Is There Credit After The Crunch?

I am not sure if I can say credit before 9pm? Having come through the biggest recession ever I have formed the opinion that it was caused by credit. As I look out I see a private sector that is bloodied and bruised, nervous and now risk averse. I see a public sector that has seen some strife but they have a whole load more coming their way - of course the knock on effect for the private sector is going to be a double blow. Not good.

This is no time to look for a new career direction, as openings are rare. Unfortunately, for many people that could be the only way of increasing their income, what with pay freezes still rife and benefits getting slashed. Looking back at the good times, when we suckled the fat teat of credit, would we have stopped borrowing, knowing what we do now? Probably not. But that's the main reason the UK's finances are in their current, rather dire state of affairs. Perhaps what's most worrying, though, is that we're now in a period where credit isn't that easy to come by, and many are on the remortgage merry-go-round, but remortgage deals have dried up. The problem being that, certainly for the US, UK and Europe, we've built a pretty comfortable life for ourselves, based purely on either being owed, or owing someone else a substantial amount.

We talked to wealth management expert and media talking head Jonathan Davis, one of the few people who would know how the trends of the next few years would develop. What became clear after a period talking to Davis was that it was going to take time for the pieces to be put back in place that was only starting to begin now. "The big picture is that for 30 years, we've had a growing debt problem- not just in the UK but right across the West. That bubbled in 2006-2007, and now we're experiencing the hangover of the debt party. I refer you to the 1930s, and the depression based upon de-leveraging effects following, by then, the biggest debt bubble in history during the 1920s. This time it's from the biggest debt bubble of all time," Davis commented.

Davis continues by looking at the current state of the banks who "are, technically, insolvent themselves. You'd be hard pushed to find a bank or building society in the UK that is solvent, when real assets are taken into account. It's all well and good to have property, but if that lies vacant, and there's a loan outstanding, then it's a loss. Look around in every town, in every city. Look up, and you see To Let everywhere. 10 per cent, or at least 10 per cent of shops are lying empty, then you've got warehouse, office and manufacturing facilities." He goes on, "In other words, you've got an enormous swathe of bad debt coming down the line. That's one of the reasons banks are reducing lending, because they know they will be cutting red ink right across the balance sheet in due course. On top of that they also have the wider G20 issue, of what's called Basel 3, which is a change in the regulations of international banking,"

Cutting to the core, as a punishment for flagrant irresponsibility across the financial sector we demanded stricter banking regulations. But in return, it now sounds like the public behind the bailout, the common Brit on the street, is again set to bear a good proportion of the brunt. Basel 3 basically means banks need greater reserves, so hold on to more of their own money. The result is that they will be willing to lend less. "Basel 3 is to prevent a future bubble emerging, followed by a crash. We're still in one crash right now, and it will continue for years," Davis replied when asked if said G20 accord was to prevent another bailout.

So it doesn't look like we're going to see much change in how much we can borrow, or at least how easy it is to find a loan, anytime soon. But does this mean the UK is set for a dramatic rise in high-interest or, worse still, unscrupulous loans? "People are already massively in debt. The amount of debt in society is more than there ever has been. I read surveys from big financial institutions that say if the cost of living goes up £100 per month, people couldn't afford to live- that's how bad it is," said Davis.

"So, I don't believe, in fact I cannot see that people will be getting even more into debt, simply because society is already maxed out. The banks are actually discouraging folk from taking on more debt by increasing interest rates, way beyond the base rate- really it's all they can do, it's not because they want to."

His prediction is that "people will not be taking on more plastic credit, they will not be increasing consumer spending, they will not be taking on mortgages, because they simply can't." Returning to our original point, the issue is that the banks just don't have the money any more. According to recent statistics the number of mortgages obtained is at its lowest level for 10 years.

Davis (and practically everyone else we talked to for that matter) were pretty disparaging of the TV advertised loans sector, payday loans, cash for gold etc, "If you're talking about over-priced, bad loans, they will always be advertised on TV, and they will pick up market share. But really once you start dealing with those types of businesses, you're on a hiding to nothing- they'll just take your house off you for the sake of a few thousand pounds." It's no wonder they have such bad reputations, it should be a crime they get to advertise at all, thankfully though most see through the veneer and don't fall for it, though there will always be a few who do or have no choice.

It will be an imperfect and imprecise art trying to predict the future, but the reasoning behind Davis' predictions is grounded in common sense, the gravy train was going to come off the rails at some point with hindsight. It's a culture shock, one we have no choice but to get use to, but the long term benefits on people's attitudes to spending and budgeting can only be a good thing. Is there credit to be had after the crunch then? No, well yes, there is, but the way to success and better finances is by reducing debt and overspending then plugging the gap with credit lines to keep level. If you're stuck, just man up, admit you have a problem and get much needed help.

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