DO YOU BELEIVE IN PAYING A DEBT WITH A DEBT

[adrianh]

What do you do if due to unforeseen circumstance you can no longer afford the repayment on short term debt but if you were to consolidate that debt into a second bond on your house you would be able to survive comfortably. This is making debt to pay debt yet it will resolve your predicament - isn't this a perfectly valid reason for making debt to pay for debt, all other things being equal.

[adrianh]

Please explain how the global economic meltdown occured?

[Citizen X]

Firstly, there are as many opinions for the causes of the global economic meltdown as there are individuals to formulate such opinions;
1. Most people agree that the global economic meltdown started in late 2007;
2. I’ll tender my opinion upfront: the global economic meltdown is inextricably linked to reckless lending of money, personal loan, bond , car and credit card. This chain reaction started in the USA(the father of capitalism, so I submit Communism failed BUT, the real question is: Is capitalism working????). Financial institutions in the USA were recklessly lending money to whomsoever would apply for a bond or loan. This is where this chain reaction started, at about the same times hundreds of thousands of people who loan money from banks were at the same time unable to make their monthly payments and this persisted until banks and other companies collapsed.
3. Recession in and of itself has two meanings: 1: a period of months or years where there is generally a reduction in productive economic activity2: Any first year BCOM, NDIP or economics 1 student would be able to answer as follows: a down swing or a contraction of the actual business cycle with several periods of negative GDP growth;
4. “According to the U.S. National Bureau of Economic Research (the official arbiter of U.S. recessions) the recession began in December 2007. US mortgage-backed securities, which had risks that were hard to assess, were marketed around the world. A more broad based credit boom fed a global speculative bubble in real estate and equities, which served to reinforce the risky lending practices.^[ The precarious financial situation was made more difficult by a sharp increase in oil and food prices. The emergence of sub-prime loan losses in 2007 began the crisis and exposed other risky loans and over-inflated asset prices. With loan losses mounting and the fall of Lehman Brothers on September 15, 2008, a major panic broke out on the inter-bank loan market. As share and housing prices declined, many large and well established investment and commercial banks in the United States and Europe suffered huge losses and even faced bankruptcy, resulting in massive public financial assistance.”
5. Tim Castello explained as follows:"The immediate cause of the global financial crisis was the massive growth and then collapse of a new asset class –securitised subprime mortgages. On one level, subprime mortgages have a positive social role – helping people with relatively poor credit ratings to own their own homes. However, the scale of the lending, the way these mortgages were sold, and how they were developed into hugely complex financial instruments that many people – even people in the financial markets – did not understand, led to a shock to confidence in the global financial system not seen since the Depression of the 1930s."


So to summarise what is otherwise an exhaustive discussion, in my opinion, the global economic meltdown was caused by reckless lending in the form of home bonds, personal finance, vehicle finance and credit cards…

[Blurock]

Recless lending? Yes! ...and stupid!

A bank will give you R20k or R30k on a credit card without blinking. Ask the same bank for an overdraft of same amount, they will turn you down.

Try it, I dare you...

Ask for finance on a new car - no problem. Now ask for a loan to buy a machine or equipment for your business. Something that will generate an income. No chance without a huge deposit, bond on your house or other security.

[adrianh]

I suppose the banks consider risk vs reward. A credit card has huge interest rates to compensate for their risk. I suppose loans on cars and houses are easier because they can grab the asset. I think the problem with machines is that small business fail so easily and that the asset only has value in a very narrow market.

[Citizen X]

Yes, it doesn't make any sense! You rather finance a machine that will generate income, jobs and boost economic activity...but instead you more happy to finance a car..

[adrianh]

A bank is a business just like any other, its not a charity!

[Blurock]

I suppose the banks consider risk vs reward. A credit card has huge interest rates to compensate for their risk. I suppose loans on cars and houses are easier because they can grab the asset. I think the problem with machines is that small business fail so easily and that the asset only has value in a very narrow market.

So if they need to grab an asset to justify their lending are they not just pawn brokers?

I agree with risk and reward and I have been generalising, but often a bank will not consider the past performance and credit history of a business due to perceived risk. This is sometimes (mostly?) because they often do not understand the business or the industry in which the business operates. Because they are content to sit in their offices?

Yet, they will grant credit to the business owner, who depends on this very business for his income!

[adrianh]

This is sometimes (mostly?) because they often do not understand the business or the industry in which the business operates. Because they are content to sit in their offices?

hmmm...their business is money, it is not knowing the business or industry in which the other business operates.

The difficulty in banks is due to the sheer volume of clients and transactions and the complexity of their systems decisions are largely made by systems developed over time. Those systems are not able to look at the nuances of each individual business and its inter-connection with other businesses so as to make a decision based on fuzzy logic. Decisions are hard-wired on strict criteria.

Don't get me wrong, I'm not pro banks, I hate them as much as you do, but I do understand why they do a lot a lot of things that they do.

[Blurock]

hmmm...their business is money, it is not knowing the business or industry in which the other business operates.

The difficulty in banks is due to the sheer volume of clients and transactions and the complexity of their systems decisions are largely made by systems developed over time. Those systems are not able to look at the nuances of each individual business and its inter-connection with other businesses so as to make a decision based on fuzzy logic. Decisions are hard-wired on strict criteria.

The banks do have research departments where share markets and different industries are being studied. There is even an industry analysis comparison where a business can be measured against the performance of its peers. Corporate bankers know all about this. Believe me, the better bankers always make a point of visiting their clients, even if it is once a year. They know their clients and the risks in that specific industry.

Unfortunately it is at the lower levels and in credit departments that things sometimes go pear shaped. The available information and knowledge is not applied and often credit is awarded on a points sytem that has no bearing on the purpose of the credit applied for. Paint by numbers may apply to the demographics of the masses of individuals, but there is far more to a business than that.

I am not a gambler, but if I had to risk money on a horse, I would want to know everything about the horse, its pedigree, past success, the jockey, his abilities and even the grounds on which they are racing. If you do not do your homework before the time, you are only gambling, and that is then why you should take additional security to cover your potentially bad decisions.