If you are reading this article because you think I have come up with the ultimate solution to our current global financial crisis, then I am really sorry to disappoint you. I have no idea, only time will tell us the right solution. In this article I am going to explore the current proposals and some of the ideas that have been put about and just cast my humble opinion upon them, so I hope you find it useful nonetheless.

If you did not already know, though I cant think how you could not possibly be aware, the world is in the grips of a global financial crisis of proportions that we have never seen before. Now I can hear some of you saying what about the great crash of 1929? Well yes I am not trying to trivialise that, it was indeed a large issue at the time, but today money is just, well, greater. The sums we are dealing with today can be measured in the hundreds of billions in some cases trillions.

So what is it all about and how did it happen? It is basically about liquidity. By liquidity I mean money in the markets. Money to the economy is like oil to an engine, no money, and the engine will seize and seize it has. Basically lenders globally have been lending money to customers, now I am sure you will have heard the saying a business either grows or it dies well in order for lenders to grow they have to continually lend more and more money. So what happens when all the good clients out there have all the money they want? Well then the lenders lower their standards and then they can lend to more people. The problem is once one lender does this they all have to start or be left behind by the others. Competition dictates that all the lenders then have to start lowering their standards in order to stay in the race.

So how has this caused the problem? The problem with lowering your standards especially to borrowers is you expose yourself as a lender to more risk. There is a reason why some customers can't or shouldn't get credit; it is because they might not pay it back. Now normally this is an acceptable risk for lenders to have some borrowers who may not pay their debt back. The problem is over the last decade lenders have lent way too much money to these people and as such they are unable to recover that money back from them.

And so begins the vicious circle. Due to getting their fingers burnt, the lenders are now less willing to part with their money and loans are harder to obtain. With regards to banks and building societies, the money that is at their disposal comes from deposits made by the public for the purpose of generating some interest. Because of the fact that these institutions are now less willing to agree loans due to bed debtors, their depositors start losing faith in the institutions ability to safeguard their money and so they start to withdraw and close their accounts. So now the bank finds itself in the situation where it has even less money to loan out to what they perceive as good debtors. This is recognised by the stock market and in turn the banks stocks start being sold off and the stock value spirals down and before you know it the bottom has dropped out.

So what solutions are being proposed to fix this mess?

One solution derived by countries such as the U.K, the USA, and Ireland was to guarantee the public's deposits with tax payer's money. This had the effect of settling the public's nerve and building confidence in the banking system once again. Now there may have been no real need for a lack of confidence but once the jitters set in the financial welfare of the individual can lead to so much panic that the whole system collapses .But now they were now more willing to leave their money in their accounts and the institutions assets remained unaffected.

Another method the UK and the US have adopted is to propose enormous bailout plans, which would be impossible to accurately explain within the confines of this article, but they are essentially using the tax payer's money to purchase chunks of these institutions. But will this be a success? Ultimately, at present there is no clear cut answer to this question. But if the liquidity in the markets doesn't start to flow then they could be on a hiding to nowhere, because without some movement the world will be faced with a recession far greater than could have been predicted.

One thing I can say is we all need to radically change the way the banking system works. I don't dispute there is a lot of regulation, hey as an independent financial advisor I am subject to it on a daily basis. My concern is I don't know whether the large financial institutions are actually regulated in the right way. I don't think anyone has ever turned round to a lender and stipulated what their minimum lending requirements should be, maybe because this would be considered restrictive practice, but lets think for a second if lenders weren't allowed to lend to such bad risk clients we probably would not have seen the sort of economical growth we have seen over the last ten years and we definitely would not have seen the house price rises we have seen over that same period but the million dollar question is .... Would we be in this mess now? I honestly don't think so!