Which Comes First? Spending or Lending?

There was a time when the amount you spent was very proportional to the amount you earned. Under the Labour term of office we lost that connection.

Much of the spending of the last 10 years and economic growth that ensued was from the amount of equity we withdrew from our mortgages which was fuelled by a big rise in house values and the corresponding availability in credit. It became a circle of plenty. And the more credit we got the less it had to do with our ability to service the debt but more to do with the value of our property.

Now things have changed.

'Bank Lending Will Not Recover Soon'

So says John Varley, the Head of Barclays Bank. He believes consumers will find it hard to access credit for possibly the next two years which sort of dampens the hopes of Gordon Brown who wants us to mobilise and spend as we did just over a year ago in order to kick start the rapidly receding economy and that depends on how much banks will lend us.

Varley further points out that while credit is available it's shrinking and he did not foresee banks increasing lending again until 2010 at the earliest. This, he believes, will spark a 'public relations crisis'. In his job he must work so hard that he is denied access to world information as I might suggest there is just a little public mouth-frothing going on already about how banks have behaved over the last few years, but perhaps he means it's going to get a whole lot worse.

What Varley is certainly right about is his assessment that there should be a reduction in the overall quantity of debt in the economy. For that to happen, lending will have to decrease - it's a mathematical thing.

Bloated Asset Values Squealing Like a Deflating Balloon

In his interview with the BBC, Varley said, "The amount of credit available was shrinking, it absolutely is, and that is a painful process, it's a process through which the world absolutely has to go. As soon as asset prices stabilise, then we will see the financial economy recover. And when will that occur? That will occur some time over the course of the next 18 months."

We all like to play with the farting noises of a deflating balloon on Christmas Day, or at least I do. This year it can be a handy scientific demonstration of how asset values are deflating in your Christmas Lecture on spending in 2009 to the family, perhaps just ahead of the Queen's Speech.

Clearly Varley has linked our ability to spend and his ability to lend with the decreasing value of our property assets - the two things are now inextricably linked. The old days of you spent what you earned are out of the window - in the last 10 years we spent what our properties increased by and now we have that spending as debt around our necks along with some £1 trillion of unsecured credit card loans.

We Are So Sorry

Varley continued by offering that banks should take some share of the responsibility for all this and that banks had a lot to do to regain confidence. It's really nice as lots of families face a nervous Christmas this year wondering whether in 2009 the bread winners will have jobs and so will have to go on that nice Mr. Brown's schemes to defer their interest payments on their mortgages that at least someone has held his hand up and say, 'Yup, all this financial mayhem around you was partly caused by me.'

Now, before we start throwing rotten tomatoes at Varley and his fellow bankers, they would all like to point out that it takes two to tango and that we share a portion of the blame too. They believe the fact we were offered so much cheap lending against assets that had to go pop some time was partly our fault for accepting it - the more we accepted it, the more they offered it. And yes, we should accept our guilt.

Just A Second

Business naturally relies on suckers for its products. From classy products to pyramid scams - we love a good purchase. And if we are given access to tons of freely available cash because business tells us we have a new source of wealth, i.e. our homes, then we should not heed the warnings of the gremlins on our shoulders and not take the nice sweeties on offer from the nice gentlemen in bowler hats. We should be austere, firm and refrain.

Sadly the last 10 years didn't a work like that. Consumers were offered credit and we spent it. Everyone thought it was a business model that could not fail.

The Boys in Suits

When thinking about who else we can neatly blame all this on we should not turn to Superman Brown. After all he has been absolutely correct in every prediction that we had a stable economy for the past 10 years due to prudent fiscal policy and because of that this 'Global Economic Downturn' that happened to suck Britain in was at first, 'Not going to affect us chickens' (sad use of the Mad Cow joke) and 'Won't affect so bad as we have such a good economy'. Anyway it all, started in the US and even they agree with that.

Consequently, Honest Gordon's stock has ridden so well that mortgage companies are basing new trackers on his growth index instead of the FTSE.

Hello - is there anyone at home? Why do we believe the tripe he says and why are we giving him so much credence after he has allowed this whole fiasco to develop? The third lot to blame in all this once we have stopped pelting bankers and beating ourselves up is to blame a Government that rode a bandwagon of growth that they knew could not be sustained. And during that time they allowed Britain to float along, allow education to drift, the NHS to sponge up more money for less return, allow kids to start killing each other and stoked up the hornet's nest of international terror as we fight at least one war that never should have started and two we can't win.

Suddenly we are getting hard on people on benefits when there are over 2 million on long term disability allowance and have been for ages. Now we face 3 million unemployed, the rules will get tougher. So as we get kicked in the nether regions and lose our jobs, the Government plans to apply heavy handed new rules which will apply to everyone the same whether you have started claiming or done so for 10 years - akin to peeing on us as we are doubled up in pain.

