Shares going back down as race to the bottom gets its second wind

Has the next wave of stock market falls begun?
I sold everything about a month ago on the expectation of a big sell-off in the markets.
The FTSE100 is now below when I closed my position.
The situation looked like a competition on who could play the bull run longest.
I am not an investment professional, so I have to trade on longer term shifts in the market.
I am expecting a rocky road now to a place well below the currently very over-hyped market levels.
Companies have temporarily improved their situations by reducing workforce costs.
Now there is a smaller consumer base as a result.
Public sector redundancies are going to exacerbate their problems.
The quickest companies to shed more staff will be in the best position to survive.
The race to the bottom is not over.

Share selloff

Starting last Friday and ending today, I sold every share I own.
I believe that the markets are so well ahead of the economic situation that even the losses I made on many shares will be worthwhile, because soon I can buy them all back at much lower price.
That 7 month bull market bubble is about to pop!
Why am I so confident? Three main reasons: Firstly, the unemployment situation is still getting worse, and unlikely to improve for a long while yet. Secondly, the government has drastically overspent to try to make the situation look better than it is. Thirdly, the increased the money supply increases inflation.
On the first point, one of the most important things any economy can do is obtain high employment. As long as everyone is fulfilling needs and wants then the economy has a good chance of prospering. As long as the economy is paying people to be idle, taxation must increase for no benefit. Increase taxation and spending slows, along with economic recovery. Delay the taxation and the interest on the debt must be paid, so the total cost of the debt goes up, but is spread over a longer period. Always living on loans is an inefficient way to run an economy, and should not be necessary. Indeed legislation should prevent the idiot politicians from doing it, only being allowed to do so after a referendum.
On the second point, politicians are always willing to wreck an economy to get back into power. Their power obsession is only rivalled by their greed. Their massive overspend on the public sector is creating a huge public debt. Their gambit was to offset the decline from private sector expenditure, in the hope that confidence would return before the debt grew too big, or at least while an election was held. Well it has failed, and public sector redundancies (always crazily expensive) will restart the private sector collapse in confidence. Expect an election soon, before everyone realises how bad things are.
On the third point, inflation makes savings less valuable. While it also reduces the real value of debt, it decimates savings income, penalising the thrifty and the many and growing population of retirees that depend on it. Those at the margins will need help, further increasing the burden on the public purse. Inflation also causes prices to rise, reducing the ability of people to buy, slowing output, and so losing jobs. In addition, expenditure tends to go to cheaper goods, and they come from abroad, worsening the balance of payments and so increasing debt again.
This is not the beginning of the end, but the beginning of the second fall.

