Sunday, 21 March 2010

Is the Car Scrapage Scheme Working

Starting a business during a recession

Duncan Banatyne's view on why

Banatyne's view on the cause of this recession is controversial. "I believe that the problem was caused by the banks lending to each other," he says. "Everybody keeps saying: 'If the banks start lending to each other, they will start lending to the businesses, and then we’ll get out of the recession', but I believe the sensible thing would be for banks not to lend to each other; I can’t understand the concept.

"Supermarket chains build up without lending each other fruit and vegetables," he continues. "If they all lent each other fruit and vegetables, and one was in trouble, they’d all be in trouble at the same time. If the banks separated from each other, and didn’t borrow from each other, they wouldn’t have the problem."

"Instead, they’ve borrowed from each other and given each other security packages, which are less valuable than what the bank is borrowing on it. If they were completely self-contained, and one of them went bust, like Northern Rock, the rest then could come in and take the pickings, and a few jobs would be saved, and it wouldn’t be such a big issue. If the supermarkets went bust, that’s what would happen. There would be a few casualties but there wouldn't be a problem on this scale.

"The banks should all borrow from the Bank of England," he concludes. "One main source. Otherwise, it's the same money moving round - the same pot that people are taking bonuses from, and eventually there is no money left."

Why Was the UK hit so hard


Financial Services

This recession is affecting all sectors from the car industry to retail, but, the finance sector is one of the hardest hit. The finance sector is one of Britain's most important sectors in terms of foreign currency earnings and national output. (The sector also makes a significant contribution to income tax and corporation revenues). With hedge funds and interbank lending both declining the Finances sector is in deep recession and rising unemployment.

Housing Market

The UK is not the only country to have a boom and bust in house prices, but, in the UK, the rise in prices was one of the largest. The fall in UK house prices has been one of the sharpest. Also, the UK has one of the highest rates of homeownership in the world. When house prices fall, it has an almost paralysing effect on the economy. The decline in wealth and confidence is a powerful negative impact on consumer spending, once a mainstay of the UK economy.

Low Savings Rate.

The strong period of economic growth in 2000-2007 was driven by consumer spending. The UK saw a rise in personal borrowing and a dramatic drop in the savings rate. In August, 2008, the savings rates was less than 1% - an historical low; compare this to a savings rate of 10%+ in 1994. People are highly indebted and the recession has been a stark reminder of this. I feel we have gone from an attitude of carefree spending to a new attitude of frugality as we try to improve our savings ratio. There is a sharp demand for higher savings.