Thursday, September 25, 2008

What Financial Crisis?

I was watching the BBC news this morning and they were doing a sterling job of explaining the current banking difficulties.

From what I can gather it all comes down to a lack of confidence resulting in the banks being unwilling to lend money, what's the problem here?

I was brought up with the notion that being in debt was wrong. Even worse borrowing more to sort out your debt is never a solution. You want nicer things? Get another job, ask for a pay rise, work harder, save. If the banks aren't willing to lend money to people who can't afford it then surely that is a good thing?

Same goes for businesses. I thought the first rule of business 101 is watch your cash flow. Money in before money out. You shouldn't have to borrow except for when you want to expand quickly, a shrinking economy wouldn't be a time for expansion anyway so I take it the businesses that want to borrow just have bad cash flow? If they can't get that most basic part of business right then I woulnd't want to lend them money either!

I can understand it being a crisis if suddenly everybody's current debt repayments tripled overnight (which I don't think they have?) but just not being able to borrow even more, I just don't get it? I MUST have this all wrong, obviously I'm stupid and don't understand economics at all but I don't understand where the crisis is in not being able to borrow.


Mikey said...

Yes - business rule 101 is watch your cashflow.

When a company produces something (a widget, a service, some advice), they have to pay upfront for the raw materials (bricks, salaries, lush office suite). Then they sell the product.

In the time between paying for the raw materials and getting the customers money they need financial support from a bank (i.e. money)

If the bank won't give it to you, your company is insolvent.

If you trade at that point, you are breaking the law and go to prison (unless you're feeling poorly).

Mikey said...

Note: This above rules don't apply to IT where we can charge for something we haven't made yet. Result!