Credit Crunch 2

Sadly, I believe that this recession probably has not reached its nadir. I know much evidence suggests it has, but fundamental problems remain that are being masked by the concerted action of governments in the most developed economies i.e. America, UK + Europe, and Japan. Even if recovery is now certain, crunch 2 is already set in motion.
Broadly, the problem was a collapse in confidence in the viability of high debt to income and income to savings ratios in the most developed economies. This was expressed as reduced confidence in the ability of debtors to service their loans. That problem was precipitated by a collapse in confidence in house prices as they reached unsustainable multiples of income in America and later the UK, and then other parts of Europe. That house price situation was mainly enabled by over generous lending criteria and stable low interest rates over a protracted period. At an anthropic level, irrational optimism and competitiveness are the underlying drivers of these problems. At a policy level, governments failed to take into account those human traits to exercise sensible control. At a factual level, it is obvious that no country or individual can continue to increase its debt to income ratio indefinitely, nor should have a high income to savings ratio. However, that is what governments continue to do and allow. Probably most politicians lack sufficient expertise to see and avoid the probelms. Those few that do just hope is to have their moment of glory and money, but be gone when the account has to be settled. This indicates another deep problem, that a system of government by politics is flawed at the most basic level. Government should be run by experts, not by power obsessed self-serving administrators.
Take a look at the video on this useful blog post to see a wise economist explain the debt problem in more detail, as not just a confidence problem, but also an absolute problem. Australian economist Steve Keen explains the problem, and that more trouble is to come.
The Times tell us of Ann Pettifor who also forecast the credit crunch, and also thinks the debt mountain has more trouble in store for us.
So why is the credit crunch yet to revisit us? We need to look at the main tactics being deployed to fix the crisis in confidence; they are low interest rates, public sector spending exceeding revenue, increasing the money supply, deferral of foreclosure on debtors, and direct incentives to spend. The most significant of these is ‘public sector spending exceeding revenue’. This is effectively shifting the balance of the problem from the private sector more to the public sector in the belief that confidence in a larger debtor will be higher. That is a reasonable assumption, but debts must be serviced even by government, and that is funded by taxation, which must then increase in the future. The notion is that as private sector spending slows, public sector spending is increased to help maintain business until private spending recovers. Governments have failed by overusing that tactic, so it needs cautious use. The tactic of ‘reducing interest rates’ is not safe. As we look back at the original problem, sustained low interest rates fuelled the unfounded early confidence that helped lead to high debt to income and income to savings ratios. In addition, low interest rates create compelling disincentives for savings, and low savings levels are part of the root causes of the problem. Further, the increasing retired population partly lives off the interest from its savings, so they will take a less active part in a spending lead recovery and at the margins will be looking for help. The tactic of ‘increasing the money supply’ enables more public sector capital expenditure in the short term, but also increases inflation in the midterm, which erodes the value of savings as welll as debt, further exaggerating the problems of savers stuck on low interest rates. If the problems are not rectified quickly, the tactic of ‘deferral of foreclosure on debtors’ only delays inevitable for many, and buries the remainder in long term debt. Providing ‘direct incentives to spend’ is another disincentive to save and head toward debt, so a lot of this kind of stimulus can also be a bad thing.
In conclusion, I think the wise among us know that moderation in everything is best. We have experienced a period of excess growth and are seeking to diffuse the inevitable correction and return to another period of unsustainable growth with some very strong policies over a short period. It is possible that one strong imbalance can correct another, but the stronger and faster the measures the more tortuous it is to achieve good balance again. I have low confidence that the failed institutions that enabled the problem forged in our human failings have the vision to correct it. I have even less confidence that a system of power obsessed self-serving administrators will ever be effective as government. I expect that even if this situation is rectified in the near term, unless sober experts are appointed to form governments that crunch 2 will one day visit us. On the bigger picture of how we conduct ourselves, perhaps we should question the race back to a hedonistic consumption based life style.

Greedy politicians (they want more than us)

Politicians are not content with a salary more than three times the national median salary. We know they need the opportunity to steal from the taxpayer as much what they want to fund their lifestyles, and they just threw out the changes designed to tighten up on that – naturally. They simply must have the index linked final salary pensions that are too good for the rest of us, and the opportunity to retire much earlier than the proletariat. Now they are off on a three-month holiday while the country is in the middle of its worst financial crisis in living memory. Clearly, they feel they work harder than everyone in this country, and in-spite of all the other benefits they generously award themselves they really need a quarter of the year off.

Printing More Money

Printing more money is well understood to increase inflation, but also to diminish the value of debt. Clearly, the latter consequence is prioritised over the former by the current government. One may conclude that this is a tactic designed to ameliorate immediate problems at the expense of later problems. Do they have a new idea, or are they just manipulating problems to improve the outcome of an imminent election. They may be timing the shift between problems, so that an election can be held as we seem to be leaving the old problem behind, but before the new problems are pressing. The fact that the current problems even exist gives one no confidence that they have more than rudimentary skills, as demonstrated by this crude inflationary tactic. Certainly, they seem to lack the imagination to find a new solution that one might hope such highly privileged people would have.

Another Next Big Thing

I think we all realise the huge impact that research on the human body will have. Researchers are for example making great strides in the understanding of genetics, cells, the brain, and tissue regeneration. It is easy to forget that food is about to undergo a radical change, and we are what we eat! In the not too distant future meat will be grown in culture, as well as on animals. This will enable cheap mass-produced high quality food that takes up less land and other resources, impacts the environment less, and can be engineered to be better for us, with for example an array of vitamins and better kinds of fat. It will also be good news for the vegetarians who abstain based on cruelty. We can also culture other expensive foods, like fish, or truffles. Companies can also start to compete on how good for you this food is, even how it might improve your health, looks, longevity, and intelligence. We can then start to create new kinds of food, never before seen. Truly, a brave new world!

