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Right, so Lehman's, America's 4th largest Investment Bank has gone tits up.

I understand that this will cause various repercussions throughout the banking industry globally.

My question is...compared to the Great Depression, how bad are things now? IIRC, the cause of the problem is different (Great Depression being essentially caused by over supply and under demand) but I suspect the trouble caused will be similar.

How worried are people getting? Myself, quite selfishly, I'm pretty much okay. The only credit I have is with my Parents, and they have no Mortgage or other loans to worry about, having paid all such things off around 2 or 3 years ago.

However, I work for a Photographic Portrait company, and we are not especially cheap. My sole worry is that the business I work for will go under, and then I'll be unemployed. Again. Through a third redundancy (I hate redundancy!) For the minute, being the sole booker for our Studio, my place is fairly safe. If we have another round of redundancies (hence me being on my todd) they'll be going from other areas, but I know that nothing is even remotely safe when your work for a Luxury Company.

Thoughts, views, analysis please. And I know it might not be possible, but please try to explain things in as simple terms as possible!

This is more like the Savings and Loan crsis in the mid-80's, maybe a bit bigger just because we're now 25 years into the great "lets just spend TONS of money we don't have" government experiment that Reagan started, so we're in a worse financial situtation overall...

Government decides "we don't need to regulate this stuff, it works great, the market is self regulating!"

Stuff churns along fine for a bit, heck we even see MORE growth! Score! Deregulation, great idea, high five!

Then we find out oh wait, all this deregulation and the growth that resulted was actually just a bunch of people doing really, really dumb stuff with loans because there aren't any rules anymore! Crap, these loans don't look very good....crap crap crap....

Then the gak hits the fan, banks start failing, the government starts bailing stuff out...

Anyway, thats part of what is going on. Read about the savings and loan crisis here:

http://en.wikipedia.org/wiki/Savings_and_Loan_crisis

a lot of that should sound familiar if you've been watching the news, even if the names are different.

As for your company...well, some companies are recession-proof, some aren't. Some people will argue that we're not in a recession anyway (to which I would say, "yet").

Unfortunately knowing nothing about any specifics in the UK I can't say if you're going to have any issues. Is the housing market tanking there like it is in America? Things that are bad in America don't always translate elsewhere. Personally, I don't think you have to worry very much. But I would also say that anyone in almost any job who isn't working or saving with a plan of being able to survive 6 months unemployed is deluded in general.

It's tanking, but possibly to a lesser degree. For the moment at least. Prices are plummeting, or more accurately, adjusting (far, far overblown!) very sharply, and I know a lot of people over here are finding Interest Rates crippling.

lambadomy wrote:I don't think you have to worry very much. But I would also say that anyone in almost any job who isn't working or saving with a plan of being able to survive 6 months unemployed is deluded in general.

True enough. While this is a mess, it's not going to be any great depression (if it looks like it is, we can just spark off world war 3 and roll right out...right?). It's just a fat wake up call that shows we've been screwing things up for far too long and now we have to pay the piper for it. Lots of people (myself included) are taking a big hit from the housing market, but things will get better eventually. Just give it a couple of years.

As for your job, I wouldn't worry too much, but I would make sure you have a decent chunk of change stashed away just in case.

Yeah, it seems that long term low-interest and low-inflation causes people to go insane. Same thing happened with the S&L crisis. Interest rates at 5.5%? No inflation? This will last forever!!!

I remember in the late 80's (housing bubble, S&L) and in the late 90's (stock bubble) people would talk about "the end of the business cycle - that the fed had finally figured it out, we'd never have another recession, interest rates and inflation would stay low forever....etc etc.

Surprisingly, it never quite works out.

Do they have fixed rate mortgages in the UK? They (were) the primary form of mortgage in the US 8 years ago, but suddenly everyone decided they needed a house even if they couldn't afford it so we ended up with some really bizarre ARM mortgages given to people who never should have been even allowed into the bank...in the US the "must own a house as my primary investment" concept is skewed even further because we still have writeoffs for mortgage interest, etc. Causes some nutty behavior in the borderline-able-to-afford crowd, and we're seeing the results when the banks are allowed to loan anyone they want money and write even the crappiest loan's return into their long-term earnings in order to make their stock look good.

The media paints a bleaker picture than reality really is, because that's just how they roll. They're just entertainment in the guise of "unbiased" information, so they focus on everything bad because that's what gets their ratings up.

I doubt there will ever be another depression. At least, not in the way our grandparents remember. But CNN wants you to think there will be so they can get more people to watch Larry King tonight...

Fixed for a period, as far as I know.

Certainly, the vast majority have a honeymoon period of fixed rate, and then go to variable. Might be a modern phenomena though, what with Banks being greedy, irresponsible morons in search of a quick buck and hang the consequences.

Seeing one Bank down really makes me worry just how messy this whole thing is going to get....

Incidentally, just checked in on GW's share price as a sort of linked interest. Shot up by 33p today. Wonder if thats indicative of owt, considering the Stock Markets have understandably slumped recently.

This is the 4th bank to fail, at least. I stopped keeping count, but you can look it up. It's definitely the biggest so far, well, not counting Freddie Mac and Fannie May, which to me are the real "Big News" of this whole thing. Those are absolutely huge companies that the gov't took over.

I was wondering because in the US, there are plenty of permanently-fixed loans. You can get a loan for 30 years fixed at whatever the current rate is, plus maybe .25%. I'm not positive, but I think it was the most common type of loan for a long time, at least since the late 70's.

Most of the people who have fixed/Adujustable loans here are people who can't afford the house in the first place, and were either:

a) hoping to flip the house for a profit before the ARM kicked in
b) hoping to refinance once the house increased in value so they had more capitol (technically owning 15-20% of the house just from appreciation) and could get a fixed mortgage
c) people who were bad at math and believed the broker who said "yes, you can afford this house"
d) people who knew they couldn't afford the house but believed their financial situation would change in the future, or just didn't really believe that anyone would actually foreclose on them, or some other delusion.

