Oh how time flies! It’s now been ten years since the last financial crisis, which many considered was the worst since the Great Depression in the 1930s.
So what went wrong?
It started with a high default rate in the US subprime mortgage sector. Many Americans were allowed to borrow the full amount against their home purchases at low interest rates and without lenders performing adequate affordability checks. This fuelled the growth of the housing market, which in turn led to a banking crisis which was seen on an international scale and ultimately culminated in the collapse of Lehman Brothers in 2008.
Banks on both sides of the Atlantic needed to be bailed out to avoid collapse and many were taken over by their government in order to prevent further devastation. In the UK, this included Royal Bank of Scotland, Lloyds TSB and HBOS. You may also recall the queues around Northern Rock branches as the public panicked, fearing the loss of their savings. Recession loomed and interest rates were cut across the globe in an attempt to ease financial pressure on borrowers, but this had a knock-on effect on savers too which is still being felt.
Quantitative Easing, the buying back of government debt by central banks and dubbed as the printing of money, occurred in both the US and UK in a bid to generate liquidity and stimulate spending and was also replicated in other economies.
Stock markets reacted. Falls were experienced across global markets and followed by lengthy periods of turbulence. As a consequence, housing markets, interest rates and unemployment rates impacted many individuals and businesses.
What’s changed?
The packaging of bad debt and delinquent loans which fuelled sub-prime mortgage markets has ceased and we now have a much more stable and responsible banking system in the UK. Anyone who’s tried to obtain a mortgage recently can attest to the extra checks and financial stress testing that is now required.
In May 2017 the UK Government sold its remaining shareholding in Lloyds Banking Group, but Royal Bank of Scotland is still partially state owned.
Fresh quantitative easing has now all but ended across the globe, but interest rates remain at historically low levels. Consequently, savers continue to suffer and haven’t received anything approaching the growth seen in stock markets. Conversely, rates for borrowers remain at their lowest they have been for some years.
The table below shows a comparison of the Bank of England (BoE) Base Rate, Consumer Price Index (CPI), Retail Price Index (RPI) and the FTSE100.
5 July 2007
8 October 2008
5 March 2009
4 August 2016
29 August 2017
BoE Base Rate
5.75%
4.50%
0.50%
0.25%
0.25%
CPI
1.9%
4.50%
2.9%
0.6%
2.6%
RPI
3.8%
4.2%
-0.4%
1.8%
3.6%
Closing FTSE 100
6635.23
4366.69
3529.86
6740.16
7337.43
Anyone who sought a safe haven in cash and perhaps held out hoping for rates to rise, has not only been disappointed with returns, but in doing so they have also lost out on potential returns they could have experienced by investing in the stock market. Without realising it, they’ve been sat on virtually zero returns for a decade! There is well worn phrase in financial planning circles – it’s time in the market not timing the market.
Interest rates are not expected to rise anytime soon, so the prospects of reaching pre-crisis levels seem remote. Those with substantial funds on deposit who aren’t willing to expose themselves to stock market risks may well benefit from reviewing their finances to make sure of Financial Services Compensation Scheme protections, which we can help with – email us: help@armstrongwatson.co.uk.
Inflation rates remain relatively low, so your money doesn’t need to work quite as hard as it perhaps used to in order to stay financially ahead, but if the rate of inflation is higher than the rate of return on your savings, your capital is actually being eroded in real terms.
The financial crisis may appear fresh in many people’s minds, but the reality is that we’ve moved on a whole decade since then and from a financial perspective have moved on a great deal, so is it time to revisit your financial goals and re-assess your financial position?
Contact our Financial Planning team for a review. Our Financial Planning Consultants can advise and support you to ensure you are financially in the best place you can be and can be contacted at any of our office locations on 0808 144 5575 or visit our website: www.armstrongwatsonfp.co.uk
If you would like more information on the above, please contact our Financial Planning team