Consume

In the past few days I had that feeling again, where I seem to be a consumer machine. I don’t like it, but it creeps up on me until I recognise it again. Then I change my attitude and slow down, but I know in a while I will want again.

Software Patents

Software patents are not good.
No doubt, some individuals and companies make money out of them, but only at the expense of others. They create nothing new. They dissipate research and development resources into an administrative black hole. If we consider the big picture, they are holding back progress. There is a well-used argument that without software patents companies would not fund research. This is just not true, unless they definitely want to go out of business. What would happen is that they would need to move faster and so we all benefit.
We need to take the brake off if we want to move more quickly. We need to prevent software patents.

Corrupt Government ~ Time to change

Recent revelations about corruption in British politics vividly demonstrate some of the flaws in democracy and politics. Power vested in a few is dangerous, because people are easily corrupted.
The best form of government is by many experts with real world experience, each with very limited power and tenure. That form of government will make better decisions and avoid corruption.
Democracy is outmoded, a relic from the tribal past where the big man ruled. We know better now. We need expert government.
Get involved in Expert Government

Corrupt Politicians

I am going to spoil my ballot paper in the coming general election.
I am going to write on it “Thieves”.
I wish that many other people would also do this, and then I would like the BBC and all the other media to have the courage to explain this to the world, so that everyone in the world knows how shabby our politicians are.
With great power comes great responsibility, and that requires strength of character, and honour.
Clearly, our politicians are massively lacking in both.
They awarded themselves huge salary rises, and fabulous pensions, but that was not enough, they needed an open chequebook, to take as much as they wanted.
So they created a law to allow themselves to steal from the British people, their own almost unrestricted expense account.
The big money grab going on by our politicians is not recent or limited to the current incompetent party, politicians from all parties do it, none is worthy of power.
Any decent politician would come forward and tell the world what was going on.
I am ashamed of the quality of the people we now have running our country.
There was a time this country valued character and honour, but now it is all gone.
I hope this is the final embarrassment for a country that once had the greatest empire in all of history.
I consider myself insignificant and very far from perfect, but even I would not associate with any of them if they wanted my time; they are a disgrace to this nation.
As much as I am keen to see the back of the current less than useless government, I have no confidence that the next ‘corruption’ of politicians will be any better.
Therefore, rather than endorse any of them I would sooner say no to all of them, and I want the world to know it.
At first I thought not voting was good enough, but that is too feeble, I need to make a stronger statement.
The honest hard-working people of this country need to send a clear message to these self-serving crooks.
I am also very disappointed in our monarch. Presented with a chance for once in her reign to stand up and do something strong for this nation, she seems not to care enough. Why does she not dismiss them all and take back the money these thieves stole from us? She would be so right to do so, and applauded for doing it. She could engage a new government, not composed of politicians, but of honest people, experts in their field, working together for the benefit of the nation over themselves.
A new start.

Wine that is fine

Wine is too strong.
I do love a few glasses of red wine, but the alcohol content has gone so high in recent years that I have to drink less of it the lovely stuff.
I think the makers could easily start making low (say 4-7% alcohol by volume), medium (8-11%), and high (12-15%) alcohol content variants.
Then I could drink more of it and they could sell me more of it.
Everyone is happy.

Marginalising Men

Increasingly in UK advertising, men are depicted as feckless and infantile. This has been the case for some years, as men play the fool to the women. Recently I have come across a few adverts that extend that subjugation, placing the children ahead of their father. Only the family pet remains to supersede the men, and they are often on par with men.
Perhaps this is only permissible because men are so confident in their status. Perhaps it is an over compensation in the movement to promote the cause of those perceived to be marginalised in the past. Unfortunately, whatever the reason, men are marginalised in this trend and consequently offer negative role models to boys. If our boys continue to be immature into adulthood, are these role models partly to blame?

What should we do about the Credit Crunch?

