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Sinking Feeling

More Credit Tightening

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So over the past few months we have seen the number of mortgage approvals fall dramatically and in the last week loan to values drop from 125% to 90%, and in the case of the Nationwide 75%. This really begs the question why do banks create periods where money is easily available and then tighten credit causing a crash, are bankers really so dumb that they can't see what will happen or is it part of a larger plan to line their own pockets?

I started to look at these questions a little over a year ago. From my own memory I remember how hard people found getting credit in the early 1990s after it had been readily available in the late 1980s. I remember a number of half finished construction projects because money was no longer readily available and the companies had gone bust. I also knew from my Dad that commercial property had undergone a similar period in the early 1970s. I started to wonder just how many more times this had happened in the past.

It would seem that the first major speculative boom in property in the UK occurred in the 1780s followed by a slump in the 1790s, with many developments in places like Bristol not completed for another generation. From other things I have read it seems as though there could have been another slump in the 1830s. No doubt there were other booms, but one that I have seen recorded in a few places is one that occurred in the late 1860s up to the crisis of 1873. In his book "Crises and Cycles" written in the 1930s, Wilhelm Ropke says that during this period "Speculation in real estate and building was rife, and there sprang up those ill-famed edifices which were to remind later generations of the bad taste of the " golden age of the company promotor." Luxury and rich living became the order of the day. It's interesting to note how many times he mentions "credit crisis" when talking about the history of slumps since 1825.

In another book "The Great Red Dragon" (1889), the American author illustrates clearly what happened during this period, indeed there are certain similarities between this and what is happening in the US and the whole Northern Rock debacle:

"The great fire of 1871 afforded them their opportunity. Nobody ever knew how it originated. A high wind prevailing at the time swept the flames through the heart of the city, leaving a path of desolation three-fourths of a mile wide. The business center of Chicago was reduced to ashes. The business community had been doing business in cheap two-story houses. In rebuilding, they would, no doubt, have preferred to erect cheap two-story buildings again; for the lower stories furnished all the room needed for business purposes.

But there has never been any money to be obtained for building, in this country, public improvements on a large scale, except in London. Chicago could only be rebuilt with London capital. The Money lenders could dictate the style of buildings to be erected--splendid structures, from six to ten stories high, the upper stories of which could only be rented for offices or lodgings. Before the rebuilding was completed, the hard times of 1873 came on; the crisis being engineered, as we shall see, by the London Money Power. The panic caught the Chicago business men in the trough of the sea. Business was prostrate: renters were lacking for the upper stories: payments could not be made: mortgages were foreclosed; and the most of the grand Chicago business blocks became the property of the Money Kings mortgagees. The crash of 1873 was brought on by the failure of the House of Jay Cooke & Co. Jay Cooke was a London banker, and the agent of the Money Kings for building the Northern Pacific Railroad. The failure was arranged in such a manner that it did not involve the London house of Jay Cooke & Co. at all. But the failure of the American house accomplished its purpose. It started a crash whose influence lasted five years, prostrating all our industries, and sweeping the country with a deluge of bankruptcy; enabling the Money Kings to hold carnival in the purchase of our produce at low prices, and in buying up property cheap at bankrupt sales.

All prices went down so low that, though we had $900,000,000 of currency in the country, it only needed $300,000,000 to carry on all the business of the country, and the other $600,000,000 was locked up and retired from circulation.

The London Money Kings certainly prepared and engineered the panic of 1873, just as they did the crash of 1837 and 1857. We find their motive in the fact that it gave them an excuse for locking up $600,000,000, and thus causing the ruin that followed, with the hard times and low prices, in which they reaped a rich harvest of profit to themselves.

They can make good times or hard times whenever they please; so completely have they gotten our country in their hands. They hold our prosperity completely in their grasp. We are become entirely dependent upon them. When they wish to make good times, they put out their money freely, in building railroads, in making city improvements, in establishing new enterprises all over the country, and in lending money to everybody who wishes to borrow and has property to mortgage as security. Then we have flush times for several years; and everybody, under their leading, rushes into speculation, and everybody gets into debt.

Then, in order to make hard times, the Money Kings have only to lock up the money they make as profits out of their various enterprises in the country. They stop building railroads: they stop all outlays for city improvements: they stop all investments in new enterprises; and they stop loans to borrowers. They simply lock up their profits, and let the money lie idle. And at once business is at a stand still: the improvements which had given activity to business cease: established businesses, such as farming, manufacturing, railroading go on: everything else stops. There is universal stagnation: prices fall: a flood of bankruptcy sweeps over the land: thousands are ruined--and the Money Kings revel in low prices of produce, and cheap purchases of bankrupt property.

This was the way in which the Money Kings operated the hard times of 1873, and several years afterwards. But they had to have a visible cause that would account for the hard times to the public, on accepted business principles. The failure of Jay Cooke did this. it destroyed confidence, and in the eyes of the public justified the locking up of the money, with all the subsequent ruin. They thus made our people believe that the crash was an unavoidable disaster, due to regular business causes, and not to their own malignant intention."

Edited by Sinking Feeling

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Guest DissipatedYouthIsValuable

Bump.

Edited by DissipatedYouthIsValuable

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I posted about a year ago about lending criteria being set in a very big high street bank by people aged 27, 28ish. These people had no idea about the previous crash. They were just working with their own experience i.e. house prices rise and high debt is acceptable and often the norm. There were no lessons learned from the previous crash.

