| Until now the blame for the financial crisis has been directed towards the large investment banks and complex derivative instruments which no one understood. The sub-prime US housing market, which was fuelled by so called financial innovations, may have triggered the impending recession, but the real economy should shoulder some of the blame.Some politicians are adamant that tax cuts will reinvigorate high street spending, but this view seems to be extremely optimistic. It is almost impossible to resume normal spending patterns at present. The real problem is that consumers are just as extended financially as the banks. American Express is the latest great financial institution to go to the Federal Reserve, cap in hand, begging for money. Like Morgan Stanley and Goldman Sachs before them, they had to get permission to become a commercial bank. Normally their application would have taken a month to process, but, in their case, it was agreed almost immediately to ensure financial stability. Now Amex is a bank, emergency funding can be granted.A salutary lesson can be learnt from what American Express is experiencing. The number of Amex customers defaulting on their loans has doubled over the past 12 months. With unemployment increasing many more people will find it difficult to settle their credit card bills, putting the card companies under enormous pressure. The favorite pastime of switching debt to another credit card company is becoming increasingly difficult. Credit cards are certainly of major concern for investors - ever since Amex funded its business by selling bonds. This is no longer the case, which has forced Amex to borrow from the Fed. Sadly there is a deeper rooted problem. That problem is a mountain of debt. Statistics show that household disposable income in the UK has risen by a multiple of 6.3 per cent in previous years. However consumer credit has soared and is now 35 times larger than it was before. Another startling statistic reveals that household disposable income rose from 4.8 per cent in past times to 26.3 per cent.You need not be an accountant to appreciate that our economic growth has been fuelled by a massive pile of debt. The total household debt, which includes mortgages, was under 90 per cent of the size of the economy, but now it has risen to be 150 per cent. Another disturbing fact is that, remortgages accounted for 40 per cent of mortgage lending - borrowing which was often spent on the high street.Over the past few decades, many people have not worried about debt. They have always been reassured by rocketing house prices, knowing that they would be able to trade down and put a hefty nest egg in the bank for their retirement.The banks have always encouraged home ownership, knowing that they could make a healthy profit on mortgages. Borrow and buy now, they said, rather than save.However the day of reckoning has to come when debts have had to be repaid. The only sustainable way of ensuring that there are sufficient funds to cover debts is by generating jobs, which in turn generates income to pay the bills. The Government must manage the economic crisis and plan tax cuts to release income for struggling families, but they must also realise that it is madness to base their economic policies on rising house prices and consumer credit. Brokers Online is a fantastic financial web site, offering information and articles about Mortgage Payment Protection, Income Protection Insurance, Redundancy Insurance and many many more Insurance products. |