Recent financial ructions prove again that people are sometimes better at creating situations than they are at understanding them. Few predicted the credit crunch coming, fewer predicted the scale of the problems and none predicted when it would happen. It is clear that society allows a privileged few to play games with complexity beyond their ability to manage. This would not ordinarily matter, but these games affect us all.
What can we do? We can punish the people who made large amounts of money from this debacle. We can also better regulate the financial services industry to try and prevent it happening again. We can distribute the burden for the normalisation of the excesses to us all over a prolonged period, in an attempt to soften the blow and recover confidence to prevent a worse collapse. Or, we could sharpen the focus on the problems to precipitate a more rapid and deep correction on the worst offenders, so we are all out of this mess more quickly. However, before we start pointing fingers, we should remember that most, if not all of us, benefited for a while from the period of sustained and now we see, unreasonable asset price growth and easy borrowing terms. It is human nature that failed us. Remove the people at the top who benefited most and they will be replaced by people just like them, possibly less ruthless for a while, but also probably less smart. Change the rules and they will find ways around the new rules, the whole silly mess will revisit us eventually. We need a deeper solution.
What should we do? The real problem is our archaic social structure and value systems. Leaving aside the obvious questions about the value of materialism for now, we still value chieftains i.e. people who look after the interests of our group at all costs against the interests of others. That is the way we always have selected our leaders. We seek people who can help us in alliances to vanquish our competitors. So we model ourselves on those chieftains and perpetuate this primordial human trait. Look around, the examples are clear, it is collaboration not conflict that benefits us. Everything we have that is good is an example of collaboration, not conflict. Competition is short-termism, the way of the beast; steal it today and forget tomorrow. People are at their best when they collaborate. Adversarial systems militate against our collective success. They waste our energy looking for short term advantage. We need systemic change. Humanity needs to change the way its governments work and the way business is organised and they very way we think.

Segregation

I visited a National Trust property a few days ago. I have been many before so the pattern is familiar to me. This time I found myself thinking what nice trustworthy people are to be found there and how it somehow seems like a little island of pleasantness to escape to. That turned into an idle muse that it would be a great place to live and the question ‘why might I have thought that?’.
I decided that all the people at a National Trust property, except the children, are there by choice and they have a similar set of interests and ideals, that is why there is such harmony. The children highlight this beautifully, they generally hate being in these old buildings, with a few exceptions, usually anything concerning monsters, ghosts, dungeons, dangerous animals or creepy crawlies. I can still remember that feeling from my childhood that I was so bored in these places that I might die of boredom if I did not get out soon.
Anyway, one conclusion that can be drawn from my muse is that if people are happiest in like minded cliques, so our country might be a happier place if we were all taught this early in life, differentiated communities were encouraged and people were helped to find their preferred community. Naturally our choices would change as we age and mature, but the current objective to help integrate people of all dispositions starts to look flawed. A system of aided self segregation in fact seems like a better objective. We already practice choice in our leisure time, so why is it not a good idea to encourage segregation into ghettos and ghettos within them and so on. Naturally I am not implying enforced poverty and reduction of rights, rather helping people understand what makes them happy and encouraging them to meld into like minded districts.
Obviously, segregation can lead to distrust and friction, but as people from one community can avoid those from another, this should on the whole be avoided. There are enough people now that we do not have to all get along. We can simply get along in our own little groups. Social networking using the internet is popular because it allows people to escape the confines of the geographic displacement and form groups of kindred minds. Clearly people would prefer to associate with others like themselves given the choice. So, a good policy for government would be to help them and so encourage segregation.

Tough Times

Big price rises and restricted credit are here and are going to get worse for a while yet. As spending inevitably slows, pay demands grow and sales fall, we can expect unemployment to rise and exacerbate the situation. The whole mess will feel worse as public sector unions organise strikes to get what they feel they deserve, despite the problems we all face. Further, the corrupt politicians will award themselves yet another massive pay rise, while scamming even more from us on bogus expenses claims.

