It’s a credit apocalypse - we’re all in the shit

My second post has been prompted by the financial crisis that's engulfing the world and my desire to preserve for posterity my thoughts and feelings about it. Not that I'm an expert on finance; au contraire, I don't pretend to have any real financial nous, but these are my views as an outsider. The last few weeks and months in the financial world have been, by anyone's standards, historic, extraordinary, fascinating and pretty bloody terrifying in equal measure.

To those of us not working for banks, it all seemed quite distant when the credit crunch first started to bite in the US last summer, when poor (in both senses of the word) Americans started losing their homes because they couldn't afford the mortgage repayments, but now it is affecting everyone financially and psychologically, and the frightening thing is this is the very beginning. The Great Depression took the world over 20 years to recover from and it caused untold pain for millions. Even if this is less serious, the fallout is going to last for years, it's going to cause a lot of hurt, and as usual in these situations, it's the world's poor who will suffer the most, and those who bear the blame who will suffer the least.

At the root of all this, as always, is excessive greed. The success of capitalism is that it panders to this basest of human instincts. Greed motivates people, but the problem is always that there are always people for whom too much is never enough.

In the UK, politicians of all colours have been seduced and overawed by the might and money of the City. Since the Labour party cosied up to big business under Tony Blair, ideological debate in this country has been virtually non-existent. With weak regulation to attract more banks and businesses we effectively gave the City a free rein to do what it liked. Big mistake. Complexity became the order of the day to pull the wool over the eyes of authorities and credit ratings agencies and to attract investors.

From what I can tell, the sub-prime mortgage scandal was a bit like this. The mortgage lenders knew full well their mortgages were highly risky shit. They had persuaded these people to take on massive amounts of debt in proportion to their income, and they knew that the buyers wouldn't be able to pay them back after a few months, especially not if interest rates went up. But it didn't matter because they had already earned their commission on the sale of the mortgage. To me, this is symptomatic of the whole financial world – big bonuses for short-term profits, and to hell with the consequences.

So the lenders chopped up the shit with a load more shit and put it all in fancy boxes with fancy names (like Collaterised Debt Obligation) and fancy packaging in order to sell them. The credit ratings agencies were clearly impressed with the packaging and didn't bother to look too closely at what was in the boxes. House prices were still rising (the only way is up, or so it seemed for a long time) and interest rates were low so clearly this asset-backed security shit was valuable and not too risky. Let's give each box a triple A rating!

Investors (e.g. the banks) and authorities trust credit ratings agencies to do their job, so the investors buy and sell thousands of these boxes across the world, making big profits in the process. No one bothers looking too closely in the boxes, and the music's playing and everyone's happy. Until, that is, inflation starts going up because of high oil prices because of the sustained growth everywhere. So interest rates go up to try to reduce inflation and now the victims of the mis-sold mortgages can't pay them back and they start losing their homes. House prices plunge because suddenly the market is flooded with repossessed houses for sale. The music has stopped playing and everyone looks in their boxes and realises they've got shitloads of shit on their hands. They also know everyone else has got shitloads of shit, but they don't know how much. So no one is sure that if they lend money, they'll get it back. So they stop lending the money which has fuelled everyone's binging for the last decade. And now we're all in the shit.