Second Round of Global Economic Meltdown May Be on the Way

Things are looking extremely rough and dangerous for the global financial markets as it turns out that a new wave of the recession which started shaking the world in 2008 may be headed back around for another shot at what many economists are referring to as a second Great Depression. With the yield on 2 year United States Treasuries falling to a new low on the records in hopes of some solid ground, 0.61 per cent to be precise, experts are stating that this is as low as the Great Depression that struck during the 1930’s. Just as some were beginning to say that Wall Street was looking good and possibly about to pick up a 3 per cent growth for the 2nd half of 2010, more foul news comes. The bond market happens to be one of the key economic indicators and its performance this year is showing that any kind of global economic recovery may well be dead in the water. According to a Deutsche Bank strategist in credit matters, the issues of credit have given economists and political officials indicators of what would take place throughout the first round of the economic meltdown that now looks to have begun critical velocity during 2007.

The credit strategist went on to say that deflation has now become the most potent risk for the West and is likely going to force the central banks to start easing up in the qualitative sense once again. The Europeans will likely not do this until they have no other choice, but the Americans, says the strategist, will do it pre-emptively. The crisis in banking that Spain is not experiencing, a drop in important economic indicators for the Chinese and the steady erosion of confidence in the US markets are all working together to create something of a perfect storm for this meltdown. Paul Krugman, a winner of the Nobel prize, has warned along with other important global economist thinkers, that not only is the current recovery in danger of failing outright, but that if the North Atlantic region (which includes the United Kingdom) tightens their purses, then things could get even worse far more quickly. According to Krugman, this is the beginning phase of a 3rd depression that is the direct result of failed financial policies. He went on to say that both Europe and the US face striking deflation at the same level as Japan is well known for – and, Krugman says, the Fed is doing not a thing about these potential pitfalls.

China, meanwhile, is having their own set of problems and this is crucial since the Asian giant controls so much of the Western world’s manufacturing. With the Shanghai composite equities index falling a full 4 per cent to be 55 per cent below the peak it had at the end of 2008, Chinese authorities will work to tighten their hold over the economy and curb not only property speculation, but inflation, as well. Already, prices for homes in both Shanghai and Beijing are more than 12 times the average income, a fact which may be hard for even the savvy Chinese leadership with all its methods of control to fix in a meaningful way. Instead, the banks that are owned by the state now have a large amount of hidden debt to deal with.

Freight rate measuring tool for the shipping of bulk goods, The Baltic Dry Index, has dropped 40 per cent in May of 2010 alone and this is unnerving to many economists since it is a measurement of the flow of goods across international waters and a key indicator of global economic health. Top this off with the fact that the European Central Bank is going to shut off £361 billion in emergency single year loans, the largest amount a central bank has ever made available, and it is easy to see why economists are extremely edgy about the future. Spanish banks are unable to get their loans extended and this will mean awful things for the European nation, but a great many banks are said to be facing tragedy beyond the borders of Spain, as well.

Sources say it is only a matter of time before the 3rd largest holder of debt beneath the United States and Japan – Italy – reaches the tipping point and once debt settles there it will be a matter of time before everything hits collapse phase for monetary union.

Housing Debt Won’t Be Cancelled for High Council

According to recent word from the chief secretary to the Treasury, the government of the United Kingdom will not be able to write off £146 million in housing debt for Scotland’s Highland Council in the short term. As it turns out the MP for Iverness, Nairn, Badenoch and Straspey, Danny Alexander, is actually known for having campaigned to have that debt be written off in his earlier campaigns. While it does not surprise political observers that government officials would be caught reversing their positions once in office, it does come as a shock to the Highland Council that had high hopes for a solution to debt woes.

The visit by Alexander to the Scottish Parliament led him to make a statement that the importance of the overall financial situation in the UK trumped that of the Highland Council’s debt troubles for housing. Right now, Highland is having to spend £15 million per year on loan charges simply to keep the debt at bay. With the situation being so serious, debt at the consumer level is also getting tougher, so many Scottish citizens who also face tough times are entering into a Scottish trust deed to try to find their way back to financial freedom. A clear indication of what economists commonly refer to when they mention that the higher levels of government are often engaging in financial behaviours that are reflective of their citizenry – no matter which government one is referring to.

Highland maintains that if the debt were cancelled so that the burden were removed, it would be able to commit more money towards the goal of improved housing stock. Alexander has assured the Council that he can not offer any hope for the situation at this time. He claims that the UK must solve overall debt woes before helping out any specific part of the country.

