Credit crunch

This driver has been archived

A credit crunch is a [sudden] reduction in the availability of liquidity in the financial markets ( i.e. loans or credit) resulting in a sudden increase in the cost of obtaining a loan from financial institutions.

High-levels of indebtedness, the interconnected global markets and the effects of the US subprime mortgage crisis and overleveraging of financial institutions caused a worldwide credit crunch. The freeze in lending between banks despite cuts in interest rates contributed to the worldwide economic slowdown. As confidence returns, major economies are likely to see small growth through 2010, lending is likely to remain subdued (see economic downturn)

What are the implications?

  • A slow return to economic growth as consumer confidence remains weak.
  • High global stock market and financial volatility.
  • Large scale worldwide government intervention to support failed institutions.
  • Flat or falling house prices as lenders and banks remain risk-averse reluctant to issue new mortgages.
  • Continued difficulties in obtaining credit for loans which will particularly affect small businesses or VCOs or individuals with high levels of personal debt.
  • Subdued business and consumer spending and confidence.
  • Interest rates to remain low to encourage recovery.
  • VCOs, individuals and public sector bodies with investments in failed institutions or falling stocks and shares will suffer.
  • Large government spending cuts as the government struggles to balance demand for public services with reduced tax receipts (see levels of public spending).
  • A more competitive and tighter funding environment for the VCS with increased pressure to demonstrate impact and value for money.
  • Futher increases in unemployment with the potential for considerable job losses in the public sector.
  • Employee volunteering in corporate institutions will decrease, although individual volunteering may rise (see numbers of volunteers).
  • More loosening of the labour market leading to a bigger labour pool and more people looking for jobs in the VCS.

Moving forward

In a more risk-averse environment, your organisation is going to have to work harder to demonstrate to funders (both statutory and corporate) the value and need for new or existing services in order to secure sustained investment. This will particularly impact on beneficiaries/areas of work perceived to be more ‘risky’.

  • Does your organisation need to improve how it assesses, demonstrates and communicates its impact?

Several of the sector’s key income sources are likely to face increasing pressure in the next few years as UK growth slows considerably.

  • If your organisation relies on statutory or corporate income, what strategies can your organisation put in place now to manage potential future changes in funding?
  • Can you look at your funding streams, beneficiaries and costs and plan some likely scenarios for your organisation?
  • Can you diversify your income sources to better secure your organisation's future income?
  • Does your organisation have a strategy in place to consolidate its resources?

As other sectors cut employees, there may be an increase in available employees.

  • Can your organisation emphasise the sector’s competitive advantage to attract new employees with new skills from other sectors?

In an increasingly competitive contracting environment, a key board level activity may be to identify and analyse potential collaborators and competitors in your service area.

  • Would carrying out a Competitor or Other Player Analysis help prepare your organisation in the current environment?

A changing economic climate will put pressure on the sector to respond to more beneficiaries as well as new types, but with fewer resources.

  • In such circumstances, can you identify which of your services can generate income and which need to be provided at no cost to the user?

Want to know more?

The Credit Crunch 1: How it began

Published by: Pearson May – a Chartered Accountant

Date: 2008

Format: Web

What is it? The first in a series of articles looking at the main factors that led to the credit crunch and how it will affect businesses and individuals.

How useful is this? A good clear, simple summary of the order of events and factors that have contributed to the credit crunch such as the US sub-prime mortgage crisis. It also discusses the links between the credit crunch and rising commodity prices, the effects on interest and mortgage rates, private equity markets and consumer spending. Although, the last two sections are useful as they explore how the crisis will unfold and weigh up the scene for recovery, they are slightly out of date as they were written before the recent Government bail out.

Other comments?
This article is the first in a series looking at the implications of the credit crunch, so look out for more related articles.

ITEM Club Forecast summary (Ernst and Young, Winter 2010)

Published by: ITEM Club – an independent economic forecasting group sponsored by Ernst and Young

Date: 2010

Format: PDF (280K)

What is it? A summary of the ITEM Club’s quarterly forecast setting out the challenges for the economy over the next year and quarter.

