Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
The US Dollar is the Driver of the Gold & Silver Sectors - 28th Jul 21
Fed: Murderer of Markets and the Middle Class - 28th Jul 21
Gold And Silver – Which Will Have An Explosive Price Rally And Which Will Have A Sustained One? - 28th Jul 21
I Guess The Stock Market Does Not Fear Covid - So Should You? - 28th Jul 21
Eight Do’s and Don’ts For Options Traders - 28th Jul 21
Chasing Value in Unloved by Markets Small Cap Biotech Stocks for the Long-run - 27th Jul 21
Inflation Pressures Persist Despite Biden Propaganda - 27th Jul 21
Gold Investors Wavering - 27th Jul 21
Bogdance - How Binance Scams Futures Traders With Fake Bitcoin Prices to Run Limits and Margin Calls - 27th Jul 21
SPX Going for the Major Stock Market Top? - 27th Jul 21
What Is HND and How It Will Help Your Career Growth? - 27th Jul 21
5 Mobile Apps Day Traders Should Know About - 27th Jul 21
Global Stock Market Investing: Here's the Message of Consumer "Overconfidence" - 25th Jul 21
Gold’s Behavior in Various Parallel Inflation Universes - 25th Jul 21
Indian Delta Variant INFECTED! How infectious, Deadly, Do Vaccines Work? Avoid the PCR Test? - 25th Jul 21
Bitcoin Stock to Flow Model to Infinity and Beyond Price Forecasts - 25th Jul 21
Bitcoin Black Swan - GOOGLE! - 24th Jul 21
Stock Market Stalling Signs? Taking a Look Under the Hood of US Equities - 24th Jul 21
Biden’s Dangerous Inflation Denials - 24th Jul 21
How does CFD trading work - 24th Jul 21
Junior Gold Miners: New Yearly Lows! Will We See a Further Drop? - 23rd Jul 21
Best Forex Strategy for Consistent Profits - 23rd Jul 21
Popular Forex Brokers That You Might Want to Check Out - 22nd Jul 21
Bitcoin Black Swan - Will Crypto Currencies Get Banned? - 22nd Jul 21
Bitcoin Price Enters Stage #4 Excess Phase Peak Breakdown – Where To Next? - 22nd Jul 21
Powell Gave Congress Dovish Signs. Will It Help Gold Price? - 22nd Jul 21
What’s Next For Gold Is Always About The US Dollar - 22nd Jul 21
URGENT! ALL Windows 10 Users Must Do this NOW! Windows Image Backup Before it is Too Late! - 22nd Jul 21
Bitcoin Price CRASH, How to SELL BTC at $40k! Real Analysis vs Shill Coin Pumper's and Clueless Newbs - 21st Jul 21
Emotional Stock Traders React To Recent Market Rotation – Are You Ready For What’s Next? - 21st Jul 21
Killing Driveway Weeds FAST with a Pressure Washer - 8 months Later - Did it work?- Block Paving Weeds - 21st Jul 21
Post-Covid Stimulus Payouts & The US Fed Push Global Investors Deeper Into US Value Bubble - 21st Jul 21
What is Social Trading - 21st Jul 21
Would Transparency Help Crypto? - 21st Jul 21
AI Predicts US Tech Stocks Price Valuations Three Years Ahead (ASVF) - 20th Jul 21
Gold Asks: Has Inflation Already Peaked? - 20th Jul 21
FREE PASS to Analysis and Trend forecasts of 50+ Global Markets by Elliott Wave International - 20th Jul 21
Nissan to Create 1000s of jobs with electric vehicle investment in UK - 20th Jul 21
Bitcoin Halvings Price Forecast and Stock to Flow Analysis - 18th Jul 21
Dell S3220DGF Unboxing and Stand Assembly - 32 Inch 165hz Curved Gaming Monitor Amazon Discount - 18th Jul 21
What Does The Fed Mean By “Transitory Inflation” And Why Is It Important To Understand? - 18th Jul 21
Will the US stock market’s worsening breadth matter? - 18th Jul 21
Bitcoin Halving's Price Projection Forecasts Trend Trajectory - 18th Jul 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

