Perspectives - Personal Finance Blog

Linda says:

How to lose absolutely astronomical amounts of money.

Most of us have at some stage in our lives lent money to a friend or work colleague with a hard luck story. I remember learning the lesson as a student that there were some people, who felt no priority in repaying money they had borrowed. As I noted the borrower to be spending on other items, but making no attempt to repay the debt to me, relations became quite unpleasant. But I learnt one of life’s basic lessons- namely be extremely careful whom you lend money to.

Old fashioned banking where money was lent to persons who had a deposit, and prospects of repaying the loan, appears to have been totally disregarded in the parallel universe called sub prime lending. The old fashioned “deposit” eliminated those who had compulsive spending problems, gambling, overly extravagant lifestyles or simply in sufficient income to service the loan. It was a useful test that even if you had a good income, could you manage your spending?

In the sub prime universe, commonsense appears to have flown out the window as bankers and brokers, paid themselves huge salaries and bonuses for making highly suspect loans, and then on selling these as AAA grade securities. Now, no amount of financial engineering can hide the smell of the rotten original loans. Prestigious firms have basically conned everyone, destroyed billions of capital and are now on their knees, to governments and central banks, to bail them out of an appalling mess.

In old fashioned banking, the first rule was not to lose money. Sure, money was lent to businesses and homebuyers, who eventually, could not keep up their repayments. But, at the time the original loan was made, the belief was that the loan could be serviced. A lot of these sub prime loans were totally rotten from their inception. The money was lent to people. who had no hope of being able to make the payments. It was lent by individuals and organizations, who were looking to shift the risk elsewhere, pocket their money, and did not care what happened down the track.

As the colossal losses that have materialized have shown, some of the involved parties have not been able to escape the real world consequences of their actions. Unfortunately, much of the collateral damage is going to affect ordinary people, who never profited from the financial games played in the parallel universe.

Linda says:

Food prices are an upcoming political issue.

Inflation and the rise in the price of food and fuel is becoming a mainstream media issue. In the United States the cost of heating oil has soared. As oil approaches a hundred dollars per barrel, more and more land is being planted with corn for ethanol production. This is land, which would otherwise be planted with grains, for human or livestock consumption.

Products such as wheat and soybeans are at record prices and the rising affluence of large populations in China and India is straining the demand, and price, of a large range of foodstuffs. Wheat has risen in price by 90% in twelve months. Whether it is the price of pasta in Italy or bread in Germany, price rises are a hot topic. A new inflationary cycle is beginning which could lead to demands for higher wages, to offset the rising cost of living.

Most affected are poorer people for whom foodstuffs represent a higher proportion of their expenditure - thus the risk of social unrest and upheaval is correlated to rises in food prices. Apart from the rises in price of food staples themselves, the rise in oil prices is increasing the costs of transportation to markets.

Droughts, pollution and loss of land to industrialization, (especially in China), are all playing their part in why the loaves at your local bakery are going up steeply in price.