Archive for October, 2008

Help nurture entrepreneurs in poor countries

Erick Schonfeld at TechCrunch blogged about a great way to help eliminate poverty – by providing microloans to entrepreneurs in small countries. Helping people help themselves is a great way to give aid.

Anything from $20 to $350 can help someone start their own business in Karachi, Kabul or Kirkut. Read more here.

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Don’t listen to Crash Gordon. Save.

What caused this financial crisis? Debt. Specifically, risky loans that should never have been offered.

As soon as house prices started falling, people around the world (not just the USA) defaulted on their mortgages, triggering repossessions and causing losses for banks. The further property prices fell, the more repossessions, the greater the loss. Many banks lent so much money to risky borrowers that bank failure was inevitable. In a free market, they would be left to go bankrupt. But the phrase "too big to fail" was adopted by every Western government and now much of the banking sector in the US and Europe is being nationalised.

So what do the governments see as the solution? More debt.

Debt for the nation

Each Western nation has taken on massive debt – billions or trillions of pounds per nation. It will take decades to repay either through lower public expenditure or higher taxation or both. The total amount remains to be seen because we don't know how big the bank losses will be. As asset prices fall (particularly houses) there will be more repossessions and greater debts. Total debt is probably more than the banks owned up to and it will get worse as property prices continue to fall.

Debt for the citizens

Last weekend, the G7 drew up a five-point rescue plan. Read between the lines and it infers that they want to rewind the clock to the rosy days of easy credit. That is being confirmed by Gordon Brown's recent statements such as "the UK problem was not shortage of demand for homes at "the right prices" but a shortage of mortgages "at the right prices for people to buy". Again, "Crash Gordon" gets it wrong. He wants us to get into more debt to buy overpriced property. This is the man famous for stealth taxation and overspending. This is the man who promised "no more boom and bust" yet we've had the biggest bust for 80 years, lumping unimaginable debts on the British taxpayer.

Debt is the problem

Our society has become reliant on debt. A certain amount of debt is a good thing – prudent borrowing permits faster investment into the economy. But we've taken it to unsustainable levels and nationalisation of the banking sector won't fix the problem. It only prolongs the pain of paying back the debt.

Furthermore, the government does not need to kick start mortgage lending – there is no problem in mortgage lending. You can get a mortgage now perfectly easily if you meet the criteria. You just need a decent deposit and proof of income. This is exactly how it should be. Responsible lending. The last thing we need is to go back to the reckless lending to people with tiny deposits and low income.

Saving is the solution

It's time to rediscover the benefits of saving: it provides greater freedom, encourages better financial planning, establishes financial security, is a good family value, is morally good and it's responsible. God that sounds dull. Maybe that is the problem – saving just isn't perceived as sexy.

Easy money and buying stuff – now that's sexy. But that's what got us into this mess. To get out of it, we need to make saving sexy. How can we do that? Interest rates of 10% might do the trick. In fact, higher interest rates would have prevented this crisis. Yet they're not going up, they're coming down even further as our 'leaders' try to keep this consumer debt machine going.

As individuals, we can do as we choose. We can decline that overpriced house, that increased credit limit, that unsecured personal loan. And we should. Stick your money in a high interest savings account. Pay off your mortgage sooner than you intended. Start a business that does not require capital. Whatever you do, don't listen to Gordon.

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