Government has borrowed heavily on our behalf in expectation of continued growth, which evidently was financial bad judgement. They borrowed in the recent good times, running up debt rather than saving for this rainy day. To balance the books now they have three tools: increase our countries already huge debt, which eventually has to be paid for with taxation, raise taxes less but immediately, cut services. Raising taxes immediately is perceived as political suicide, indeed government has just committed us to even more debt to pay for the interim 10p tax concession, so obviously the pay later option will be selected in combination with cuts to services.
These problems show how poor our system of government is: clear financial incompetence, political power placed before good judgement, corruption at the very top. Sadly the incompetence is not limited to the financial aspects of government. It seems impossible for the public sector to keep our information safe or prevent top secret information from being scattered across the country. To top the list of complaints, how did we end up in an expensive and damaging war in two countries that were no threat to us? Was it breathtaking incompetence or an ego trip for our previous PM Tony Blair? Whichever it was Gordon Brown was not seen to be against it.

We need a new form of government. One not based on an adversarial political party system run by the dysfunctional people that are politicians. Politicians tend to be self serving, power hungry, deluded and egomaniacal. Adversarial political party based government is an anachronism, we are all in this country together and we need to work together, not fight each other. We need a new government system that is not party based but formed from people of all views. It must be adaptable and able to respond rapidly to changing world conditions, not based on dogma or ideologies or evolved out of rule by despots. The system needs power to be widely distributed to deny corruption and ego. Positions need to be filled with experts, not friends and family of those with existing positions. Changes are needed to the legal system, so that it does not persecute the innocent, unlucky and misinformed, but targets the criminals. Control of the economy needs to be placed squarely in the hands of the expert with a remit of long term stability for the whole, rather than be used a tool for political party advancement. Accountability needs to be more immediate. One vote every few years for one of a small number of parties composed of dysfunctional individuals is not good enough.

To get involved in the creation better government visit this site and join the forum.

No EU Democracy

Jose Manuel Barroso: (EC President and big head): I don’t care what the stupid people think, we want more power.

David Miliband: (Foreign Secretary and annoying child): Me too!

Tories: (Where do we fit in and mostly anti EU party): Told you the EU is crap!

Liberal Democrats: (The whinge and tax party): err, that’s disappointing, we need an extra penny on income tax!

Gordon Brown (PM and ditherer): Arse! Does anyone know what to do now?

Although I am outraged because I live in what is supposed to be a democracy, I know its not, so I am not surprised. Further, I think democracy is an anachronism anyway, so lets ignore the lot of these megalomaniac fools and create something better for us all.

Icarus Economy

I distinctly remember Gordon Brown not so long ago implying he should receive plaudits for a successful UK economy. I also remember thinking that he did not do all the work, we did, the best one can say for him is that he did not get in the way too much.

Now it seems the economy is going pear shaped, will he be as quick to seek the responsibility for that? Perhaps there are problems even his mighty skills could not quell. Then again, perhaps it was just a combination of good fortune and our application that allowed the UK to prosper.

If we flew too high fuelled on hubris, we would do well to remember who was the designer of our wings.

Why Celebrity?

Many celebrities are not particularly unusual, nor have they done something excellent or noteworthy, so why are people interested in them? It would seem to be just because they are widely known. If that is true, why is it so interesting to people that someone is widely known?

Why for example is Paris Hilton interesting to many people? She garners a lot of interest for nothing exceptional, other than apparently being wealthy by someone else’s industry and antics which could broadly be summarised as childish or at best immature.

Credit Crunch Conspiracy?

I very rarely attend to conspiracy theories, when I do it’s just for entertainment value, so I am surprised to find myself writing this, but something smells odd about this credit crunch and I can’t just ignore it. Anyway you judge for yourself and correct me if you see mistakes.

I have read a lot about the credit crunch to try to understand it. Apparently it was precipitated when many more US borrowers than expected were not able to repay their residential property loans. Lenders belatedly reacted by tightening their lending criteria and something like hysteria broke out among them, restricting lending more widely and so impacting the economy as a whole. This spread to the UK and around the world via global financial institutions. I know this is a gross simplification of the situation, but documenting the hyperfine nature and causes of the credit crunch is not my task here; this is a good enough understanding for this post. For a deeper exploration see my earlier post: Understand the Credit Crunch.

