Yes it is down to sub-prime (ie very risky) debt but the implication that it's the fault of reckless individuals is designed to get the banking sector off the hook.

The reason the financial institutions went into meltdown was because they developed - and were permitted to by poor regulation - financial instruments to disguise the riskiness of debt and then sell it on.

From the perspective of a lender, if you lend to a 'high risk' individual, you can charge a higher interest rate so this is preferable. In the industry they have a term NINJAs which means No Income No Job or Assets, so if you lend to a NINJA the odds are you ain't getting the loan back. But you can charge them a high interest rate and so you have that contract worth repayments at a high interest rate.

If I lend £10000 to a NINJA over 10 years at an interest rate of 15% then I have a contract for repayments worth over £40000 so if I offer to sell that to you for £20000 then I am doubling my money instantly but that's also a good deal for you because you pay me £20000 now and have a contract that entitles you to repayments over £40000 over the years. However if you know the circumstances of the borrower you will not touch it with a bargepole as you know that contract won't be worth the paper it's written on when the NINJA defaults and you have no way of getting recompense as he doesn't own anything you can take.

However what if I make loads of loans to NINJAs and also loans to more reliable borrowers, then I offer to sell you a security that offers lots of small shares of the repayments of multiple loans, that sounds better, for one there are more borrowers involved so you are spreading your risk, also it is difficult to determine from that how risky what you are buying is. In fact I probably got it checked by a credit rating agency and they couldn't see anything wrong with it so rated it at AAA so you bought it. In this way I can make a lot of high interest loans to NINJAs then sell on the debt so that someone else is holding the timebomb when they all default, and I make money. This is what banks were doing and they had an easy way of getting debt off their books because someone else would hold it. So they aggressively targeted the NINJA market to make loans, then sold them on in disguised form. Except because they were all doing it and large banks have many different parts, sometimes the toxic packages they were selling on, would end up being bought back by a different part of the same bank, after being passed around the markets. So when the defaults started to roll in the banks had all infected each other.

From the point of view of the "free market", this is a classic market failure because it is one of 'imperfect information' - sellers had a means to withold information about the riskiness of debt from buyers, and so it created a huge moral hazard problem where banks had an incentive to directly make loans to people that would not repay them, so they could sell them on and make a quick buck whilst someone else held the risk. Now the banking sector is trying to turn round saying "its down to people living beyond their means".

Its the equivalent of if you got an inheritance of £10000 and I offered to keep it safe and pay you 10% interest on it a year, then I lend that out to a homeless person and charge him 15% interest, except he disappears and i can't trace him. When you ask me what has happened to your money, I can just say "a homeless person borrowed beyond his means....blame him, its not my fault".

Really? You think Tesco and Vodaphone are not making huge profits then?

Tesco issued a profits warning the other day, so they are in their terms doing badly. That was not the point though. What I said was if they paid more in tax they would have less for wages, which would be clearly the case irrespective of whether you feel that should pay a larger percentage of their income as wages or not. Linking to what has been said on another thread about poor investment in industries in the past, part of the reason for that was as those industries suffered competition too big a portion of their reducing revenues was going in wages, making them increasingly uncompetitive and investment pointless.

So these companies are paying wages out of profits? The staffing costs don't get factored into the price of the goods/services to be covered by turnover?

And you think this "business" thing is a good example of how to run the country?

God help us all!

Yes, that's the point I was trying to make. It's not the individuals taking out loans they couldn't afford that was the primary cause of the crisis, but the banks gambling with this sub-prime debt to try and make a quick few million here and there.

Any company that pays wages out of profits wants its collective head looking at.

On the basis of your comment, if Tesco make a loss, they will automatically have to pay every employee less.

And you've confused revenue and profit in the full original post I quoted.

So the dividend paid to their shareholders would be slightly smaller. I'd say this was a worthwhile sacrifice to ensure that the companies are paying what they ought to be paying in tax, and that their employees are able to live without having to seek help from the state.

A profits warning means they got their forecasts wrong, if they are doing badly I'd like to be a quid or two behind them.



And clearly they wouldn't, the could use a little of their profit to cover this.




Tesco is hardly suffering from under-investment.

They pay wages out of income. Income is constrained by what their competitors charge. If supermarkets sold just one prduct, say milk, and Tesco charged £1.50 for a pint and Asda £0.45 how long do think Tesco would last? If it were simply a case of factoring costs into prices then virtually no business / no industry would ever have gone bust!

He didn't suggest that.

He suggested that they pay their tax bill.

Just like you or I have to do.