It’s hard to regain savers’ trust

One of the things that makes this credit crunch different from any that have gone before is that the indebtedness is concentrated in the personal rather than the corporate sector.

This almost by definition makes the adjustment slow and painful. There are things companies can do to rebuild their balance sheets in a relatively short time — selling assets, trimming product lines, running the business for cash and so on. The options open to the individual to rebuild a personal balance sheet are fewer and far less dramatic.

It is virtually impossible significantly to increase one's income in the short term, even by taking an extra job. It is similarly difficult to make dramatic cuts in spending, given that big outgoings such as mortgages and travel to work have to be met. Selling assets on eBay or in a car boot sale is unlikely to make much difference.

Indeed, in the past the only quick ways for an individual to escape from a mountain of debt have come from default or inflation — neither of which is on the Chancellor's recommended list. This, if nothing else, suggests a protracted downturn, albeit not necessarily a severe one.

However, recent events are hardly likely to encourage people to save. It is too early to know what long-term impacts will flow from the current market upheaval and collapse of so many banks, but it is certainly not going to engender trust in the financial system.

Indeed, the complaint in this country from insurance companies in the wake of the problems with pension and mortgage mis-selling was that the public did not trust them. Though that is not far short of 10 years ago, the trust has not really returned.

The upheavals of recent weeks go much further than this, however, and call into question whether individuals should be buying any equity-linked products at all. The way some institutions have evidently behaved in recent years will only fuel the suspicion that the well-intentioned amateur saver exists purely as fodder for the professionals.

Buying equities is always seen to be risky because of the possibility of adverse economic events. But who can blame the individual if he or she feels this threat pales into insignificance when set against what the professionals are likely to do to your savings?

It is the behaviour of a relatively small part of the financial world that has caused the current mayhem, but its effects will show through in a loss of trust right across the financial sector.

Commerce needs equity investors, the City needs equity investors, and the country needs people to invest in equities to provide for their own old age, given the gradual disappearance of employer-based pensions. We will all be the poorer if one outcome of the current crisis is to drive away such people.

Why funds love short-selling

The Financial Services Authority was surely right to ban short-selling last week in its efforts to restore some semblance of stability to the stock market.

But in positioning hedge funds as the villain, it probably shot the wrong fox.

To understand this, one needs to understand that behind every short-seller there is some person or organisation that owns the shares and is willing to lend them out so they can be sold. This is an essential part of the process because it allows the hedge fund doing the short sale to deliver the stock to the buyer.

These shares come for the most part from the big investing institutions.

To many, it is one of life's great mysteries why any institution would lend out shares to be used in a process the sole purpose of which is to reduce the value of the lent shares. What sane person lends out an asset so it can be degraded?

But such people do not understand the City. The point is that the shares belong to the beneficial owners of the funds — the end investor, in the form of a pension fund member or holder of a life assurance policy or unit trust.

They as owners suffer the economic loss when the shares plunge. But the fee for lending the stock goes to the fund management company that controls the assets. It is an executive in the fund management company who decides whether or not stock will be lent.

There is an obvious massive conflict of interest here that everyone ignores. The lending fee is too small to make a material difference to the value of the fund, so shareholders would not do it for themselves.

But it gives a meaty boost to the profits of the fund management company — so they can't get enough of it.