How useful is this? The autumn forecast analyses the effects of the credit crunch on the economy. It explores how to what extent the global economy will recover over the next couple of years, and the implications for UK commercial activity and investment, economic growth and unemployment in the next couple of years. It encourages businesses to look to exports as a potential area for growth. The forecast provides a good summary of how the effects of the credit crunch link into other economic indicators and cycles and examines some of the possible solutions and factors that will be required for economic recovery in the future.

Other comments?
The previous Summer 2008 forecast, although out of date, is also useful for an explanation of the background economic factors that contributed to the credit crunch.

The impact of an economic slowdown on the VCS

Published by: NCVO

Date: 2008

Format: Web

What is it? A write up from a NCVO Third Sector Foresight seminar on the impact of an economic slowdown on the VCS. It includes weblinks to download and listen to the session’s presentations and a summary of opportunities, risks and practical solutions for the VCS of the credit crunch and overall economic slowdown.

How useful is this? Although this summary is looking at the implications of an economic slowdown for the sector, rather than a lack of credit, many of the implications are the same. The summary of the seminar discussion offers a good overview of a wide range of opportunities and risks that VCOs need to think about in a slowdown, providing organisations with a starting point to think about wider implications and some practical actions to consider. Other members of the Foresight network have also added some tips for how organisations can act more strategically in order to weather the downturn. The presentation on the impact of an economic slowdown from Keith Hickey from Charity Finance Directors Group is particularly helpful in exploring the main implications of the current economic climate on the VCS and highlighting some strategic responses to deal with these.

Other comments?

Last updated at 16:00 Wed 23/Feb/11.

LockRecent comments

AuthorComment

It is important to think about how the uncertain economic environment may impact upon the effectiveness of voluntary and community sector campaigns.

Not only are government priorities likely to shift – and so the tactics and tone campaigners employ to influence policy and practice likely to change – the credit crunch may also impact upon funding. But what other effects might this have on campaigning? How might public attitudes change towards poverty and social justice? How might public attitudes towards campaigning change?

I have come across an interesting newsletter from Chris Rose at campaignstragegy.org which explores ‘campaigning your way out of recession’ – so rather than looking at the ways the financial crisis may impact upon campaigns more generally, it explores the opportunities that this may offer to campaigns, using renewable energy to illustrate this, but principles could be applied to other sectors where campaign objectives could be met by economic growth.

I have included key points and included a link to the newsletter should you wish to read it in full and find the references:

To achieve this, campaigners will need to:

  • Put the case in terms which meet the psychological needs of the time – first for security, safety and belonging, then profitability, and only after that, their favourite territory of ethics and global responsibility
  • Persuade by providing evidence, not argument: allow politicians and the media to draw their own conclusions
  • Resist the temptation to say “we told you so” and to push themselves forward as advocates in place of conventional pundits
  • Speak to the immediate needs of the moment, and frame 1 the solution in terms of the problem as perceived by those who you need to influence (mainstream politicians and media), not an alternative ‘vision’

The New Role Of Governments

By part-nationalising banks governments previously 100 percent behind neo-liberal economics have changed their role, and the first element in the new campaigning opportunity is to use this newfound will for intervention and get it applied to the economy. This is why the financial crisis is a social storm wave: it has brought about a major social upheaval, particularly in political thinking.

However no government is going to try and replace the market – their strategy will be to try and kick-start the market economy. To do this they will need to build confidence and it’s in this soft, slippery and mercurial field that communications play a central role. Whereas campaigners can’t influence anything with their money, they can influence public conversations and perceptions.

Creating Centres of Confidence

The design brief for campaign strategies here should be to create ‘centres of confidence’: places, sectors, programmes and activities which attract investment, create jobs and engender growth, with the obvious subtext for campaigners that they also do social good. More about this below.

Fitting the Frame

Of course this ‘win-win’ was already the agenda of many ‘green growth’ advocates and some politicians already made this argument before the crisis broke. For example in London on 22 October UNEP is due to publish a report 2 calling for a ‘Green Economy Initiative’. The plan, backed by Germany, Norway and the EU, arises from a study commissioned by the G8 in 2000. It aims to promote investment in job-creating programmes that ‘restore natural systems underpinning the economy’.

To those who already perceive the erosion of such systems as the biggest problem the world faces this is timely and may be ‘best’ response to the financial crisis but even this initiative, with its G8 pedigree, runs the risk of being filtered out of serious consideration by use of the ‘financial crisis’ or ‘economic crisis’ frame, as it does not start from the current problem of a lack of confidence.