The Reality

Superman Brown may have a rude awakening soon. As Mervyn King worries about whether the banking bail out was ever going to be enough and more cash is required, as old businesses like Woolies go belly up, the car industry collapses like Bambi on ice, Brown would like us to spend more. Well average household earnings decreased over the last 10 years and now asset values and the equity we withdrew have also collapsed. So 2.5% off VAT and a few scraps of incentives just won't cut it.

We boomed, we bust. Deal with it.

Where Next for eBay?

This year's annual eBay gathering eBay Live was not the usual happy-go lucky affair celebrating the rise of the individual, small time seller. The expected 10,000 attendees was rumoured to be much reduced as the auction pioneer experienced the effects of boycotts from the small sellers it built its business on.

One of the more controversial areas in the firing line is the new eBay seller transaction ratings. In a move to stop retaliatory negative feedback, eBay has introduced a new system where sellers can only leave positive feedback ratings. Lorrie Norrington, President of eBay Marketplaces said, 'Building trust is a priority for us and it should be for you too. But some of our users have developed bad habits.' It was part of a talk that received much booing.

There was much talk of small sellers quitting and moving to rivals, many talked of lobbying Google to become a credible rival. Meanwhile eBay is changing. CEO, John Donahoe, stated 'The Company wants to operate less like a car-boot sale and more like a shopping mall'. Therein lies one of the issues.

The issue of trust in using eBay is a major problem as it has long been dogged with an image of dodgy dealers, scams and fraud. I have personally been on the end of an attempted scam when having bid on a car and failed to win, I was offered a 'second chance' at my derisory offer price. Being the trusting sort and tempted by an amazing bargain I was completely sucked in by the official-looking eBay email and so ignored the fine detail that the transaction was to take place outside of eBay. I was given a phone number, email address and details to transfer the deposit of £2,000 by Western Union. Looking back, I was really dumb, but I can understand how people get sucked in by this official-looking scam. Luckily, Western Union came to the rescue and put me straight onto a special security department who informed me in the London area alone, eBay scams were running at the level of around £1.6m per week. Even that could buy enough petrol, gas and electricity for an average British family for a few weeks. Meanwhile, eBay had an email address I could send the attempted fraud to from which I got an automatic reply. I had supplied the email address and phone number and to my knowledge none of it was followed up.

How is the eBay Model Changing?

In the quest to find its nirvana, eBay is moving its model evermore away from its auction roots - the idea a seller could put a reserve on an item and over a short period buyers could bid against each other and buy at the highest bid. In the last quarter of 2007, fixed-price sales accounted for 42% of the total revenue for eBay which is now a staggering $60bn last year from 233m customers. However, despite a 22%leap in profits thanks to a superb performance by its Paypal subsidiary, the eBay core business was pretty flat and listings rose only 4%. Its business is vastly underperforming the ecommerce market where Amazon is growing at 32%.

Part of the cause in underperformance of its core business is that small sellers are not the only ones affected. Larger sellers like Emovieposter.com who have sold over $13m on eBay have estimated to continue their business under new fee changes would increase selling costs by 40%. The claim is that large discounts for the massive sellers will be offered by eBay and there will be changes in its search processes to favour them with good feedback.

eBay seems to be looking to drive toward the Amazon model. Its major issue is that Amazon does not have the weight of all those small sellers to carry and it has virtually zero fraud. What happened to the integration of the Skype acquisition - well there was no mention of that particular 'weight' around the corporation's neck.

Is This The End of The Housewife Millionaires?

So does this signal that eBay is about to ditch the generation of small time business folk who from their homes bought and sold items and made a very healthy living out of it? The stay at home entrepreneurs who used eBay initially to get a supplementary income and found that their reach was way beyond the boundaries of their home and all across the US and beyond. Will this be the end of the era when anyone could pop onto the web, participate in a short auction and find a secondhand barbecue for the Summer months at a bargain price?

Inevitably businesses have to change to maintain their momentum and deliver consistent growth and returns for shareholders but I cannot help feeling eBay has rather cynically ditched the very customers who fuelled the staggering growth of its business. I also think that it has a long, long way to go to match the simplicity, logistical expertise and image that an Amazon has in terms of trusted buying. The difference in the model is that Amazon is a true internet retailer - in charge of its own logistics, product buying, selling and payments; an end-to-end online store. eBay is a platform for traders to sell and buyers to buy, only the payment side is owned by eBay the rest is delivered by the traders and buyers amongst themselves. It still means that eBay is very dependent on the trustworthiness of those who use its platform and their logistical expertise and honesty which means the eBay brand will forever be the sum of its traders.

eBay might have done well to contemplate that as it moved toward the goal of an online shopping mall, because once you have ditched the small market traders there is no turning back should eBay fail to achieve its goals. I think it's a massive gamble.