UK Banking Sector and Housing Market Reverting to Below the Mean

Economics / Credit Crisis 2009 Jan 27, 2009 - 07:31 AM GMT

By: MoneyWeek

Economics Best Financial Markets Analysis ArticleBanks have money - they just don't want to give it to most people - The job losses are stacking up across the world. According to The Times , about 70,000 jobs went globally yesterday. Most of the cuts were in the US - construction equipment maker Caterpillar is cutting 20,000 jobs, while mobile phone operator Sprint Nextel is cutting 8,000 posts.

In Britain , steel maker Corus is cutting 2,500 staff, while ING and Philips, both of which have operations in the UK , are cutting thousands of staff worldwide.

If companies aren't making as much money, they have to lay people off. But unfortunately, as more people lose their jobs, the less money there is to go round, and the more bad debts that will build up.

No wonder banks don't want to lend...

Careless lending has left banks very vulnerable

The banking crisis came about because banks had overstretched themselves. They loaned out more money than it was realistically possible for the economy to pay back. That left them very vulnerable when defaults started showing up in the dodgiest loans – the US subprime market .

Lending clammed up. Governments tried to come to the rescue, and are still trying. Interest rates have been slashed, money is being printed, and central banks are crossing their fingers and praying for inflation to magic all the bad borrowing away.

But all that careless lending led to careless investment too. Businesses and jobs were created that relied entirely on the continued existence of large quantities of borrowed money to fund them. Now those companies and jobs are disappearing along with the borrowed money.

Banks are becoming choosy about who they're lending to

So while the recession may have kicked off with the banking crisis, it's now taken on a life of its own and moved into the next phase. I've heard quite a bit of anecdotal evidence that the idea that banks aren't willing to lend isn't strictly true. People with successful businesses who don't need the money are apparently being pestered to take loans. And if you look at the mortgage market , you can get lower rates than ever before – as long as you have a big chunk of equity in your house.

It's more accurate to say that banks don't want to lend money to as many companies or individuals as they used to, because suddenly the outlook for those businesses (and home buyers) is pretty bleak. In other words, banks are doing exactly what they always do in recessions.

Would you lend money to an estate agency today? Or a theme restaurant? Or a florist, say? I doubt it. All of these businesses rely on a forgiving economic environment where people are willing to spend. But people are not willing to spend – in large part because they're worried about the future.

Here's what banks do. They borrow money at one rate, then lend it at another. The rate they lend at needs to be higher than the rate they borrow at, or else they don't make any money. And the people they lend to need to be able to pay them back, or else they don't make any money.

In a world where everyone is lending money to anyone, you can't charge very much for loans, even to people who would normally be seen as poor credit risks, because there's always someone round the corner willing to undercut you.

But when there's less competition, you can raise your prices, and you can be more picky about who you lend to. And that's what's happening now.

Property pundits in particular are describing the banks as “mean” and blaming them for the drop-off in property prices. But banks are only to blame in so much as they allowed so much careless lending in the first place. Property prices only rose as far as they did because credit conditions were ridiculously lax. What's happening now is a ‘reversion to the mean' – we're returning to normality after an abnormal period of rampant credit growth.

Why you should still avoid buying bank stocks

The trouble is that just as things tend to overshoot when everyone gets too greedy, they also undershoot when the greed turns to fear. So in terms of house prices, economic growth, and unemployment, we're looking at things getting a lot worse before they start to get better.

This partly explains the whole scepticism towards banks at the moment. Some of them might be OK for now. But if you don't know just how much worse things are going to get, it's impossible to predict how much damage is still to be inflicted on their balance sheets. That's why I'd keep avoiding the banking sector for the time being – despite the more than 70% rebound in Barclays' ( LON:BARC ) share price yesterday.

By John Stepek for Money Morning , the free daily investment email from MoneyWeek magazine .

© 2009 Copyright Money Week - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Money Week Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in