Keynes way of kick starting the economy

22 10 2008


Argos Logo 120x60
Home Retail Group, the company that owns the DIY store Homebase and retailer Argos, reported a loss of £450 million in its half-year operating profit. The reason for this loss is attributed not only to consumers restricting their spending, but also the weakening of the Pound which means that it costs more to import products from other countries, add to that the increase in the cost of raw materials, production and transportation. Products that are seen as a luxury have seen their sales and consecutively their profits drop as consumers switch to cheaper value-for-money products. Budget stores, as a result, have seen their sales and profits increase rapidly, in cases like Poundland, even double.

However, a drop in sales at Argos, which is not exactly an upmarket store, should create a little more than just a flutter amongst businesses operating in similar sectors. This is because it suggests that not only have consumers changed their shopping habits and switched to cheaper stores, they have stopped spending altogether on items they deem unnecessary. There are concerns about unemployment as many are worried that they would lose their jobs. The utility bills and mortgage repayments are rising. All this creates an atmosphere of uncertainity and leaves people preferring to save any surplus rather than spend it as they did before.

John Keynes, Image from Business Week

John Keynes, Image from Business Week

According to John Maynard Keynes, a well-known British economist, who lived during the Great Depression of the 1930’s, the only way to give the economy a kick-start, is to spend and spend and spend. This is because a recession is caused by a fall in demand, not by the fall in supply. Demand has fell quite a lot recently because the credit that backed it no longer exists. Although Governments around the world have injected banks with capital, banks in turn have effectively turned off the tap of credit. Keynes believed that in the event of consumer spending decreasing, the Government should maintain or even increase its spending rather than cutting back. The people employed in the sectors where the Government spends its money would in turn spend their wages benefiting the local businesses who in turn spend and make investments and that gets the whole economy moving again. That way, a downward spiral of recession could be turned into an upward spiral of growth.

Alistair Darling, the Chancellor of the Exchequer, is adopting Keynes’s ideas. He said that the Government would increase its spending on large scale projects. In the long term, it means increasing the national debt as the Government has to borrow money to keep up its spending. So be it. Keynes said that Governments should think of the short term, because, as he put it, “in the long run we are all dead”.





HSBC, Bradford & Bingley and Seagate cut jobs to cut costs.

26 09 2008

HSBC announced today that it was going to sack 1,100 of its 335,00 employees employed worldwide. According to the BBC, half of these job losses will be from the investment banking section of HSBC whose headquarters is situated at Canary Wharf.

Mortgage lender Bradford & Bingley announced yesterday that it would sack 370 of its employees in a bid to cut down its costs. 300 of these will be from its mortgage processing centre in Borehamwood, Hertfordshire, while the rest will consist of mortgage advisers and sales staff. Bradford & Bingley believe that these job cuts will save them around £15 million in costs. However, it also plans to add about 70 more staff to collect repayments from their customers who have failed to pay up. B&B specialises in buy-to-let and self-certified mortgages and has been hit heavily by the falling property prices since the fall in price leads to negative equity of its assets, i.e., the value of the property is less than the loan secured against it. B&B is also finding it hard to attract depositors because last week, B&B’s credit rating by the credit rating agencies Fitch, Moody’s and Standard & Poor’s was downgraded to just above junk status.

Electronics company Seagate Technologies, which is one of the world’s largest manufacturer of hard drives, announced yesterday that it is moving its manufacturing from Limavady in Northern Ireland to Malaysia which will see 1000 employees lose their jobs. The factory at Limavady has operated for the last 10 years and was due to be shut down around October end this year but its closure was brought forward. Although Seagate may not be a household name, its hard drives can be found in consumer electronics ranging from computers, portable music players and games consoles such as the PlayStation and Xbox.





AIG bailout-CNN video

19 09 2008

In an interesting video on the CNN website, Richard Quest explains the link between the bankruptcy of the Lehman Brothers and how it affected the insurer AIG. 

Credit Crunch 101 http://edition.cnn.com/video/savp/evp/?loc=int&vid=/video/business/2008/09/19/quest.credit.crunch.101.cnn





Lloyds TSB confirms HBOS rescue.