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The London Money Kings certainly prepared and engineered the panic of 1873, just as they did the crash of 1837 and 1857. We find their motive in the fact that it gave them an excuse for locking up $600,000,000, and thus causing the ruin that followed, with the hard times and low prices, in which they reaped a rich harvest of profit to themselves.

Nice post.

In "A Short History of Financial Euphoria" Galbraith expresses the idea that financial memory lasts a maximum of 20 years.

"This is normally the time it takes for the recollection of one disaster to be erased and for some

variant on previous dementia to capture the financial mind. It is also the time generally required for

a new generation to enter the scene, impressed, as had been its predecessors, with its own innovative genius."

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Isn't it as simple as - "Get it while it's going"?

The quote from the UBS shareholder meeting on Wednesday is telling: "A bank is not a casino!" Well, shareholders might be angry about all this, but the pros know how to make money AND how to walk away when money (not their own) is lost. The notion of the limited liability company as a single entity with integrated goals and planning is mostly nonsense.

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Nice post.

In "A Short History of Financial Euphoria" Galbraith expresses the idea that financial memory lasts a maximum of 20 years.

"This is normally the time it takes for the recollection of one disaster to be erased and for some

variant on previous dementia to capture the financial mind. It is also the time generally required for

a new generation to enter the scene, impressed, as had been its predecessors, with its own innovative genius."

Agreed v. good post, and thanks for articulating and pointing to some 'learning' in relation to my 'gut feeling' re. the memory/psychology of these cycles.

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This really begs the question why do banks create periods where money is easily available and then tighten credit causing a crash, are bankers really so dumb that they can't see what will happen or is it part of a larger plan to line their own pockets?

Because:

1. In a credit boom they'll get big bonuses for lending vast amounts of money to people who'll never pay it back.

2. Odds are they won't be working for the same bank by the time the lending comes back to bite them in the ass, and may not even be in banking at all.

3. If they really ****** it up, the government will step in and save them as they did with Northern Wreck.

So they have lots to gain and nothing to lose. The real question is why banks don't just take their money to Las Vegas and bet it all on a roulette wheel... if they win they double their money, if they lose the taxpayer will be forced to bail them out.

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Because:

1. In a credit boom they'll get big bonuses for lending vast amounts of money to people who'll never pay it back.

2. Odds are they won't be working for the same bank by the time the lending comes back to bite them in the ass, and may not even be in banking at all.

3. If they really ****** it up, the government will step in and save them as they did with Northern Wreck.

So they have lots to gain and nothing to lose. The real question is why banks don't just take their money to Las Vegas and bet it all on a roulette wheel... if they win they double their money, if they lose the taxpayer will be forced to bail them out.

because then they don't get your house/farm/commercial property as well

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Because:

1. In a credit boom they'll get big bonuses for lending vast amounts of money to people who'll never pay it back.

2. Odds are they won't be working for the same bank by the time the lending comes back to bite them in the ass, and may not even be in banking at all.

3. If they really ****** it up, the government will step in and save them as they did with Northern Wreck.

So they have lots to gain and nothing to lose. The real question is why banks don't just take their money to Las Vegas and bet it all on a roulette wheel... if they win they double their money, if they lose the taxpayer will be forced to bail them out.

I think i remember Peter Schiff saying something along the lines of investment banks are no longer owned by the people who run them.

They can be run into the ground and none of the bonuses need to be paid back if the gamble goes wrong.

Didn't the heads of Citigroup and anotheer bank walk awya with 100s of millions in bonuses when they left?

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Credit tightening and property falls IMO can be good for banks, it gives them time to reassess, consolidate, and calculate the real risks. Once the prices have fallen there will then be more people available that they can lend to, and can adjust the lending criteria accordingly, and the cycle continues...

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Guest Bart of Darkness
Because:

1. In a credit boom they'll get big bonuses for lending vast amounts of money to people who'll never pay it back.

2. Odds are they won't be working for the same bank by the time the lending comes back to bite them in the ass, and may not even be in banking at all.

3. If they really ****** it up, the government will step in and save them as they did with Northern Wreck.

To which I would add:

4. In a boom no one wants to say anything negative for fear of potential consequences (at best, ridicule by your colleagues, at worst, being earmarked for the push). Best to keep shtoom and enjoy the party while it lasts.

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All good points on this thread.

Another answer to the question of why the credit cycle happens the way it does is that banks feel they have to follow each others' lead, or go out of business.

If one bank relaxes its lending criteria just slightly, they will tend to gain market share. Their competitors have to compete, or they won't survive in the market. The lenders end up acting as a herd. Similarly, on the borrowers' side, a business that borrows to expand its operations will take market share from its rivals. So while money is cheap, it makes no sense to refuse it. It might be risky to take the money, but it might be riskier not to, because everyone else is doing it. (It's like that old saying of Keynes's, that the market can stay irrational longer than you can stay solvent.)

Of course the exact same thing happens in reverse as credit contracts. We're seeing it now. The banks who are slowest to tighten their lending criteria will be left with all the riskiest customers. Defaults and foreclosures beget more defaults and foreclosures. The herd does an about-turn and starts running the other way. But every one of them is driven to do what they do as a result of rational analysis and business decision-making. You don't even need some underlying madness or mania to take hold. It's like watching birds in the sky, or sheep in the field. Why do they suddenly veer off in a different direction with no visible stimulus? It doesn't matter. They just do.

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  • 292 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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