All of this behavior caused house prices to go through the roof, which fueled even more A and C behavior.

Anyway, everything will be fine. We're far from a depression-level event. in 1929 the stock market lost 89% of it's value in a week. Before that, people were so insane they were taking out bank loans in order to buy more stock. It was a nutty time. People were acting nutty with houses now, but not nearly in the same scale...and while I don't love Ben Bernanke or the Fed, they at least have some tools to help smooth out the fall or mitigate the damage (which they're already doing) which did not exist in 1929.

Don't look at stocks on a day-to-day basis for any kind of meaning. That's only for speculators, day-traders and other crazies who think they can outsmart the market, daily fluctuations without some kind of announcement, especially on a stock as small as GWs, is indicative of nothing.

Lehman wasn't a bank. Please don't insult us.

Can only go on what I understand!

Far as I know, Lehman was an Investment Bank, and not one you could hold a Current Account with (Checking Account is the US equivalent I think)

Correct. Lehman wasn't a bank. I'll just leave off at that.

I'm interested in the difference if you feel like explaining?
(Poor ignorant science educated me)

Da Boss wrote:I'm interested in the difference if you feel like explaining?
(Poor ignorant science educated me)

Lehman Bros is a bank, or at least some of its holdings are banks, but they aren't banks in the sense of having savings accounts, branches and automatic teller machines.

Lehman Bros does a lot of commercial banking, organising financing for large companies, investment management (maintaing share portfolios for individuals and funds), and private equity (basically high risk investment in new companies and takeovers).

lambadomy wrote:This is the 4th bank to fail, at least. I stopped keeping count, but you can look it up. It's definitely the biggest so far, well, not counting Freddie Mac and Fannie May, which to me are the real "Big News" of this whole thing. Those are absolutely huge companies that the gov't took over.

It looks like Freddie Mac and Fannie Mae might actually be solvent, though, funnily enough.

I was wondering because in the US, there are plenty of permanently-fixed loans. You can get a loan for 30 years fixed at whatever the current rate is, plus maybe .25%. I'm not positive, but I think it was the most common type of loan for a long time, at least since the late 70's.

Sort of, but the basic rate isn't based on the current rate but the forward rate. The forward rate is basically the expected average rate in the future. That is, if you take out a loan for two years, and the rate now is 7% and the rate is expected to be 8% next year, a fixed rate loan will be offered at 7.5%. If the rate was expected to drop to 5% next year, your fixed rate would be 6%.

Most of the people who have fixed/Adujustable loans here are people who can't afford the house in the first place, and were either:

a) hoping to flip the house for a profit before the ARM kicked in
b) hoping to refinance once the house increased in value so they had more capitol (technically owning 15-20% of the house just from appreciation) and could get a fixed mortgage
c) people who were bad at math and believed the broker who said "yes, you can afford this house"
d) people who knew they couldn't afford the house but believed their financial situation would change in the future, or just didn't really believe that anyone would actually foreclose on them, or some other delusion.

All of this behavior caused house prices to go through the roof, which fueled even more A and C behavior.

Except this stuff has always been around. What changed was the willingness of banks to loan money to people who couldn't meet the housing repayments by themselves, basically counting on the appreciation of the asset to sustain the loan.

Anyway, everything will be fine. We're far from a depression-level event. in 1929 the stock market lost 89% of it's value in a week. Before that, people were so insane they were taking out bank loans in order to buy more stock. It was a nutty time. People were acting nutty with houses now, but not nearly in the same scale...and while I don't love Ben Bernanke or the Fed, they at least have some tools to help smooth out the fall or mitigate the damage (which they're already doing) which did not exist in 1929.

Sort of. I agree that it isn't a great depression event, but that doesn't mean it's nothing. It's probably a step greater than the dotcom crash, but we won't all be trekking to California to find work.

I think the biggest problem is panic, not money. In recent years a lot of very unwise decisions have been taken with regards to borrowing/lending by governments, banks and individuals and now the market is desperately trying to correct itself.

If people let it happen, then yes, a lot of companies will lose a lot of profit, but they won't go under. Unfortunately, the nature of modern capitalism is such that making a profit is not enough. You have to make an obscene and ever increasing profit or its the end of the world as we know it.

Because traders and investors abandon companies at the slightest whiff that they are making x profit instead of 2x profit, this causes unnecessary failures that ultimately the taxpayer foots the bill for - either because government bails out the company with taxpayers money or because loads of people just became unemployed.




Taking the UK housing market as an example:

The average wage is £20k per working adult per annum.
Mortgages should be granted at no more than 3x the borrowers annual pre-tax salary.

Hence an 'average' couple should be able to get (20k + 20k) x 3 = £120k mortgage.

The average UK house price is currently running at £167k (and that's after significant losses in recent months), so the 'average' couple cannot afford the 'average' house!


So, people cannot afford to buy houses, so house prices are going down. This trend will continue until some sort of parity is restored - welcome to economics 101.

sebster wrote:

Da Boss wrote:I'm interested in the difference if you feel like explaining?
(Poor ignorant science educated me)

.

Lehman Bros did a lot of commercial banking, organising financing for large companies, investment management (maintaing share portfolios for individuals and funds), and private equity (basically high risk investment in new companies and takeovers).

Corrected your post

Banks are heavily regulated and generally aren't permitted to involve themselves in equity and similar transactions (workout is a big exception of course). In addition they tend to be substantially more conservative in their lending - residential, business, and corporate lending. Banks are substantially more regulated (at least in the US) creating a more conservative culture overlapping their more limited capacities.