We are used to the generalised media and campaign group identification of the ´banks´and government borrowing levels as the ´cause´of the credit crunch and crash, but isn´t it about time that the pointing became much more specific, and we the public make the media do some naming and shaming of the real causes and people.
The seems to be a clear linkage from the US mortgage industry (not just S and L banks but Freddie Mac and Fannie Mae and several government departments) pushing the idea that everyone should own a home, even if they may be unable to repay any loans or even may not have a sound job; to the creation of mortgage backed securitisation (an investment banking idea, which when it took off exaggerated the value of the real estate backing the loans.
Was this actually inventing value that had no real existence ? or just another facet of the investment banking drive for ever greater profits, whatever the social cost. I think this drive has its roots in the willingness of investment banking customers, in the size of M and A consultant fees, IPOs and lawyers fees, plus audit work.
Why do companies willingly pay such huge fees and who makes the corporate decisions to agree to pay instead of fighting tooth and nail.
The other big ´culprit´ is the ´Bond market´. To the media, a nameless crowd of private (and fund based) investors that push continually for a better risk/reward balance for their money, frequently using the devices of short selling and insurance to cover/mitigate their losses. These are organisations and people that are gambling rather than investing, and they are helped along by the rating agencies, with some dubious results.
I would hope to see some better analytical reporting on all these things, instead of inflammatory language that serves only to create labels used by the anti-everything campaigns.
I know we, John Q public, were happy enough in general to allow the value boost to our property to support increasing indebtedness and spend on credit cards until suddenly it all went pop.
I would like to think that, if we can increase the public awareness of the innate causes of the problem and have some more thoughtful reportage, there may be more empathy for the plight of the SMEs (Small…
I'm surprised that no-one else has responded to this article (ee - you know a thing or two about bonds!):
The other big ´culprit´ is the ´Bond market´. To the media, a nameless crowd of private (and fund based) investors that push continually for a better risk/reward balance for their money, frequently using the devices of short selling and insurance to cover/mitigate their losses. These are organisations and people that are gambling rather than investing, and they are helped along by the rating agencies, with some dubious results.
...but who are the biggest holders of bonds? Not speculating hedge funds who operate at the periphery, but organisations like pension funds, banks, governments and insurance companies. In other words anyone looking for a relatively safe home for money, offering a reasonable return. It is mainly those that manage our savings.
Yes, the ratings agencies could be considered culpable, and so could those who recklessly packaged up a bunch of sows ears (i.e. loans made to the uncreditworthy on daft terms) and with some fatally flawed mathematical reasoning claimed that they'd turned them into a silk purse. So could those pushing out credit to all and sundry (remember the bombardment of spam offering low cost loans with no credit checks). And so could those accepting loans they knew they could never pay back (except, perhaps, through a Ponzi scheme of ever increasing house prices). Within the "bond market" herd mentality played a crucial part: very few supposedly well-informed investors saw the lunacy behind the sliced and diced CDOs. This included professional council treasurers, who were paid to know better than to invest council reserves (ratepayers' money) in dodgy Icelandic Banks. Governments globally (both of left-ish (UK) and right (US)) could also be considered culpable by not regulating banks (and other lending organisations) adequately and allowing loans to be made recklessly and then swiftly moved off balance sheet to a "greater fool".
The key point is that much of this is easy to see with hindsight. Credit is due to the small number of Cassandras who foresaw the danger of money that was much too easy. When the mood is so euphoric, and everything appears to be going swimmingly, it is very hard to "put the brakes on". What government wants ot be accused of "over-regulating" and deliberately slowing economic growth?
The truth is that no one individual or "cadre" is solely to blame. Many parties were at fault - with the benefit of hindsight. But the most important factor was basic human psychology and herd mentality.
The deficit a consequence of the above. Firstly, governments had to unexpectedly expend considerable treasure rescuing financial institutions, to avoid a systemic collapse*. Secondly, the "reset" in economic output and hence government revenues, without being able to quickly "reset" government spending (except by damaging GDP through much higher unemployment levels hitting consumption) further adds to the deficit.
Even more importantly, have the lessons been learnt? That is a matter for debate. Personally , I am not sure that enough action has been taken to control systemic risk. However, what I do find encouraging are the many complaints that credit is too hard to obtain, for individuals and small businesses. That indicates to me, at least for now, loans are not being made recklessly - and I would hope that enough lessons have been learnt to prevent that happening again for many years, It may be that, as often happens, there has been an overreaction and lending terms have been tightened too far.
Perhaps the worry now is whether loans are being made to uncreditworthy countries rather than individuals or businesses. The consequences of that is what troubles me most, at present - and is not without historical precedent.
Mark
*Anyone that suggests this was unnecessary is either crazy or highly unimaginative, IMO. Firstly, can you imagine the consequences of a run on ALL the banks, not just Northern Rock? Secondly, perhaps you forget that global trade froze for a few months at the end of 2008, with ships at anchor piling up outside major ports because trust in credit had been lost? Without the rescues, trade would have remained frozen and we would now still be in the midst of a global depression similar to that of the 1930s. Restoring confidence in the financial system was absolutely crucial - and I do credit politicians with seeing this and avoid a repeat of the 1930s.