18 09 2008

Lloyds TSB confirmed the speculations and rumours about the rescue deal of HBOS which is to be worth around £12.2 billion. This deal is still awaiting the approval of the majority of the shareholders and the Financial Services Authority to go ahead. Should this deal go ahead, it will create a bank which will be worth about £30 billion and will have about 28% of the mortgage and savings market.

However, the staff at HBOS may not be celebrating as yet from the news of the takeover since it is very likely that many, some estimates being around 40,000 members of staff, will be made redudant. It is likely that in places where branches of HBOS and Lloyds TSB are too close to one another, the least effective branch will be closed. This will certainly reduce costs for the new bank, something it needs in such times, but will also contribute to unemployment.

http://news.bbc.co.uk/1/hi/scotland/7622711.stm

http://business-easy.blogspot.com/2008/09/lloyds-tsb-confirms-hbos-rescue.html





AIG bailout and HBOS trouble.

17 09 2008

The US Federal Reserve, which is America’s central bank, threw a lifeline and saved one of the world’s biggest insurance group, American International Group (AIG), from collapse by lending it $85 billion, which would have to be paid back over two years at a high interest rate. Just recently, the US Government took over the US mortgage giants Fannie Mae and Freddie Mac in a deal which is reported to be worth around $200 billion.

In Britain, media reports are emerging about banks Lloyds TSB and HBOS being in the advanced stages of a possible merger deal or even a takeover of HBOS by Lloyds TSB. According to the Council of Mortgage Lenders, should this deal go ahead, it would create a lender which would have a 28% share of the mortgage market in the U.K. Currently, HBOS has a 20% share of the U.K. mortgage market whereas in comparison, Lloyds TSB have only 8%. Back in Frebruary of this year, Lloyds TSB was interested in taking over the troubled bank Northern Rock, but the Government were reluctant, and Northern Rock has been nationalised since. Looking at the current state of the markets, its seems unlikely that the Government will create any obstacles in this deal. On the contrary, according to the BBC, the Treasury and the Financial Services Authority are infact encouraging the deal so as to prevent any more turmoil in the banking sector. 

HBOS was formed by the merger of Halifax Plc. based in Yorkshire and Bank of Scotland based in Edinburgh back in 2001. HBOS’s main source of revenue is from its mortgage products, but with the current increase in repossession of properties due to default payments and the drop in house prices, HBOS will be left with properties worth less than the mortgage secured against them and hence, with little left in its pockets.

It will be interesting to what happens to this proposed deal.





Britain’s Personal Debt more than its GDP

27 08 2008

Despite the credit crunch and the tough criteria of the banks making the borrowing of money hard, the rate at which personal debt rises is greater than the GDP (Gross Domestic Product). The total amount of personal debt, i.e. personal loans, mortgages, credit cards, etc., as of June this year stood at £1.44 trillion which is 7.3% higher as compared to last year. On the other hand, the GDP was £1.41 trillion which had risen by 5.1% as compared to last year.

One of the reason for this rise in personal debt despite it being expensive to borrow may be down to the fact that interest rates on mortgages have risen which lead to an increase in monthly repayments add to that the decrease in household incomes as many people have lost their jobs and many of those still employed have not seen an increase in their salary to match the rate of inflation.

 

Dispatches aired a report on Channel4 on Monday (25 June) which highlighted the plight of homeowners finding it hard to meet the monthly repayments on their mortgages and were faced with repossession. In some cases, up to 125% of the value of the property had been borrowed. Although the banks are seeing their profits drop, it may not be all bad news for them since they are able to recoup their losses by raising the interest rates not only for the mortgage repayments, but also other products such as unsecured personal loans. The CEOs of the top banks are not complaining either since they are receiving pay packets of around £1 million excl. bonuses.

 

Source: http://itn.co.uk/news/b7276faa0a92618f97aedfeb8c37fc05.html      

 

The link to watch Dispatches again on 4OD can be found below.

http://www.channel4.com/video/dispatches/catchup.html

 

http://business-easy.blogspot.com/