Similarly, campaigners and Ministers engaged in the forthcoming climate negotiations at Poznan and Copenhagen face calls to set aside climate emission cuts because “we can no longer afford it”. Fixing the climate does not, as a solution, fit the frame of the financial and economic crisis. The jigsaw pieces – the problem and solution – are not aligned (see the motivation sequence)

Saying that that the world faces climate change on a scale which may makes the consequences of the financial crisis seem puny, or that deforestation costs the world more than the banking crisis 3 and government advisers saying that we ought to be cutting CO2 emissions 80% by 2050 4 – to mention but a few, merely makes any messenger sound as if they have a different and irrelevant agenda.

Saying that we need to invest in climate-solving technologies and programmes ‘anyway’ as an answer to “we can’t afford it” is effectively to advocate a distress-purchase: something you must buy even though you don’t want to. That’s not very attractive to Prospectors, who are almost certainly those most traumatized by the collapse of the success-ladder occasioned by the current crisis. Thus it will have little political traction.
When the banks were ‘collapsing’ and politicians used metaphors like the house is burning down, the ship has hit an iceberg, the patient has had a heart attack caused by over-eating, or the dominoes are tumbling, the frames demanded a rescue, a lifeboat, a lifeline, putting things back up again, or dousing the fire. It was no time to say “we’ve taken a wrong direction” – rescue not navigation lessons, resuscitation not health education was the order of the day.

So all those who hope that the immediate response can be turned into a moment of realization that we need to ‘think differently’, maybe think again. This is the most important reality check for campaign groups.

Creating Centres of Confidence

Put yourself in the shoes of politicians. Most must fervently hope for a progressive ‘return to normality’. Of course we may want that to be a different reality from ‘business-as-usual’ but the first steps out must be in ‘normal’ terms and ones which resonate with the public mood, which is above all scared, anxious, nervous, seeking reassurance. The trick is to find ways to show politicians and opinion formers what advertisers would call ‘evidences’ that lead them to take actions which, in turn, start us on a journey towards that different future.

This is different from calling for such a future, or, unless you can get “quality time” with sympathetic political strategists advising Ministers, from explaining such a strategy. Calls for ‘vision’ and saying that, for example, we “ought to be investing more in renewable energy” or “we need to decarbonize our economy”, imply that they are (in the case of ‘vision’) for the future, which means not-applicable-today, and, in the case of ‘ought’, that it isn’t happening now. The only evidence which will really count is what works now.

So welcome though the UNEP report will be, a more compelling ‘narrative’ could be started with evidence that ‘smart money’ is going into renewable energy now, and rather than from an environmental messenger, this needs to be sourced from the world of finance. The website www.greenchipstocks.com for example talks about the bull market in wind energy. The philosophy of that site, “a new way of life, a new generation of wealth” comes much closer to the tune that we need politicians to take up. As that site details, there are supply chain problems in meeting demand for building wind farms: that’s a problem which politicians could show leadership on. That’s a campaign agenda for these times.

Evidence from market analysts showing the profitability of wind suppliers, is one useful element in a package of evidence. Another is the car market. Although sales are down, sales of the Smart Car and the Toyota Prius for instance are up 5.

Campaigners only need a handful of such evidences to start a conversation between media, politicians and the public which is optimistic, positive and about opportunity not sacrifice, forward movement not retrenchment.

Governments could also take a number of actions in a sector such as renewables (or small or electric car production and transport-energy infrastructure) to give it greater prospects for growth and hence attract further investment. For example:

  • They could create a larger market with direct public expenditure, bringing down unit costs, for instance by subsidising installation of solar thermal or pv on homes
  • They could create wealth at a stroke by relaxing consent conditions on renewables eg wind (equivalent in resource economics terms to discovering oil or declaring they own the airwaves for licensing)
  • They could create a tax holiday for renewables (eg no tax worldwide for ten years)
  • They could create stability and predictability by committing to long term programmes
  • They could invest in (or mandate) training for associated service industries

Outside renewable energy environmental jobs are being created in waste-to-energy schemes (eg biogas) and many other sectors. There is no reason however why the same approach can’t also be applied to non-environmental issues. I’m not an expert but it might even apply to such ‘unexpected’ areas as international drug trafficking and terrorism. It has been suggested for example that Afghanistan’s poppy crop could be diverted into meeting the world shortage of morphine (and that the UK is experimenting with licensed poppy production for codeine 6). Could this be used to generate a more positive form of economic growth in pharmaceuticals? Less imaginatively, public procurement rules could be used to stimulate growth in a wide range of markets.

