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Cracking the Credit Crunch. Recession Veterans v Recession Virgins

Ten years ago, Britain was enjoying a renewed optimism. New Labour took power and Cool Britannia ensued; rock stars visited Number 10, The Full Monty showed how Brits make the best of a sorry situation, and sustained financial growth left many with grins as wide as the Prime Minister’s.

Unlike those who lived through the early ‘70s, ‘80s and ‘90s, Brits who came of age financially in the last ten years have enjoyed a binge of cheap and abundant credit. But with an economic slowdown looming, it looks like all of us, recession virgins included, are headed for a financial reckoning.

In an exclusive report, we’ve examined the economic facts and assessed whether experience can help you survive the boom and bust cycle. By quizzing recession virgins and veterans alike we’ve discovered different generations’ real attitudes to the credit crunch, and uncovered a wealth of ways to stop it biting quite so hard.

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The opinions expressed here are those of the individual writers and are not representative of The Motley Fool.

At 15:49 on March 27 2008, TMFSara said:

Seems I'm the first! David Kuo mentions he'd like to know how people are coping with their increased household outgoings. I'm not finding it too difficult -- so far it's been a relatively easy balancing act (spend more on food = spend less on shoes!). The thing is, I'm still playing the recession V-card, and I’m wondering whether those who've been around the recession block a few times know something I don't -- specifically, whether keeping things in balance is enough, or if now's the time I should be digging in and saving like I've never saved before... Anyone?

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At 17:34 on March 27 2008, TMFLena said:

A friend of mine is thinking of buying a flat - a year ago she would have been thrilled at the thought. Now - it's a different story... hit by the credit crunch chill...understandably!

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At 21:10 on March 28 2008, UpHillAllTheWay said:

I may wether the storm OK - I haven't invested over the last 5 years (and I missed out on the boom), but I have been saving and not spending much. I sold my house in early January, and I'm using the interest on the money to pay for rental for a year or two till I see what happens. What I expect is that the housing market will teeter and totter, but not fall - then when I start to feel confident again, and buy another house - then it will plummet!

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At 08:47 on March 29 2008, sbradnam said:

It's obviously getting more difficult, but when we bought our house, it was with the long-term in mind - ie we are going to live here for a long time......so get that bit right, (not always easy I know), and then you are less worried about house pricces going up and down etc, 'cos you're in it for the long haul, and not looking to make a quick buck.....this thought process is calming and quite reassuring I can tell you!!!

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At 15:55 on March 31 2008, carloswhizz said:

I graduated just as the 1990 recession bit hard. Living in an era of high interest rates and rising was not easy but interestingly enough while cash was very, very tight I was able to enjoy life as my expectations were not as high as they are now. Keeping things simple, using the library, buying cheaper clothes at Oxfam, eating well but mostly vegetarian, avoiding expensive nights out, etc. avoided the pain of that recession fairly well. This time around the downturn means more cost-cutting across more areas obviously as I bought a house less than a year ago, am getting married and hoping to start a family with my lovely fiancee. Nevertheless we are keeping our cost base low, saving for large purchases and avoiding debt. A second stream of income is also valuable at these times and we are working on that too. Tough times ahead yes but with good budgeting and a long term view I am confident for the future.

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At 11:00 on April 01 2008, figurewizard said:

The sums involved in the credit crunch are beyond the capacity of the leading central banks to resolve. Therefore the approach has been to cut interest rates, thereby enabling the banks to expand their margins by keeping the rates that they charge borrowers relatively high while reducing those that they pay to depositers. Over the next two years this should help to restore liquidity. As cash rolls out of such things as property and commodity investment the pressure on rates should ease further, just as long as a fall in stock markets doesn't result in a rush to invest in 'cheap' equities. Either way house prices must fall.

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At 14:48 on April 01 2008, FoolishFilFive said:

We need to remember that things are never as bad as they seem in bear markets, and never as good as they seem in bull markets. Worry less about what you presently own, and concentrate on the bargains you can pick up in the next 2 or 3 years.

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At 16:33 on April 03 2008, TMFSara said:

Great to see discussion picking up here... carloswhizz yours is a pretty chilled-out, thought-out response to the whole 'how much will it REALLY impact me' question. I'd like to think you're right, too. Thanks for your perspective :-)

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At 19:46 on April 03 2008, Tortoise1000 said:

I keep reading about credit card rates going up, so I was quite surprised to get this email from the Halifax today:

Dear Tortoise,

To help you make the most of the credit that's available to you on your Credit Card account, we've lowered the interest rate available on your Halifax Credit Card account to 6.95% p.a. for the lifetime of the balance on balance transfers made before 8th May 2008 plus a 3% handling fee (minimum £3).

Thats down from 12.9%

They wont get me to do it, though ;-)

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At 21:57 on April 04 2008, FAZERSIX said:

Reiterate there is no credit crunch the Banks will claw back all losses from customers that always pay.

