The Financial Crisis - Essay Example

Introduction Do you ever wonder how one country began to have a financial crisis, then all of sudden, other nations just so happen to jump on the bandwagon or fall into the fold Do you ever wonder how and why so many people are loosing more money and facing more financial devastation more than ever Furthermore, do you ever wonder what the unseen, nearly clandestine individuals who control and implement policies containing to different monetary systems have to say about credit and the concept of money Well, just read this quote which was pulled from a short animated film which can be viewed on www.google.com entitled Money as Debt. "The modern banking system manufactures money out of nothing. The process is perhaps the most astounding piece of sleight of hand that was ever invented. Banking was conceived in iniquity and born in sin. Bankers own the Earth. Take it away from them, but leave them the power to create money, and with the flick the pen they will create enough money to buy it back again Take this great power away from them and all great fortunes like mine will disappear, and they ought to disappear, for then this would be a better and happier world to live in. But if you want to continue to be slaves of the banks and pay the cost of your own slavery, then let the bankers continue to create money and control credit." Sir Josiah Stamp Director, Bank of England 1928-1941 (Reputed to be the 2nd richest man in England at the time) I thought that it would be a fitting quote to open up this essay, seeing that I am to write about the financial crisis that is going on in the United Kingdom. What better person's quote to use than the director of the Bank of England As if people may not know, the world is experiencing a so-called global financial crisis. Everywhere an individual turns; there is talk of job-losses, recession, tough times and times getting harder, no matter which politician or elected official gets put in office. It is as if Charles Dickens' novel "A tale of two Cities" really isn't a tale at all. It seems that this author's book was and is effectively serving a preamble of things to come and what is happening right now. Truly it is the best of times and the worst of times simultaneously. It is the best of times because as you may know, there are winners and losers in every situation in life. In this essay we will analyze the financial crisis that is happening in the United Kingdom. We will analyze the crisis thereof using political, economic, social, and technological factors and attempt to discover useful solutions to the problem at hand. We will take a no nonsense approach to identifying the problem, government attempts to solve the problem, and The relationship between United States and Great Britain It has been exactly two hundred thirty two years since the United States declared independence from Great Britain, and now it seems as if both nations are in the same predicament. And even though the founding fathers of the United States didn't want to have a central banking system similar to Great Britain because of the evils inflicted upon the colonies, have similar systems of central banking. Both of the nations have the same colors on their flag, which are red, white, and blue. Let's just hope that England's colors don't represent the same virtues as America's flag; red being blood, white being purity and blue meaning truth. Henceforth, here is a truth again taken from the film Money as Debt from American founding father Benjamin Franklin. "The inability of the Colonist to get power to issue their money permanently out of George III and the international bankers was the PRIME reason for the revolutionary war." However, the colors of the two nation's flags are not as important as the shade of times that the two countries are living right now. Let's look at the Bank of England and look at our friend who started the whole concept of banking. For the sake of this essay, let's call him Gary the Goldsmith. The History of money Mr. Paul Grignon's video which can be found www.google.com entitled Money as Debt gives a clear depiction of exactly what money was, is and how it was created. The Goldsmith's tale is the story of how the modern concept of money came to be and how many international modern banking systems came to be. So simple is this story, is that a child can understand it. However, so many adults know nothing about its incorporation, nor do they know how the whole system even works. Once upon a time anything could be accepted as money, just as long people had enough faith that the object could later be exchanged for valuable goods and services. Precious stones, beads, shells, and even feathers could be used as money. Then along came our friend Gary Goldsmith. Mr. Goldsmith held the occupation in which is sir name suggested. In his shop he fashioned gold objects and minted coins so that people could use those gold coins to purchase goods and services in the marketplace. Overtime however, people began to come to his shop to use his vault to store their quantities of gold coins. Obviously, the goldsmith charged people a fee for the use of space in his vault. When his customers came into his shop to store their gold, he would give them a receipt or what was known at that time, a claim check that had the amount of gold the person stored in the vault written on it. As fate would have it the goldsmith stumbled upon an astonishing discovery. Over time, the Goldsmith noticed that people rarely came back to withdrawal their deposited gold. That was because the claim checks that the goldsmith issued was being traded for goods and services in the marketplace. Furthermore, another crucial factor to know was that these claim checks was directly backed by the amount of gold, which was in his vault. The original bank Gary Goldsmith had just invented a profession. He became the first banker not because he knew what he was doing, rather was so because he became the first person ever to store other people's gold (or money) in his vault. His claim checks that were issued became hot commodities on the market as more and more people came to him to store their wealth. Thus the concept of paper money was born. After noticing that the people