Credit crunched

Another day, another finance company. Haven’t i written that before? Maybe but my memory is becoming blurred as groundhog day for the credit system is on a repeat cycle.

What we have now is an old fashioned run on finance companies. Clearly anyone who can read a balance sheet can see they don’t carry much cash so if you rock up asking for your money back you may be waiting for some time. Of course you should have checked that before you invested. As some argue this is a good cleaning out process which is long overdue.

Why should the RB bail them out? Well i would argue the RB is not worried about fnance companies going under but more concerned about the financial system freezing solid. So they opened their wallet and the banks were more than happy to plunder. But the poor finance companies can’t access this cash.

So here’s a story from a few years ago (verbatim from Fred Harrison’s “Boom Bust: House rices, Banking and the Depression of 2010″:

In 1794 “the City Council of Liverpool faced a complete collapse in the local banking system. On March 20, the Mayor reported that 58 merchants urged the council to secure a loan from the Bank of England to enable the City to survive “the distress which had engulfed the people”. Parliament issued a special Act which entitled Liverpool to issue negotiable notes for a limited period, to be lent at a rate of interest slightly below 4.5%. The citizens weathered the storm, thanks to what the Webbs described as “the boldest financial step recorded in the annals of English local government.

What caused this trauma? Speculation focused on the rent-yielding opportunities presented by canals”.

Oddly enough the same thing happened in 1812, 1830, 1848, 1866….and on and on.

As Samuel Taylor Coleridge wrote in 1817, in his Lay Sermon booms and bust seemed to occur “at intervals of about 12 or 13 years each {as a result of} certain periodical Revolutions of Credit”.

Thanks Fred for this great piece of research. Let’s hope the central bankers read it and then weep voraciously.

Another Day, Another Finance Company Busts

You have to feel sorry for Kiwi investors as another finance company goes bust. Today it’s the turn of Nathans Finance to declare itself out of the game. They used to send me stuff through the mail every month. Who knows how many were seduced by the slightly higher interest rates on offer.

It may sound like i’m enjoying this but i’m not. I wrote several letters to the powers that be well over 3 years ago exhorting them to sort out the non-bank financial sector but to no avail.

Ultimately it’s a case of caveat emptor. Before you invest in anything understand the risks. I am amazed how many financial “advisors” have put their clients into these flaky companies. I use the term advisor loosely here.  I seriously doubt whether many of them actually understand how the products they sell actually work and how to stress test them.

If you want higher yields then invest in a decent fund that buys the whole spectrum of bonds and therefore diversifies the risk. A couple of decent Kiwi funds are Fisher Funds and of course the self styled people’s champion, Gareth Morgan.

Check the fees and check what you are getting. Don’t listen too much to the experts. Learn about it yourself. There really is no free lunch out there except at the City Mission and if you’re down there the chances are you’ve blown your dough already.

It’s your money and your responsibility.