For years I observed a property price bubble forming in the UK and for a while was surprised at its extent. Had I been in the US I think I would have experienced something similar. Lenders employ actuaries to do mathematical analysis and must know quite accurately at which point to restrict lending to maximise profits. So the lenders must have seen problems coming; even using the crude metric of house price growth against wage growth one could see that the situation was well away from the norm. Naturally lenders are happy with larger percentages of earnings going to them, but concerned that this extra thick slice of the pie does not get eaten away by bad debt. So how did things get so out of kilter? There are several possible scenarios:
1, the outcome is approximately what the lenders intended.
2, the actuaries got it wrong.
3, the people running the companies ignored their actuaries.
4, exceptional events confounded all the experts.

Certainly the first scenario is not claimed by anyone, so we can leave that for the moment. The second scenario does not seem likely. Actuaries are bright people that do exactly this type of mathematics for a living and they have many years of examples to draw from. Even I could see anecdotally the inevitability of most of the problems (at a course grained level obviously) only the spread of lending restrictions between financials was not obvious to me. The third scenario does have something of a ring of truth about it, because we have seen high profile heads role, but nothing like the clearout one might expect. Can the heads of so many large organisations have been so bad at their jobs? It could be self interested short-term planning by executives looking for a few years of exception bonuses and a golden goodbye. Perhaps the purge is not yet complete, or perhaps the top jobs are safe regardless. The absence of large numbers of high profile sackings implies that the financial institutions don’t attribute the problems to their executives ability or probity. The fourth scenario is also receiving some backing; in particular creative sales people supposedly managed to slip many billions of unwise lending through the system without anyone noticing. This seems more than a little improbable. I am sure that this happens on a very limited scale, but not in such amounts for so long. That would imply that nobody had noticed even the broadest of indicators looking dodgy and I feel confident that people must have been monitoring them. Perhaps I am missing one or more scenarios, but if not where does this leave us?

There is doubtless a combination of factors from the scenarios, but as much as the property price bubble was obviously forming, none of these scenarios or a combination of them is obviously causal. That leaves me reconsidering the first scenario. Perhaps we are broadly where the money lenders expected us to be. Not only have they grabbed a larger slice of the economic pie for themselves, they are seeking even more from state / central banks as support and that eventually translates into taxation. This reminds me of the old saying about owing a lot of money to the bank implies the bank owns you, but owing an amount the bank can’t afford to lose implies you own the bank. Do the lenders own us all? Are they using the state / central banks as proxies to extract even more through extra taxation on their behalf. Certainly the wealth extracted so far by them either was not created yet and that is what needs correcting, or it did and is now somewhere. If it didn’t exist that implies serious strategic mismanagement on a colossal scale, which again would be easy for the actuaries to spot. If it did exist where is it now? Have we been intentionally cleaned out by the lenders? Certainly the outcome seems to be the same.

I know that some of you will say that hindsight provides perfect vision and that the financial institutions were heading into this blind. To that I would say property price bubbles are nothing new, we have seen them before, their outcome is broadly similar. How can a property price bubble have exceptional or unexpected consequences when we have seen them before? Is something different? Well if it is simply that the scale of the thing is bigger then it should have been more obvious as it formed. It was obviously a problem building to me as a casual observer. Admittedly I did not foresee the lenders restricting credit to one another, but then it was not my concern to look out for such a problem.

Perhaps I have misunderstood or not noticed something, if so I am sure someone will put me right and that is what I think is most likely, but until I have that understanding I have to say things look suspicious.

Understanding the Credit Crunch

This post documents my understanding of the credit crunch and its associated ructions thus far, along with some wider understanding of related important economic factors. In it I address: what are the problems, what caused the problems, what are the consequences of the problems, what is being done to fix the problems and what are the consequences of this fix.