Renting instead of buying costly, so why worry about buying or selling,its the media frienzie that's causing a false problems and stopping the housing market.

How many Banks have gone bust in the past 20 years
,comparied with other companies,who as the prime location on the high street, need i say more.

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At 14:18 on April 05 2008, boomandbustagain said:

I keep reading about how sterling is falling in value against the euro so I was thinking about opening a euro savings account.
Does anyone know if this is possible with a bank based in the UK or would it have to be offshore ? I looked at euro offshore accounts online and the rate of interest is always a lot lower than with a sterling account. Why is this ? What are the tax implications aswell ?
Thanks for any info !

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At 21:56 on April 06 2008, FAZERSIX said:

Why dont you take look at instant access accounts like, ICICI OR KAUPTHING EDGE BANKS with monthly interest.

Both memembers of the FSA and both .co.uk

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At 17:29 on April 07 2008, Basillio said:

I was tripped up by the early 1990's house price fall - mortgage rocketed. I ended up renting out my flat and getting digs. I vowed never again. Took out a 17 year mortage in 1996 and since 2003 overpaid massively. Mortage ended last May - 6 years early. Rather than increase my discretionary spend following a promotion - I used the pay increase to overpay on the mortgage. Now thankfully I have no mortgage or any other debt for that matter and reasonable savings. I am lucky to be able to watch from the sidelines.

My advice is simple. Get the saving habit - get a buzz from putting funds aside for that new whatever.

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At 23:15 on April 07 2008, FAZERSIX said:

The big difference between boom and bust is interest rate are very low Now in comparison with property boom late eighties very early ninties.

Remember 16% repayment mortgages ouch,savers had a field day them days.

My advice is buy a cheaper house rather than overstretching your finances to keep up with Jones.

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At 16:03 on April 08 2008, Igoodfellow1 said:

I know this is not entirely to do with the credit crunch, but it certainly helps make it. When is someone going to stop bodies like DVLA & TV licence & BANKS plus others being able to make mistakes & demands without auto redress against them by law, they demand from you amounts, and you are left to prove you don't owe them, this is all done in the name of a computer error, when you finally prove you never owed the amount in the first place. Then why should their not be a case in Law that if a body has made a computer error, demanding amounts already paid, They be made to pay in compensation to the victim the same amount

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At 16:36 on April 08 2008, Wembdon said:

This is one strange recession and credit crunch and boy are the media leveraging it.
The banks are in the main still making remarkable profits. Loads of companies are still enjoying excellent revenues and profits and most are still recruiting, possibly because in the last minor correction they made lots of staff redundant and then later hired everybody back again with vastly inflated salaries and golden parachutes - dumb. At last supply has agin equalled demand and so golden parachutes have gone and indecision or strategic do nothingness has afflicted many.
A London CEO told his staff recently that they were doing very well despite the recession. There is still no recession, just London employers doing nothing whilst the media talks of recession and everybody tries to work out what is going on.
Mortgage products get withdrawn. No, really? Like this has never happened before.
The market got greedy and over hyped. The market self corrects. The market keeps changing, now places like China and India are big players and expanding.
Oh, and by the way mortgage interest rates are not 15%.

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At 10:32 on April 10 2008, RhondaABZ said:

sbradnam and wembdon make very valid points. The whole situation was brought about by greed. Remember the old saying - "those who live by the sword, die by the sword".

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At 23:28 on April 12 2008, UpHillAllTheWay said:

Igoodfellow's point is a bit off-topic, but one that I agree with. If I make a financial mistake (eg forget to pay a bill), the company concerned will charge me a fee to cover their administration that resulted. If they make the error, they never offer to reduce their costs to compensate for my administration time in proving my innocence.

Sorry - I know it's got nothing to do with the price of fish.

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At 07:52 on April 13 2008, kingm1234 said:

I'm a mortgage broker. The last 4-5 months have been dire. We have all heard that lenders are pulling the number of products available - but what most people fail to see is the actual scale of it. Simply put it means the choice of mortgages now is limited to a small number and if you dont fit into the banks renewed 'criteria' then tough luck.

The other trick the lenders are doing is pulling mortgage products from the market with literally a few hours notice. Plenty of applicants are falling foul of this - they think they have a mortgage in place then it evaporates in the blink of an eye.

Oh and by the way - its not only Northern Rock that has now pulled away from mortgages (they still offer them but in reality are trying desperately to ditch their mortgage clients) there are many unreported mortgage lenders that have pulled out of the market completely.

The credit crunch is a very real thing from where I stand. Oh one more thing - is our currency slide against the Euro the real integration with Europe? It is nearing parity - when it's £1=€1 then we will be in for ever.

