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Recent History: TARP

30 Dec

TARP stands for the Troubled Asset Relief Program. It was a program in the USA that formed part of the response to the 2008 financial crisis. There was much controversy about TARP at the time both domestically and internationally, and it is something that is being talked about again as comparisons are being drawn with other interventionist measures, particularly in the eurozone.

At the heart of what went wrong with the global financial markets back in 2008 was the problem of sub-prime mortgage lending. What this means in short was that the wrong people were lent too much money. This in itself would not have caused much difficulty beyond the borrowers and lenders concerned, however this debt was packaged as derivatives and sold on. This happened many times, and by 2008 toxic debt had spread to all corners of the financial system.

The aim of TARP was to buy up toxic assets to prevent them from being able to cause further difficulties. The amount set aside for this was set at a colossal $700 billion, which even for the government of the United States is a truly huge amount of money.

Assets that counted as ‘troubled’ were anything that was to do with mortgages that dated before March 2008. By getting these ‘dangerous’ assets out of circulation it was hoped that further damage to the wider economy could be limited. Critics viewed the move as meaning that the tax payer had to take on the risks for the profits that private entities had generated.

Was TARP a success? Certainly in was not a panacea.  The events of 208 have been followed by a continuing economic slump which shows no sign of abating, and that some are predicting will last for over a decade.

There are those that believe that TARP was the most successful government intervention ever seen, and there also those who believe that it was the most disastrous.  Those that trumpet TARP as a success point to financial institutions protected. Those that see it as being less successful prefer to focus on the fact that the assistance did not do much for individual mortgage holders, many of whom still had to face losing their homes.

There are certainly similarities that can be drawn between the situation  with mortgage securities in 2007/2008 and the situation with European sovereign debt in 2011/2012. There are definitely differences as well, with the stakes being arguably much higher.

Whether those working in private wealth management will be feeling comfortable about either sovereign debt bonds or indeed the European single currency right now seems doubtful.  A lot will depend on the political will to pump cash into the system, spending dearly to prop up financial institutions at the same time as having to cut spending.

Children Balancing the Family Budget in Northern Irelend

7 Dec

Looking after the family finance is kids play in Northern Ireland as parents take an active role in teaching their children about finance according to research by Ulster Bank, reports 4NI:

The new data indicates that parents are now spending much more time talking about managing money with their children than before, and that personal finance education is now regarded as an extremely high priority in preparing young people for the future.

Amongst the findings of the significant piece of research are that 58% of parents in Northern Ireland report talking more about money with their family in the past 12-18 months than before, and that 91% of parents say they feel personal finance and financial education should be taught as part of the school curriculum.

In fact, parents in Northern Ireland now place personal finance as the fifth most important subject that should be taught in local schools, just behind Science and Computer studies.AdTech Ad

The research also shows that nearly half of parents in Northern Ireland say they have seen a recent improvement in their teenager’s ability to manage money.

Pauline McKiernan, Corporate Sustainability Manager at Ulster Bank, said: “What is perhaps surprising about this research is the extent of the high priority Northern Irish parents place on teaching children essential life skills around money management – both in terms of the formal school curriculum and the support role of the family.

“The research shows parents hold strong views about the value of financial education and its role in preparing young people for adulthood.”

The research, ‘Money Matters for Parents of Teenagers’, was completed by Amarach Research – on behalf of Ulster Bank – involving 603 interviews with a representative sample of parents with children aged 11-19.

This is a great idea, and could help the next generation put money in their savings accounts, rather than finding themselves getting deeper and deeper into debt. Educating them about money at an early age could also aid them in the business world, giving them a solid foundation on which to build their entrepreneurial skills.

Ulster Bank has also launched its latest MoneySense guide ‘Making the most of your family budget’. Developed in conjunction with Parenting NI, it covers a wide range of financial issues from benefits and practical tips on teaching children good money habits.

 

What Is Quantitative Easing?

19 Oct

In October 2011, the Monetary Policy Committee of the Bank of England voted to inject £75 billion into the United Kingdom economy via a process known as quantitative easing. Here we examine what quantitative easing is and what the effects of the Bank’s decision might be.

The economy of the United Kingdom is to receive a £75 billion stimulus after the Monetary Policy Committee (MPC) of the Bank of England decided in October 2011 to carry out another round of quantitative easing, which effectively involves printing new money, in order to boost the ailing economy.

Sir Mervyn King, the Bank of England governor, described the economic climate as”the most serious financial crisis we have seen since the 1930s, if not ever.”

The additional money will be used to buy government bonds (gilts) from investment and pension funds, freeing up these funds to invest more in equities and other higher risk areas.

Initial reaction to the announcement appeared positive, with the FTSE 100 index gaining around 4% almost immediately.

The Bank carried out a £200 billion round of quantitative easing in March 2009, and this resulted in a great demand for UK equities from overseas buyers, and a rise of almost 2% in the UK’s Gross Domestic Product. But some analysts wonder whether the effect will be as great this time, especially given the universally low predictions for short-term growth in the economy. Some have suggested the money would have been better used to boost private businesses.

Perhaps the best known task of the MPC is to set the UK’s base interest rate. This rate has stayed at 0.5%, the lowest the Bank believes this rate can feasibly go, since March 2009. Recent Committee votes have been unanimous as to keeping the rate unchanged. Hence the Committee has been forced to examine quantitative easing as an alternative way of boosting the economy – there has been almost zero growth in the UK economy over the nine months to June 2011.

The announcement of the stimulus has reinforced a belief in the financial sector that interest rates will remain at 0.5% for some considerable time, and hence high street banks are setting rates on their own products on the assumption that a lengthy period of low interest rates will follow. This is bad news for savers whose account interest rates are often determined by the level of the base rate, but potentially excellent news for those considering a new mortgage, with some of the lowest fixed rate deals ever seen in the UK being offered as of October 2011.

The quantitative easing announcement could mean that pension annuity rates fall further. The last round of quantitative easing reduced the yields on government bonds significantly, thus reducing the annuity rates.

Injecting more money into the economy can raise inflation, especially if a period of low economic growth follows, and at the time of the announcement, the UK’s Consumer Prices Index stood at 4.5%, well above the Bank of England’s target of 2%. However, many analysts expect inflation to fall significantly in the coming years given the economic difficulties.

When the last round of quantitative easing took place, under a Labour government, George Osborne described the move as “the last resort of desperate governments when all other policies have failed.” Although the MPC is independent of government, the decision to carry out more quantitative easing has now occurred under a Conservative – Liberal Democrat coalition government, of which Osborne is Chancellor of the Exchequer.