What are the problems

The problems are manifold and the pressing problems for individuals such as elusive credit, falling house prices and job insecurity are really consequences of problems in a larger picture, so I will focus on that. That larger picture has two important players, the large financial institutions and state / central banks controlled by government(s), together they modulate economies. The main macro scale problem for the money lenders seems to be a lack of confidence in their ability to avoid collapse under the weight of bad debt. Specifically, it is the fear that much more than expected of what has been lent will not be fully recovered and lead to large enough losses to make the lender unable to continue in business. The main macro scale problem for state / central banks seems to be the possible collapse of money lenders, especially those that also provide savings services. The collapse of large financial institutions will have a negative effect upon the confidence of the whole financial system that could cause a cascade of secondary problems through an economy.
Certainly there is a poor position on mortgage debt and one does have to wonder how it was not obvious to the lenders that they were getting into it, but that does not mandate rampant defaulting on repayments. It was obvious to me for years that a property bubble was forming and would need correcting. I always assumed it was even more obvious to lenders and that they had calculated the best level of risk to accept in order to maximise profits, balancing those that would continue to pay with defaulters. It is rather a surprise and suspicious that they claim not to have seen it coming. Regardless, the lack of lender confidence slows down business as usual and perversely increases the probability that lenders will fail. It is the cessation of business as usual at the money lenders that is creating the dramatic economic effects. Unless we can identify the causes and find fixes for the problems the fear of failure will translate into actual failure and the problems will be amplified.
The credit crunch problems are exasperated by shortages of food and fuel causing steep price increases. These are a simple consequence of supply not keeping up with demand. Although their timing is unfortunate they are only related in so much as they restrict consumer spending patterns, which has a deleterious effect on business, slowing overall growth and confidence.

What caused the problems

Housing has increasingly been used for profiteering. It always has been used this way by architects, builders, mortgage providers, landlords, estate agents, solicitors and surveyors, among others. However, recently two classes of interested party have burgeoned. One class is the speculators. Speculators have no product and offer no service, they are simply there to profit and are the biggest cause of the problems. Speculators pump up what they have already identified as hyperinflation in prices. Some speculators may call themselves ‘property developers’, but they do little or nothing but profit from a bubble situation. Just to be clear, people who take out buy-to-let mortgages are also speculators, they differ from traditional landlords in that they must borrow to acquire property to let. This is obviously a risky practice and inflationary for property prices. The other notable problem class is those with meagre means being offered excessively easy terms to buy.
Property was bought with increasingly easy to obtain loans for increasingly tangential reasons; for example: buy-to-let property, holiday homes, weekend homes, university accommodation and just plain resale i.e. naked speculation. This combined with the demands of rapid immigration and a property supply that did not increase quickly enough, to cause unsustainable house price rises above wage rises. Housing, like pensions is too important to be used in that way, government should impose controls to prevent its misuse.
Some of this profiteering is long term, with people using it as a pension because of the poor quality pensions. The UK government does not provide a sound pension scheme, except naturally for themselves and other public sector workers. A good pension scheme should: be 100% underwritten by the state, have a guaranteed minimum growth rate, be contribution based, have a guaranteed minimum pension at the end regardless of contributions but based on time resident, be index linked, not be means tested, be ring fenced and protected by law. It seems the government believes that only the public sector are worthy of a good pension. They are, as ever, helping themselves.
So the causes seem to be increasing use of residential property as a means of speculation and pension savings combined with poor lending criteria. The problems only seem to have become visible when the inevitable increasing bad debt arranged with less financially solvent borrowers as mortgages on inflated property prices precipitated a collapse in confidence. That increase in defaulting was triggered by an increase in interest rates which were held low for a prolonged period to avert the worsening of the previous economic slowdown. During that period many poor loans were made that could never be sustained on a return to more normal interest rates.

What are the consequences of the problems

Debt is used as money i.e. the potential to recover money at a profit from loans is being treated as money. This works well enough if you know that the loan will be repaid with interest. Unfortunately, not all loans are repaid, some fail and money is lost, but as this is statistically at an expected level its effect of reducing the value of the rest of the debt can be taken into consideration. When that rate of failure jumps, confidence plummets in the value of the loans and they are less valuable alternatives to money. The loss in confidence in their own loans and those of other lenders who were similarly unwise, tends to restrict them from lending to all classes of borrower, including each other, to reduce risk. This has the effect of reducing the number loans made, how adventurous lenders are, how high the repayment rates are and how much collateral is required. Those changes in turn make it difficult for business to borrow for expansion and ride out problems and so employment and the greater economy suffers. Also, reduced borrowing by consumers slows spending, with the effect of reduced opportunity for businesses to profit from sales.
We may wish to consider the sustainability of economies built upon the premise of continuous growth in consumption. Large disparities in the relative sophistication of economic development must be sustained and the more sophisticated economies need to retain the perception that their economic model is best. If they fail in either part, people will stop pursuing the growth model. Debt has potential for significant further expansion providing lenders can consolidate to drive economies of scale and operate on tighter margins and apply pressure to keep interest rates low enough that borrowing is the only obvious route for many purchases.

