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As my old man used to say – “Haven’t you heard, there’s a squeeze on?”
If we believe what we read in the press, there is something of a credit ‘squeeze’ at present.
My theory is this – the brain is no more than a bio-computer that can be ‘programmed’. If you believe something positive will happen, the more likely there will be a positive result and if you expect things to be negative they are more likely to be so. There is an expression, “If you ask life for a penny this is exactly what you’ll get” or “If you think you can or you think you can’t you’re right”. If you would like to see more on this, you may like to visit www.mindstore.com but basically everything that has ever been designed in life started as a thought and it was a burning desire to turn that thought into reality, by believing that it could be achieved, that made it a self-fulfilling prophesy. All the great inventions were conceived as a thought before they became reality. The key is to keep on keeping on.
So why the blurb? It’s simple really. Because we are told there is a credit squeeze and many people allow negativity to be their best mate, folk are apt to believe there is one and then act accordingly. So, the very thing these lemmings fear becomes a self-fulfilling prophesy. The dead hypochondriac told you he was ill. It was just that only he believed it.
If we believe what we are told, it is more difficult to borrow money and so it becomes so. Then the usual carpetbaggers get in on the act in the form of the press and the BBC. All these sub-prime lenders are charging too much and they shouldn’t be lending where people self-certify their income and so on and so forth and we Britons now owe a shed load of money by way of every conceivable type of credit available. Then the regulators step in to say that lenders should lend responsibly thus passing the burden of responsibility to other people other than the borrowers. Surely, this type of responsibility is a joint issue. And who pays for regulation – the borrowers of course.
The point, of course, is lost on these folk. It is not possible, these days, to have anything like a reasonable (and by this I mean just above basic) life style without having some credit. If you want a tractor, a trailer or need a car then unless you want to pay copious repair bills you have to buy reasonable kit and reasonable kit does not cost tuppence: unless you are cash happy, you will need finance. Just about everything in Blighty is expensive so if you can pay for it out of cash flow, then I admire you.
Therefore, what would happen if there were a) no access to credit and b) no sub-prime lenders?
a) If there was no access to credit, excluding mortgages, then less would be bought by ‘consumers’ (a term I hate – I prefer buyers). Initially, this would be deflationary because sellers would have to drop prices to encourage buyers but there would be a point below which prices could not drop without businesses making a loss. This would then truly cause a recession with ultimately job losses and attendant misery. Mortgage repossessions would increase as folk, having lost their jobs, were unable to service their loans and then the press would be on about big bad lenders all over again (the self-fulfilling prophesy) and the hat of responsibility would be hung on someone else’s peg. Not least, as sales drop there is less VAT for HM Government, less income tax through job losses with the only option being for the Government to borrow more or to raise more through other taxes or by tax increases. Given that our current mob is already well above its borrowing target, it won’t take an Einstein to work out the way this would head – result? compounded misery.
b) In conjunction with the above, where less mortgages are granted, less property will be sold with less tax revenue by way of stamp duty land tax and house prices would drop. Do excuse me, but I rather thought that an Englishman’s home was his castle. You see, I have some rather worrying news for you. I have already waxed lyrical about how this government has pillaged pension funds and more recently I spake upon the issue of how the Capital Gains Tax rules are being changed which are likely to have an impact on those that might sell a business (though there may be a suggestion that Darling might bring in some form of retirement relief but let’s have a show of hands to ascertain whether you think you will end up paying more or less tax as a result of the changes). You see where I am heading – just about everything you might rely on as the reward for your life’s work may well be shafted one way or another and, as usual, it will be those of us in the middle that pay the price. So, unless I am mistaken, (and the BBC might wish to argue) there is a direct correlation between property sales and the availability of mortgage finance (as well as retail sales and other credit) and this is where we come to the sub-prime lenders, those apparent brigands who care less about their customers than they do about making bread. In an earlier article, I explained what makes a borrower sub-prime. Sub-prime is the new ‘sexy’ way of saying non-status. Essentially, a person would go to a sub-prime lender because they cannot go to a prime lender (let’s say a high street lender). This might be because of adverse credit or lack of income proof or both. Non-status rates of interest used to be high but as more players came to market, the more money there was available and rates dropped so that these days it is fair to say that prime and sub-prime rates are not really that different. Were it not for these lenders, many folk would not be able to borrow at all and so there would be less money around for house sales or money raising for any legal purpose with the result there would be less tax take, house price reductions and so on and so forth. Perhaps our ‘friends’ in the press believe that the lenders themselves will buy what the ‘consumers’ don’t. I can’t see many lenders buying the odd washing machine, or a Peugot 206 with luxury climate control. I can’t see many lenders on their way to the Trafford Centre on a spending spree or paying a removal company as they move multiple sofas purchased at DFS [with nothing to pay for a year and four year’s interest free credit] into multiple property portfolios they have bought.
It’s simple really – less credit means less sales means less tax take means more tax in other ways or more government borrowing with more tax to pay for servicing the said borrowing.
So to all those who attack sub-prime lenders and the availability of credit and blame our industry for why people borrow – think of the bigger picture eh! It would seem that at least one guru agrees with me in the form, no less, of one Alan Greenspan former head of the Federal Reserve Bank for Uncle Sam. Greenspan argues that sub-prime helps to create broader home ownership which, he says, from a social and economic view is worth it. In other words, the advantages outweigh any disadvantages.
It is true that some lenders have become very pious and arrogant about things - it won’t last. They key is finding the right lender for the right job and that’s where we come in.
Hallelujah! Praise the Lord and pass the ammunition!
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