at least another year.

MNgC