Do people realise how bad the present financial crisis is? Or how bad it can get? I doubt it. The general attitude seems to be that we have been through recessions before, with little long-lasting damage.
After a period of belt-tightening, recovery sets in, prosperous times come back and life goes on as before. After all, following the last two recessions - which is all that most people can remember - we actually emerged much healthier.
The first of these recessions came in the earliest Thatcher years. Crucially, though, it was one in which the long-term cures for our economic ills were obvious. The burden of the great, loss-making state industries had to be removed by privatisation. The trade unions had to be brought to heel.
With those problems tackled, recovery was on its way, and ‘Thatcherism’ became a global byword for radical economic reform.
The second of the recessions, in 1991-92, owed most of its origins in the government’s mad decision to join the European Exchange Rate Mechanism, or ERM. Interest rates then galloped up to 14 per cent in attempts to stay in that straitjacket.
The path to recovery was obvious: end ERM membership and regain proper control of our own interest rates. Indeed, by the time Labour took over in 1997, the British economy, previously reshaped by the Thatcher reforms, was in better condition than at any time in memory.
If a redeeming feature of these two recessions was that the cures were obvious, this cannot possibly be said of today’s crisis.
We have a monumental banking crisis for which even the shrewdest economists are unable to offer a straightforward answer. The solutions so far have amounted to a mishmash of day-by-day patchup jobs.
This recession will be deeper than others we have experienced, and is likely to last longer. The political and social implications are enormous. Disorder, violence, riot?
Such possibilities cannot be dismissed. Numerous countries may be affected by rising unemployment and collapsing businesses, with no government able to offer a straightforward or convincing solution.
Siren voices on the Left and the Right are sure to be heard offering extreme solutions. There will be demands for curbs on trade which undercuts national workforces.
We have already heard claims that today’s crisis marks the end of capitalism. Yet that cannot be so.
Capitalism is ingrained in human nature. We trade, we buy and sell. We borrow, we lend, we save.
The entrepreneurial spirit is natural. What we grandly label capitalism will always occur - unless the state intervenes to impede it.
There are many claims that the present crisis is due to ‘capitalism’ in general, and bankers in particular. The latter deserve plenty of blame for their greed and irresponsibility; but here an interesting point arises about the origins of the present crisis - and I do not mean just Prime Minister Brown’s spending spree.
Foolish as our own excesses have been in mortgages (allowed by the Government and its regulators), the real problem has been in the U. S., where two semi-official bodies, known colloquially as Fannie Mae and Freddie Mac, provide loans for house buyers.
They were set up to attract large-scale capital into the mortgage business. They got a federal subsidy. At the same time, they packaged up mortgages and sold them as securities and made profits - apparently for their shareholders, though more certainly for their managers. Much creative accounting was involved.
Since these were bodies established by government charter, they sounded safe to investors buying their securities.
But the catch was that both these bodies were constantly pressed in Congress, and later by President Clinton himself, to perform a good socialist duty and lend on easy terms to the poor - those that banks regarded as ‘bad risks’.
Both lending bodies responded with enthusiasm.
By the middle of this year, the two bodies jointly accounted for nearly half the U.S. mortgage market - much of it ‘sub-prime’ loans which had no chance of being repaid when, as was bound to happen, the property bubble burst.
Spectacular losses were reported in the middle of the year and the stock markets started to plunge. In early September, the U.S. government took over both Fannie Mae and Freddie Mac.
The collapse in value of the huge wave of securities which had by then been sold to financial institutions all round the world - perhaps your pension fund had some - was the catalyst for the global credit crisis. Banks were left fearing to deal with other banks and their securities, in case they were dealing in ‘toxic’ debt.
The key question is: was this a failure of capitalism or a failure of socialism?
This case is a model for what goes wrong when you combine greed by bankers with almost wilful incompetence by politicians and regulators.
Fears about securities of every sort - including those of the insurers who rashly offered banks ‘protection’ premiums against bad debts - have rippled through the plunging stock markets.
Unlike our last two recessions, the clouds in this storm have no silver linings. But if I spot one, I will let you know.
…Malls from Michigan to Georgia are entering foreclosure, commercial victims of the same events poisoning the housing market.
Entries (RSS)