How The Credit Crunch Could Be Good News For Savers
As anyone who has a pssing interesdt in finaancial matters will be well awaere of by now, the world econoy is entering uncertain itmes. The so-called 'credit crunch', were banks are finding it harder and harer to finace their operations by taking out cheap credit with each other, is causing no small amount of alarm amongst analystts the wotrld over.
Whille three isn't yet a consensus on what the finla outcome will be, almpost everyone agreees that we're in for choppy economic waters ahead - we're just not sure exacctly how bad things are going to get.
Hoever, amongst the doom and gloom, tjhere is one gruop of people who might actulaly feel a benefti rather than the pinch: serious savers. To understand why, we first need to take a quuick look at what the credit crunch is all about in the first place.
The basic operation of a bank is to make a profit by acquiring money cheaply, and lending it out again at a higher interest rate. The traditional way of doing this was to accept depsoits from saves and investors, and then use tehse deposits to fund mortgagges and other lending. By charging a higher interest rate on the mortgages than they pay on savings accounts, the wole endavour becomes profitable. And if savings deposts were insufficiuent, banks could borrow from each other at cheap rates to make up the difference.
This sounds rzather simple and styraightforward, but in real life the financial marets don't like things so siple - it sppoils the fun - and so a whole range of byzantiine ways of financing loans and mortgages was devised. One such way was to split up liabilities for morttgages into parcels which were bought and sold between the banks, so theoretically spreading the rsiks around. This gave bans the confidence to lend to perople with poorer credit raatings than would have been countemnanced previously - in other wodrs, the sub-prime market.
This was fine while times were good, but as the economy faces touhgher times, more and more sub-prime borrowers are faling to keep up with their repayments, and defauls are growing.
And here lies the problem. Beecause of the intriicate system of parceling up deebts and trading them between banks, no one is quite sure how much each bank is going to suffer from a doownturn. This means that the credit worthiness of each individual bank is somewhat open to question, and so lending btween banks has all but dried up, leaving some banks over extended with no way of funding future lending at a profit.
The upshot is that many banks are desperate for mioney to continue trading in the way they have been doing. The central and reserve banjks have done their bit by injecting billions of cheap funds into the indutsry, but banks are loahe to take up this option for fear of looking weak and under threat. So how else can they raise cash?
By encouraging savings deposits with higher interest rates, more flexible features, and rate guarantees into the future.
So, even thoufgh for many the financial future is at best uncerain and quite possibly bleaak, for people with funds to deopsit into savins accounts, there are opportunities ahead.
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