Communications Rules

One of the first tasks is to secure the right language. ‘Green Chip Investments’ is good, as is the Green Collar Economy – another American invention 7 At the very least this makes it possible to have a sound bite exchange in which the existence of such investment opportunities is naturally plausible.

But words are less powerful than stories and pictures. The iconic images of the crisis are of bankers faces starting aghast at stock market screens, and the Wall Street ex-employees existing their offices with possessions in a cardboard storage box. Last week The Times of London had a front page picture of an ‘investor’ wheeling a private wall-safe out of the front door of a shop, ostensibly on his way home to stash away his cash, having lost confidence in stocks and shares. An image quite likely to precipitate a further squirreling away of funds.

Any strategy to create a centre of confidence in renewables means catalysing events which create images that say “this is profitable” or “this is where the smart money is going”. That might involve symbols of success, and people, institutions or processes associated with being clever with cash.

Read the newsletter

Natalie's picture

Natalie

Third Sector Foresight

Is the credit crunch having an effect on your organisation? If so, tell us how.

Kathryn's picture

Kathryn

Third Sector Foresight

Economic concerns are slipping into everything these days. At a marketing conference I went on recently, the credit crunch was one of the first things talked about in a session on how charities can get themselves noticed. Not the most obvious linkup? For me, it underlined how vital it is to be aware of changes in the external environment such as economic shifts and to think through their implications for your organisation. I’m not sure I would have immediately considered the recession when thinking how to ‘get my organisation noticed’. If you’re not aware of the potential implications, how can you make sure your organisation comes out on top?
The first question in this driver is about assessing how you communicate and whether this needs to be perhaps changed or evolved to respond to the external changes. At the conference this was definitely seen as important by the delegates. Sarah raises an interesting point above about language changing. Speakers emphasised that campaigns don’t have to be wildly expensive, and the importance of thinking of long-term benefits; Patrick Cox has a wealth of examples of how his charity ‘male cancer awareness’ gets what it wants and needs with a ‘I’ll scratch your back if you’ll scratch mine’philosopy. I think this is a fascinating way that charities could respond to possible lower donation levels and tighter purse strings. Have a look at our driver on collaborative working for other implications and ideas on this approach.
Another issue that was floated around the fringes of the day, but which would be a much more central concern for charities generally was trust investments. They’re likely to be feeling the pinch in the marketplace and may respond by reducing what they have to offer or being even tighter in their requirements for funding .We highlight in our credit crunch driver thinking about diversifying your funding. Others are doing it, so make sure you are too!

Another interesting newsletter from campaignstrategy.org – and relevant to the current economic climate – talks about why political communicators, governments and campaign groups need tax and why and how we can re-frame the issue of tax.

“We…need a new and more positive way to talk about tax”, says Chris Rose of campaignstrategy.org, arguing that “…instead of just advocating what governments should do in terms of delivery objectives…NGO campaigners should utilise their political advocacy networks to help reframe the tax that is needed to create the wherewithal for government spending.”

What do you think and how might this affect your organisation?
Read the newsletter

Joh's picture

Joh

I think the real problem is down to in a seemingly overwhelming amount of places the ratio of wages to living costs. Especially in the area I grew up in and still live, the facts are that at least half of any prospective young person's will have to pay fairly high rent

I personally pay 110 Pounds a MONTH for Council Tax on a Small 1 Bed roomed Basement Flat who I rent off the landlord who lives above. Seems slightly Ironic that despite not earning 'Bad' money I simply cannot afford to put any money into savings and try for a first time buyer mortgage as simply I cannot afford to save any money.

More emphasis needs to be put on wages being higher so consumers do not have to rely on 'Nightmares' such as Credit Cards etc...

Join the discussion!

How will this affect your organisation? Have you considered it during your strategic planning? Can you share any interesting relevant links?

  • Lock