What is being done to fix the problems

Firstly it is rather worrying and suspicious to me that the state / central banks seem to have been as blind to these problems as the money lenders claim they also were. Can they really be surprised that many years of house price growth above wage growth fuelled by low cost loans would lead to problems when interest rates rose. It seems so stupid that I would be quite credulous if a plot of grand proportions to profit under the guise of the credit crunch was revealed to me.
Anyway the government tactic to solve this problem is to get the state / central bank to lend money to the lenders. That should enable the lenders to keep trading, as their confidence of surviving problems is increased and the whole system stabilises. There are still a lot of loans that will take time to become worth what was lent, as property prices can take years to normalise, or they can be normalised quickly but catastrophically for some. Unfortunately, the government doesn’t have any money to lend, in fact it is itself a big borrower. So as neither has any immediate money the government has offered bonds (which currently are sufficiently sound to be considered as good as money) in exchange for quality debts of the lenders, proving certain guarantees are made. This is following the drawn out normalising process, rather than the rapid normalisation process. The former has the advantage of apparent stability in the short term, but the disadvantage of producing a tardy correction for the medium term and so slows the economy as a whole. The latter is better in the medium term as it affords all parties more time to recover, even the worst hit, but is worse in the short term for those in the worst positions and for general confidence if the effects are not well isolated. Both approaches will be equal in the long term as normalisation must occur.
One feels bound to ask here: who has the money. It seems that everyone is borrowing money, somebody must have some. An interesting question and to answer it one needs to remember that money is just a vector for production i.e. work done multiplied by efficiency; twice as efficient gives twice the production for the same amount of work. So the question should be: is there enough production to pay for the debt. One buys things with ones own productivity, but that includes recycling the productivity of others; specifically in creating the basic inputs to ones own work. If there were a finite amount of productivity in the world then clearly there could be no growth and so any debt should remain static. However, increasing populations and efficiencies, particularly in currently low technology economies, provide the continued growth in productivity. That is likely to continue and so debt levels can also increase, but they should not increase faster than the rate of increase in productivity.
Whether productivity is increasing or not, what level of debt can be sustained? Can it be as much or even more than the level of production? I think the answer to these questions is in confidence in the stability and predictability of the economy, markets and debt arrangements. As long as we have confidence that a debt will be repaid as arranged we can increase debt. If sufficient confidence exists then there is no reason why debt could not be arranged that could span whole lifetimes or even generations. The obvious inference from this is that we can have more debt than earnings, so long as we can sustain confidence in the stability and predictability of the economy, markets and debt arrangements. I would suggest that we are already in such a position and that explains the state / central bank conservative tactic of protecting the status quo as the least risky but otherwise least sensible option. Clearly a strategy for preventing the situation is preferable. That would imply a clutch of strong measures and checks to provide the required stability.

What are the consequences of this fix

Normally the government sells bonds to raise money. Bonds are a promise that the government will repay the money in the future; in the interim they will pay interest on the loan. The government (tax payer) must pay interest to the bond holders and in this case gets in exchange for those bonds another less reliable form of debt from the lender, rather than money and that makes the lenders more confident. Unfortunately, the country now owns the poor quality debt instead of money and is paying interest on it. In fact as we know the value of the mortgage debt the country has now acquired is over rated, not only is the country paying interest for these loans, it will have to wait years for them to be worth their face value. The net effect of all this is that the profits of the lenders in the bubble years have been protected by the government at the expense of the tax payer. Greater government debt must be paid for by taxation or cuts in services. Although this is a terrible deal for the people as a whole the government is essentially arguing that it is better than a collapse of financial institutions with potentially catastrophic ramifications. However, it may be that a better deal for the tax payer is a tactically managed collapse where the worst institutions are isolated and made to carry the whole burden.
A proper strategy to avoid us getting into this kind of situation would of course be preferable and that needs a slew of measure to check for abuses and imbalances. Unless such a system is put in place we face the probable repetition of this situation in the future.