The tenants of the local authority voted in 2006 to not transfer ownership of over 14,000 homes to a privatized housing association (the Highland Housing Association) by a vote of 60 per cent having the majority say against the plan. This went against the ministers and leaders of the Highland Council who had encouraged the tenants to support the transfer of ownership. That move would have yielded not only a clearing of £160 million in debt, but more than 1,000 new houses constructed.

Bank Customers Stunned by Supreme Court Ruling on Unfair Overdraft Charges

After fighting what it believed to be unfair overdraft charges from banks, the UK’s Office of Fair Trading (OFT) has lost its two year court battle against seven major banks and one building society. The case had begun in lower courts, but after appeals by the financial giants, landed in the Supreme Court where the five most senior judges in Britain ruled that the OFT does not have the power nor authority to monitor banks for unfair charges. As a result, many customers expecting refunds of wrongly applied and excessive charges will get nothing back, the bad news coming at a time when many had been looking forward to having their money returned in time for the upcoming holiday season. A large percentage of those expecting the return of these fees will be turning to Individual Voluntary Arrangements and Debt Management Programmes as a way to get back on their feet financially.

The ruling stunned both legal and financial experts who had no doubt that the Supreme Court would rule in favour of the OFT rather than the banks. In fact, in a previous ruling, the banks had been told not to bother taking their appeal to the Supreme Court because there was almost no chance that they would succeed due to widespread disapproval from consumer advocacy groups working to help a huge number of UK consumers already struggling under massive loads of debt.

The OFT had sought to monitor these charges after customers began reporting fees ranging from £20 to £50 for each accidental overcharge to their accounts, even if those accidents were only a few pounds more than their account’s balance. In particular, consumer advocates felt that the fees were designed to target lower income customers who are already financially at risk and that this made the bank’s practice look eerily similar to predatory lending, a greatly disapproved of practice in Britain. Prior to taking the case all the way to the UK’s highest court, the OFT had won two cases in both the High Court and the Court of Appeal, exactly as experts had predicted.

The OFT had expressed concerns that the flagrantly high overdraft charges were unfair and could be considered unauthorised charges since they were subject to changes in price, without written or verbal customer consent, at the whims of the banks themselves. However, the banks considered the terms to be part of the contract customers signed when opening an account and alleged that the overdraft charges were needed to avoid having to charge fees for other services given to customers with more money in their accounts.

Financial and legal experts remain greatly puzzled as to why the judges of the highest court in the land ruled in the manner that they did after the previous rulings by the lower courts. The judges did issue a brief statement that the OFT has interpreted to mean that the grounds of their case was too narrow in scope to be effective at allowing them the power to monitor the banks fees to its customers. In other words, the Supreme Court feels the OFT, an official government body, does not have the right to monitor banks in an effort to protect financially vulnerable consumers from large lending institutions – at this time. The OFT had intended to investigate the fairness of the charges under the Unfair Terms in Consumer Contracts Regulations 1999, but have been told that this will not be considered possible under the law as it stands now. The OFT was also told not to pursue the case in the courts of Europe and to keep it within the UK.

The defendants in the case that the OFT brought were one building society and seven banks, including HSBC, Lloyds TSB, Nationwide, Clydesdale Bank, HBOS, Barclays, Abbey, and the Royal Bank of Scotland Group. All of these lenders had claims pending against them by a staggering number of customers, but all of those claims were frozen by the Financial Services Authority pending the Supreme Court’s verdict.

This means that customers waiting to get their fees refunded will now likely never see a penny returned to them. Had the ruling gone in favour of the OFT, the banks were facing nearly £20 billion in presumably unfair overdraft charges that they would have had to give back to customers. This would have been quite a blow struck to an already teetering financial sector, but also a major boon for consumers struggling with historically high levels of debt themselves.

The Treasury has promised to more aggressively pursue lending institutions that insist on excessive charges, going so far as to state that they intend to push forward legislation to cap overdraft charges if the banks and building societies will not limit the charges on their own. While this may help future customers of the lenders, it will unfortunately leave all those who have been overcharged up until now with zero compensation.

Many people are curious about what has happened during the past twelve months that could possibly have led to this Supreme Court decision. Over the past two years, despite the appeals by the banking institution, legal experts had been positive that the OFT would be clear to return the overdraft charges to customers, especially if the case made it to Britain’s highest court. However, during this time the government has bought up 43% of HOBOS and 84% of the Royal Bank of Scotland, two powerful UK banks. Adding to this the fact that the government recently announced that it secretly injected 62 billion pounds into both of these banks, could there be a conspiracy in play or is it simply coincidence that the government was facing a 20 billion pound loss if the OFT had gotten its way?