So where has all the money gone?

[Bugsy2]

I just don't get it & I need someone within an economics sort of mind to explain - please!
We live on planet earth, there are currencies circulating all around the world, people buy & sell things. How can it be that 10 years ago the economic outlook was good & certainly in the West most people were buying houses, getting more wealthy & everything was fine & dandy. Now, it is all doom & gloom, countries are going bust, people are losing their homes & its all going tits up. So where has the money gone? Who has it, where was it, where did it go to?

Thank you livingontheedge - so the Greeks had no bloody dried cows at all then!!!! What I don't get is who bought their government bonds? I thought analysts were supposed to trawl through all the financial detail to ensure that there was actually some dried cow in the back of the cave. What were all these investors thinking when they bought Greek bonds? Sorry, another question, who actually owns the worthless bonds now? Is it possible you could have a commercial take over of a counry?

In the case of Northern Rock what happened was that they would borrow money on the international market and lend it on to their mortgage customers. Northern Rock did not have a bad-debt problem in the slightest. The assets (the mortgaged properties) were fine. Customers paid on time etc. However, when the international money market said 'you can't have any more' they had a cash flow problem.... they had nothing to lend out.

Money is a product that can be bought and sold like anything else. If Northern Rock had been KFC selling buckets of chicken rather than buckets of money and the chicken supplier said 'there are no more chickens'.... KFC (still having to pay out wages and rent etc) would quickly struggle to survive.

but surely Northern Rock would have had a whole lot of money coming in from all their customers who were servicing & repaying their loans each month? Didn't they have their own reasonable size chicken farm? OK, so they couldn't get their hands on the foreign chickens, but there were still their own ones. Could they not have said, you know what we can't borrow ourselves at the moment, so we are going to have to reduce the number of new loans we make - but there is nothing wrong with the day to day business, so no loss of confidence. Or does even that send such a frisson of fear through the market that it talks itself into a decline?

Would I be right in thinking that this whole cascading financial crisis was all due to sub-prime loans? Are there other things involved too?

There is a lot more involved. The key is growth (which is why everyone is so worried about recession = no growth).

For example Britain owes other countries huge sums of money - every year we, in Britain, comsume more than we make. But we assume that each year we will make more and be able to not only meet our interest payments but also pay back debt as it matures. The big problem (way,way bigger than the bank bail out) is the amount that the UK government is committed to paying in public sector pensions in the future - basically unless there is a repeat of somethign similar to the industrial revolution or the IT revolution then there is no way that the governement can meet its commitments.

To give you an idea - the labour government consistently spent about £11 for every £10 the country made over its term in office so we have racked up a huge debt (mainly to the Chinese and Indians).

The key point I think is that teh UK imports almost half its food and most of its oil. Countries will stop sending us food and oil if they think that we do not have the goods and services to send them in return.

so the Greeks had no bloody dried cows at all then!!!! What I don't get is who bought their government bonds? rather unfortunatly we did (along with the rest of Europe) in that British banks and british pension funds and investment funds did. If you have a pension or any investments in things like unti/investment trusts or funds then you are probably owed money by Greece.

but who do we & the Greeks, the Portuguese, Irish, Italians owe all this money too? I keep wondering who is the paymaster general of planet earth?

Bloody hell, so we all owe each other. What an absolute fuck up. Maybe I should start asking, which countries don't owe any money?

Thanks for asking this bugsy as it makes my head explode trying to understand this and there are some really good analogies here (I'll remember the dried cows for a very long time). But here's my question - why can't these economies just print more money to pay off some debts (I know it's something to do with devaluing the currency and in Greece might be linked to being in the Euro, but we did it (quantative easing) so why can't the EU?). And yes, do we all owe money to China as they seem to be the only country without big economic problems?

Didn't they have their own reasonable size chicken farm? it wasn't big enough. About 10% of the money that NR was lending in long term loans (mortgages) was borrowed off other people in short term loans. Also in general people will packaging mortgages (making bundles of good UK mortgages with bad, American ones). Everyone know that this was going to all crash down (because of what was happening in America) so everyone was waighting for the crash. When it happened NR could no longer borrow the (massive) 10% of short term money that it needed to finance its long term loans so it crashed.

My head is still bursting Birdy, what a lot of greedy sods we have all been. I can't help feeling that all the fuckwits who got us into this mess, will all get off lighter than those of us being pinched from all angles as times get harder & harder. I think if you print money, you are effectively just printing bits of paper & gradually that paper literally just becomes worth the actual piece of paper & nothing more. You can't make money out of nothing - although that does seem to be what some reckless financial types seem to have tried doing!!!!

who do we & the Greeks, the Portuguese, Irish, Italians owe all this money too? as I said partly us (do you have a pension fund? If so the probably you) and also the Chinese and Indians.

why can't these economies just print more money to pay off some debts As Bugsys says because it becomes worthless - you can get hyperinflation (Germany 1930s - this was what brought Hitler to power). Say I printed my own money - would you swap my money for goods? I suspect not [grins] so the same with any currency. If we print more £s then no one will want them so food and oli will cost loads more.

I also wonder if China & India will be screwed if none of the big Western markets can buy any of the stuff they produce. I would have thought their capitalist explosion has to be fuelled by selling externally in the first instance. Maybe there will be a reversal of fortune & the West will start making cheap plastic crap to export to China!!!!

