Thursday, 6 November 2008

Punishment for prudence

I've been toying with posting about the current economic situation for a long time, and have until now deferred to those more knowledgable and articulate around the web than me, but recently it's got personal and I can resist no longer.

For anyone who hasn't taken an interest in the ongoing economic predicament, here's a great piece of pre-req reading for this post from Robert Peston (August 2007), explaining the whole sub-prime debacle. Warning: economics is addictive.

When I graduated from university and started working, I had financial choices ahead of me. On one hand lay a 100% mortgage, debt and property ownership and on the other lay paying off my debt and saving with the hope of getting a better interest rate on a mortgage later. I chose the second path, and started paying off my debts and amassing a nest egg.

It's now 7 years later, so lets review my progress. I've paid off my student loan in full and built up a sizable amount of savings. I've done so in a period of historically low interest rates, meaning that I've received a poor return on my savings and also during a period in which average house prices have more than doubled meaning that my odds of being able to purchase property have significantly diminished.

It transpries that my diligent saving over the last seven years helped to give the banks leverage to lend money as loans, mortgages or even to gamble with super senior credit default swaps. However, as illustrated by the recent kerfuffle in Iceland, when a bank goes to the wall, it's savers like me who are in trouble first. The banks don't seem to go back to all those people who've taken out huge mortgages and say "Sorry chum, I like your £2m pound house and all that, but you're gonna have to sell it and pay back your debt.".

To loop back to the start of this post, Iceland is where it got personal for me. I had a lucky escape as my sizeable Icelandic savings lump was in Kaupthing Edge, so after a stressful week I magically became an ING customer as my savings account was sold off as part of KE 's rapid deleveraging. In my office, a colleague was left in the lurch as his ICESAVE account got frozen just as he needed to pay his son's first year tuition fees for University. Perhaps worst is another colleague who's buying his first property right now (I've told him he's mental) and who's deposit has become entrapped in ICESAVE, leaving him with a high likelihood of his house purchase falling through.

The most irksome thing about of all of this though, is that now that I've learnt my lesson that saving does not give you rewards (just look at today's MPC decision to bring the base rate to 3%), the economic climate won't support me. I've decided I want 100% mortgage, a hot tub, a Porsche and some 1st class round the world tickets, but unfortunately for me, there's no credit available now. Bummer.

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