September 20, 2007 in Politics

Crisis Averted (for now)

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America sneezes and the rest of the world catches a cold. Or at least, they start to sneeze too. Case in point, the dodgy mortgage deals that are wreaking havoc on the real estate market in the US are now putting the squeeze on financial markets across the globe.
Here in the UK, we almost had a major financial institution (Northern Rock) fail. But crisis was averted earlier this week when the Bank of England stepped in to say that they would now guarantee all investments. Thus, whereas before, people were guaranteed to get back 100% of the first £2,000 and then 90% of their next £33,000, now depositors will get 100% back irrespective of amount, if an institution goes belly up.
This is awfully nice of the government, but how does that hold banking fat cats accountable? The entire Northern Rock management team is still in place. Why has no one been fired? This was a clear case of mismanagement.
Also, what does this do for competition? With this blanket guarantee, UK banks now have further license to be more wreckless in their strategy for profits and it will then be the tax payers who have to pick up the bill should one go under. Somehow, this doesn’t feel right and it sets a dangerous precedent.
Now, I’m not saying that people who put their money in banks should not have some sort of guarantee that it will be safe. But as in life, everything comes with a risk. Thus, savvy investors know that you need to spread the risk around after carefully researching the options. This guarantee lets people off the hook should they now decide to put their savings into potentially higher earning riskier products at less stable banks.
Plus, irrespective of how much money you have (or don’t have for that matter), one should never have just one bank account. Put your money in a few places. Also, based on age and retirement goals, diversify the products you invest in.
Based on the stories of people waiting in those long lines, was surprised to learn that most had their entire savings wrapped up in one bank with little or no diversification in products. That my friends, is a fools strategy!
But hey, what do I know. It looks like I just purchased a house at the top of the property boom!

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