Some years ago I was sitting in the accountancy module B212 ‘window dressing and off balance sheet techniques‘ during my Masters course when the lecturer at the time piped up that one of the biggest fears in was the fact that mortgages were lent long whilst money was saved or acquired from the market short. In principle short money can be called for very quickly whilst paying back a mortgage on demand is impossible. A interesting discussion took place as we considered the possibilities of savers suddenly loosing confidence and withdrawing funds to stuff under the mattress or inter-bank lending suddenly drying up. And the fact that as mortgagees we would be unable to pay our green loans on demand loans so all chaos could result. We also in passing have a quaint notion that the money in the bank is actually ours to call on on demand – look to how Cyprus handled their depositors!
Obviously I am drawn to this reminiscing from a course more than 20 years ago by the thought that we have actually looked into the abyss over the last few years in the banking crisis. If this loss of confidence had gone much further there is actually no way that any government could cover all of the required finance without long term fiscal consequences. When looking at any proposed bailout of 700billion in the US this was clear – the figures are simply too huge. So how did we get here when the risk was well known. We had all began to assume that the ongoing growth period from the mid nineties would go on forever – we believed for a short while the Brown and Bush nonsense that the boom and bust and the cyclic nature of economies was a thing of the past. Actually not many economists bought this line but there seemed to be over the last ten years a creeping complacency in the market and in the economy at large that growth would continue house prices would rise and all would continue as before. So we are just past the worst of it house prices are on the rise again and we are set for another round of wish and hope. I can’t wait for the first labour politician who tells us we can take the breaks of public spending.
One of the problems faced by HBOS for example was the breaking of the linkage between grannies saving, and loans being made to the newly forming families to buy their homes. Grannies tend to keep their money safe in a Bank for a rainy day – so save relatively long. More of the money that was being lent was being acquired on the wholesale market thus very short and when money becoming in short supply and loans were called in the whole circus came to an end. Coupled with this trend the window dressing of junk debt and reselling as triple A in other areas meant in some cases these inter-bank loans were unpinned by toxic and rubbish debt that could not in any case be collected. So a prediction of an accounting professor twenty years ago came all to true in a few turbulent weeks three years ago.
What is a little depressing about the saga is they who carried out these feats of financial engineering received the plaudits of their peers only a short while before the drop. The CEO of HBOS for example was hailed as a ‘genius’ only a year before the end. To some extend it was rather pleasing to see another rueful former CEO contemplating the handover of his company in a garage sale to one of his former rivals. A 300 year old company was sunk in that case during his short three years at the helm – a nice achievement not unique unfortunately if you look across the water.
There is an old saying that goes ‘when the going gets tough the politicians run for cover’ and politicians on both sides of the Atlantic squarely place the blame on the city or processes such as short trading and not themselves. Not minded to the fact that their policies and management of the economic context and their abject complacency has led us to where we are now. In the UK eye watering public sector borrowing to finance the client state, virtually no monetary policy, the encouragement of a reckless financial environment the surreal belief that would go on forever and the belief in the infallibility of their stewardship and lack of responsibilities are where some the explanation lies.
We even have the left in the UK claiming the debt is being caused by the current government and it was the nasty banks that let the country down. Partially true, I knew quite a few of these rather intellectually limited but supremely arrogant idiots, but the almost criminal management of the economy by the Labour government and the financing of the client welfare state was at the heart of the problem in the UK.
If we are talking about banning reckless bankers how about reckless Politicians anyone?