rarely came back to withdrawal their gold, the goldsmith decided to take a bold and deceptive step. He decided that he could print more claim checks (or print more money) for gold that wasn't even in his vault. Furthermore, he could charge interest (or the cost of borrowing money) on the gold that he personally had, and on the gold that he held for other people in his vault. Thus, this became the method in which the goldsmith made money and is more than likely the cause of the credit crisis in Great Britain. The concept can be applied to any industry imaginable. In this case we will use the mortgage industry as our base subject and talk about how the concept of credit is applied to purchasing a house. What is a mortgage To understand the mortgage crisis in the United Kingdom we have to understand what a mortgage is. The website www.yourdictonary.com/mortgage financially defines the word mortgage as "A debt instrument that enables the borrower (mortgagor) to receive funds to purchase real estate. In return, the lender receives a lien on the property as security that the loan will be repaid. The borrower receives access to needed funds and the lender earns interest. The borrower has full use of the property and ownership rights. The lien is removed when the mortgage is paid off in full." This is essentially how a mortgage works and it seems as if such a simple yet dreadful concept as this is the cause of many mortgage companies folding its doors and kissing their businesses good bye. The mortgage business is not folding because the amount of people needing loans is low, but because the people who are not able to repay these loans with interest are high and steadily growing. Just take a look at UK based mortgage company, Watford-based Loans, from an article by Natalie Martin entitled Loans.co.uk exits secured industry. She states, "Watford-based Loans.co.uk shut its doors last week, resulting in the loss of 276 jobs. The firm adds that the decision to close was caused by providers tightening their lending criteria and falling house prices, which has made it difficult for customers to meet lenders' LTV offers." There is something called self control. Most people have none, or at least not enough to tell themselves that they can't afford a new house no matter how good the loan papers look. This is a primary reason of why there is a financial crisis. I like to call it the sub-prime lending fiasco. A crisis financial occurs when people are unable to pay back the loans that they knew they couldn't afford in the first place. Now governments all over the world are cutting interest rates. Meaning, in a pathetic, macroeconomic attempt to strive off economic collapse, banking systems are increasing the supply of money to lower the price at it, to put the market back to equilibrium. According to an article by L.Beauchamp-Stamp from www.mortgagestrategy.co.uk/cgi-bin/ England is at the forefront of the interest rate slashing phenomenon. "The last cut an emergency 1.5% was intended to stimulate spending and starve off recession but the economy has continued to suffer. The cut also brings the current interest rate to the lowest level in the Bank's 400 year history, its never gone below 2% since the Bank was set up in 1694." My only question to that would be shouldn't the BOE, or any central banks for that matter know that something like this was going to happen Now it seems that all of the problems of people not spending are going to be solved by sloshing all of this money around and throwing it at people in the form of all of these economic stimulus packages. With purposes of increasing consumer spending, which accounts for about 70% of all spending in the economy, the BOE, similar to America, and Japan has whipped together its own stimulus package. However, don't count on any people to be buying houses in the UK, even though the prices are falling. But don't take my word for it. Ask the experts at The Economist newspaper from a Nov.15th 2008 article in the EBSCOHost database, entitled Plumbing new depths. "the Bank of England's governor, said on November 12th that he supported some fiscal stimulus, provided that it was temporary and accompanied by a mid-term plan to get the public finances back on to a sustainable footing." Let's just pray that this man is not fruit of the same tangled vine as our friend Sir Josiah Stamp. Conclusion Education is the name of the game, and it's the only way anyone will win at anything in life. Fittingly, I think that education is the first step to solving any problem, especially one such as this one. If banks can get people to lobby for them to the government on behalf of their interests, then why can't school teachers and parents get together to lobby that real financial education needs to be taught at our public schools What is wrong with that picture I mean, after all, isn't that where some of your tax dollars are going Where are the fruits of your labor Sounds like taxation without representation if you ask me. Sources Ash, A. February 5, 2008. The Market Oracle [Online]. Market Oracle Ltd. http://www.marketoracle.co.uk/Article3615.html [December 7, 2008] Beauchamp-Stavo, L. December 4, 2008 Mortgage Strategy. Centar Media Plc. www.mortgagestrategy.co.uk/cgi-bin/ December 7, 2008 Martin, N. 2008. Loans.co.uk exits secured industry. (1). (accesses December 7, 2008, from EBSCOHost.com database) The Economist. November 15, 2008. Plumbing new depths. The Economist Newspaper 389(8606) 1 (accessed December 7, 2008, from EBSCOHost database) Underhill, W. October 20, 2008. Dark Days for The City of London. Newsweek. (Atlantic Edition) http://search.ebscohost.com/login.aspxdirect=true&db=f5&AN=3504689&site=ehost-live [December 8, 2008] Dear Customer, Sorry about turning in the assignment so late. As compensation for your time and patience I request that you do not pay me for this assignment. Even though I have never heard of the Harvard style of writing in my entire life, I did the best I could and it was a pleasure to write this assignment for you. Thank you for your business, and for being patient with such a 'young whipper snapper' as myself. One thing about young people, we are always rushing, but never have the time. Thanks again. Sincerely Joshua Goodlow Read More