All the best

Mart

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At 23:17 on April 13 2008, lowkey48 said:

How to survive and do well in the credit crunch? Well, it seems that banks are scrabbling around for 'clean' sources of credit, i.e. credit uncontaminated by the subprime poison currently infecting (almost) the entire system. Time to become a saver, in, perhaps, more than one sense of the word. Banks can only lend what they have deposited, yeah yeah, fractional reserve banking and all that, so to steer themselves into a better position they are soon to become 'bessie mates' with any and all who can stick lovely clean cash into their vaults. I've cleared my debts (first things first) and am searching for the best risk/reward savings ratio that the banks can offer. The government can only pump so much cheap(ish) money into the system before a devaluing effect becomes apparent and when the taps are turned down ( higher interest rates) the banks will woo what money already exists and encourage savers.
It's cloudy skies ahead but my best chance to use pound cost averaging to buy into the stock market cheaply on a monthly trickle-feed. I'm trying an index tracking Isa and unit trusts for my long term.

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At 19:28 on April 14 2008, plingbb said:

HI - I wasn't quite sure where to chip in but here's my two-penneth . .
I recently moved my ISAs to a now provider. While chatting to the member of staff who had just performed the administration of this (in a local High Street bank), they mentioned that they had never seen so many new customers turn up at their counters trying to find a home for cheques of £35000! Looks like the Fool's message has started to sink in.
However, my point is this - if each person's money is spread thinly (if £35000 is thinly) among a selection of companies, surely, when it all goes pear shaped, all (or most) of those deposits will now be covered by the 'guarantee' - or will it? Can the system cope with paying back 90% of (nearly) all the cash on deposit? Or will the taxpayer have to fork out again. It really is a house of cards isn't it?
Cheers

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At 11:57 on April 19 2008, zcfr said:

I used to rent out a property till I worked out what my rental yield was against the capital value of the unmortgaged house, it was around 3%, what was the point in continuing? When I noted the sharply increasing rate of capital appreciation of residential property and compared that bubble to other asset bubbles the penny dropped so I felt a sense of urgency to sell, (tax considerations also made a sale seem imperative)I obtained some evaluations in November 2006, decided to wait a bit redecorated and sold in May 2007. The house sold for 17% more than the valuations 6 months previously. The estate agent didnt have a clue what the fair market rate might be, all they knew was that people were almost hammering on their doors demanding to by houses at virtually any price before they vanished beyond their means forever, or so they thought. This situation was crazy, our economy is dependant on consumers buying luxury goods which they do not need, if all available income is directed to mortgage repayments then that must force a resession as consumers realise they cannot afford the luxuries, the short term beneficiaries were bank shareholders but no one else apart from a few people like myself. The million dollar question is will the phsycology that prevailed during a manic buying frenzy be reversed as price increases stall? Unless you want to carry the burden of debilitating debt for the rest of your life do not buy a house, its just not worth the risk now.

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At 12:25 on April 20 2008, rouge14 said:

Most analysts agree that this is the worst financial crisis they have seen and some say the worst since the war. So much recent UK wealth has been generated by the finacial services sector that the government are forced to prop it up. Other major growth providers have been house price increases and consumeism. These are really one and the same. People tapping their homes for cash to spend,spend,spend in a consumer debt orgy.Well for one to be up against it would be bad but all 3? Trouble is this government has been debt binging even worse than the average IKEA shopper. Brown as chancellor sold much of the countrys gold (yours and mine-not new Labours)at an all time low value and robbed our pensions to go on a big spending spree. Now in volatile times not only didnt he "fix the roof when the sun was shining" looks like he actually flogged it! When interest rates were so low the smart used it to pay off their mortgages and other loans. For them these times will offer rich pickings. Banks and building societies desperate to recapitalise are offering very generous fixed rate bonds. If you want something more racey these could possibly be the best buying conditions for years with equities plunging. Im sure people like Buffet and Soros are filling up.

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At 12:46 on April 20 2008, rouge14 said:

sorry just re-read my post.Meant to say Brown sold 400 tons of our gold at a 28 year low value NOT all time low. Even HE is not that stupid? is he?

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At 11:32 on April 23 2008, jani123 said:

Speaking as a Northern Rock borrower whos fixed rate ends 1/7/08 - we are in real bother. Have very large mortgage so difficult to re-mortgage especially as self employed. No-one seems to want to lend to self employed with no proof of income. despite fact we have had mortgages for 30 years and never missed a payment. Cant afford to pay more - help

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At 19:21 on July 30 2008, CashOnTheNail said:

Tempted to ask why banks do not revert to Captain Mainwaring twice blokes [sorry 'girls'] annual-income plus 10% CASH deposit mortgages.

Cash-shortage resolved with massively-reduced mortgage-lending; though one-or-more banks will go-to-the-wall maybe within days of 'key date' 08.08.2008

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