You're right - it does come doen to confidence like was said further up. I wouldn't accept living's money for my services as I wouldn't be confident that someone else would then accept them to pay for something I wanted (we could just set up a MN currency as I'm sure between the whole membership we could have a flourishing economy!)

down obviously not doen

I also wonder if China & India will be screwed if none of the big Western markets can buy any of the stuff they produce possibly but they may just turn their production over to stuff that they want internally and, worryingly, turn their food production over to stuff that they want to eat (meat/diary) rather than mass food (grain) for the west. There isn't enough land in the world to feed the population if we all eat western meat rich diets. The Chinese and Indians are starting to stop wanting to eat rice all the time and want meat/dairy products. We have sort of conned them into believing that they cannot "afford" to do this as they have to lend us money (effectively work for the west) so that they will be better off in tehe future. They are startign to realise that this is a con so they may think "lets cut our losses/ties with the west and grow our own cows for our own country". We would then struggle to feed ourselves.

Think about London - who "controls" the supply of bread to London? No one does - it just "happens" because the markets make it. This is quite a scary thought once the markets start to fail.

Northern Rock explained;

1. A bank normally lends what it receives in deposits out in loans. e.g. It will borrow the money at 3% and then lend it out for mortgages at 6%. the 3% in the middle is the banks margin. Customer deposits however tend to be of shorter duration than a mortgage: say the customers only want to leave cash on deposit for three months, but the average mortgage is repaid over 25 years.

1. Northern rock specialised in mortgages, especially buy to let. To grow it's balance sheet, ie increase the number of mortgages it could approve, it needed to borrow money from other banks and bond investors as it didn't have enough customer deposits. It was therefore funded "in the Market".

1. 2008 crisis hit. Banks became very suspicious of lending to each other, fearing one might go bust, so Northern Rocks cost of borrowing rose to a level it could no longer afford. The bank went to the Bank of England to ask it to help it meet its commitments. When this became public knowledge people who had money on deposit panicked, withdrew their cash and made the bank's problem even worse. There was a run on the bank.

1. Investors in the bank also lost confidence. The share price collapsed. This reduced the bank's capital which is essential to cover future losses. It then became apparent that the quality of loans was so bad the capital in place would not be enough to cover the losses.

1. With investors unwilling to support the bank with fresh capital, ie by buying new shares, the bank was nationalised to safe guard customers and the system.

The end

polar monkey thank you but can I ask in point 4 which loans are your referring to? I thought that NR had not made sub-prime loans? Also, why weren't NR smarter about telling their depositors not to panic? Why didn't the Govt say "Don't be headless fools, just hold on a minute" - surely it would have been in everyone's interest not to have a run?

Livingontheedge - I am just saying to myself in the manner of Edmund Blackadder before he went over the top in the last series, "We are all doomed"!!!!! Is there any hope? Sounds like Germany & France may have enough dried cow to keep us going for a bit - but what about the US? I listen to the shit spouted by politicians in this country & have very little faith - are they doing the right stuff for the UK?

NR did lots of irresponsible lending, 125% mortgages were a key product. The total mortgage book had a loan to value ratio above 90%. So a 10% drop in house prices meant to loans were the same as the value of the book, but a 15% drop pushed it into negative equity.

Panic by definition defies rationality. At that point the govt only guaranteed 30k of a depositors money. So if you had 45k with them you could lose 15k. Why run the risk?

I thought that NR had not made sub-prime loans? Say I borrow £100 for a year off you Bugsy and lend polarmonkey £100 for 20 years. Each month PM pays me interest which I buy food with and each year I ask you if I can borrow the £100 again (I can't actually pay you back as PM has the money).

Everythign is fine as long as you are confident enough of my finances to lend me the £100 each year. One year Birdy (sorry birdy - random choice :)) spreads a visious rumour about me - that I am broke. You do no tknow whether or not this is true but you do know that lots of other MNers are all defaulting on theri loans. Do you lend me the £100? You have to make the desision really quickly and you do not have time to do a proper check on my finances as the are "very involved".

This is what happened. By the time the "proper checks" had been done it was too late.

The givernment and NR did say "don't panic" but there were still huge queues of individuals wantign their money. NR didn't have their money any more. They had lent it to people.

China and India have huge internal markets, their populations are massive. Internal consumption can compensate for a fall in external demand.

are they doing the right stuff for the UK?

possibly they are. Remember that we are not in the euro . We owe money but as long as investors are confident that we can make cuts, stop over spending so much each year and get our act together, and as long as we haven't lent too much to Greece, then they will still want £s and still be prepared to lend to the UK. This is why the cuts are important.

Say someone wants to borrow money off you each year - they seem to have lots - spend loads on cars, luxuries etc - and then they start to get into a bit of financial trouble. They insist that it is all sorted adn ask if they can borrow more. If you could see them cutting back (down sizing house, getting rid of gas guzzler car) then you would still lend. But if they continue to spend money right left and centre then you get suspisious and don't lend.

Exactly the same is happening here - China does actually still want to lend (= supply us with goods and services now for a promise of a retuirn in the future) but unless it can see us making cuts (spendin gless) then it will lose confidence in our ability to repay.

Thanks so much for posting this Bugsy, I really struggle to get my head round the current situation and this is an extremely enlightening thread for the financially clueless with some great, easy to understand explanations. Hooray for MN :)

I know that while NR might not have had a huge portfolio of classically 'sub-prime' ie self-cert etc it certainly was one of the leaders in greater than 100% mortgages. Friends had a 120% mortgage which they used to consolidate some other debts. Luckily they sold for a very tidy profit just before the financial crisis kicked off otherwise they would have been left in significant negative equity.