Banking ten years on

I was lucky enough to be a student during the banking crisis which meant I had time to read about it, research it and indeed to write about it.

I remember my anger at reckless and greedy bankers. I remember too the calm reflection that pointed the finger at me, at us. Bankers may have been reckless and greedy, but we, as members of pension schemes, wanted our pensions. If we had savings, we wanted a return.

The reality though was that high returns were a thing of the past. Chinese surpluses had provided all the cash the western world needed and interest rates could be rock bottom. It didn't matter.

We have now lived through ten years of rock bottom interest rates. From time to time amazing investments appear, only to disappear. Ironically for British investors Brexit provided a shot in the arm: a weaker pound meant that the non sterling earnings of global British companies were worth more overnight. Returns have been good and will remain so, unless we decide to invest in the UK economy which, what any one says, is suffering.

As a nation we can no longer pay our way. Look at the evidence:
The NHS needs billions more just to stand still.
University lecturers want decent pensions; actually everybody does. The reality is that the investment returns simply aren't there to provide them.
We are desperately short of housing, yet houses have never been more valuable.
Government outsourcing was meant to be a panacea. Now outsourcing companies are losing money and going bust.
High Street names failing to survive

Labour wants to take over banking so that banks lend to businesses rather than providing mortgages on over priced residential property or providing ever increasing credit card debt. This is laudable but it ignores what banks have become. They are global. They make a good slice of their money from trading currency and securities and this profit provides much needed tax revenue. There is no longer the bank manager in his sober grey suit. The world has moved on.

Any government seeking to address the economic issues facing this country needs to take the country as it is, not as it was in the 1950s. It needs to recognise that it can only effect change if it works with like minded governments of like minded nations. It can do nothing alone.

The scene of the 'march of shock' following the referendum result.

Ian Jack's article is a helpful reference 

The Blame Game

It seems that there is nothing for which Mrs May is not responsible. This is profoundly dangerous scape-goating and risks hiding the real issues.

Taking a very broad brush, the tragedy in Kensington, the Brexit vote and the state of the NHS all have in common the results of austerity. Buildings seem to have been maintained on the cheap and millions have seen their living standards eroded and it seems that there is simply not enough money to pay nurses properly or provide the health service we need. There has grown up in government a mind set that says all that matters is not spending money. It is a fear that if ministers do so they will be outed for sacrificing a sacred cow.

We don’t have enough money.

Why?

The immediate reason was the need for government to pay out many millions to save the banks which were on the point of going bust in the financial crisis of 2008. Banks going bust mean countless millions losing savings. It mattered.

Having saved the banks, the Labour government set about trying to balance the books. Millions had been borrowed and, if only to pay the interest, millions had to be found. There is a choice: borrow more, raise taxes or reduce public expenditure. Borrowings already looked terrifying, raising taxes risked impeding enterprise, or upsetting core supporters, and so public expenditure was chosen. The Coalition and then the Tory government continued on the same path.

The result is the denuded public services we now face and ministers closing their ears and eyes to the evidence of experts on the safety of tower blocks, for example.

Who was to blame?

Blame must focus on the banking crisis. Unpicking the strands, we had a situation where financial institutions were struggling to keep the interest rates paid on people savings at the levels they had become used to. World interest rates were falling, largely as a result of monies flowing out from China. The backroom boys at the banks set to work to devise products that would offer high interest rates to the people and pension funds hungry for them, that is you and me. One way of doing this was to lend money at high interest rates to people probably unable to borrow otherwise – high risk lending. These loans were bundled together in such a complex way that, when they were offered as an investment, the inherent risk was hidden. These were the sub-prime mortgages. First in the USA and then at Northern Rock amongst others people began to see that ‘the emperor had no clothes’, that millions of pounds of investments were worthless. Banks had invested heavily in them and so they faced disaster. The government stepped in, borrowing massively to do so.

Who was to blame? Was it pensioners demanding high interest rates, pension schemes struggling to meet their obligations to retired workers, evil bankers who without question made a fortune in the process? A bit of each. What is certain is that it was not the NHS, it was not occupiers of high rise flats and it was not millions of people whose jobs had disappeared over the decades with technological advances and third world countries entering the market. It wasn’t the EU.

Governments, including the EU, should have applied tighter regulation and still must. De-regulation goes back to the time of Mrs Thatcher but it continued under governments of all colours since.

What do we do?

We can’t go on with austerity. We have to have and pay for proper public services as Polly Toynbee argues in her book, Dismembered. So we have no alternative than to raise taxes, from everyone not just the rich, but the rich should pay proportionately more. The LibDems were wrong suggesting a penny in the pound from everyone; but Labour were also wrong in saying the rich must pay. We are all in this together, but those best able should shoulder the greater part of the burden, not by threats but by seeing their role in a cohesive society.

Probably the major part of the deficit arising from bailing out the banks should be left and no attempt made to repay it. Adair Turner, in his book Between Debt and  the Devil, suggests this. Investment financed by new borrowing should now be made in infrastructure and in education and training to encourage enterprise which is the key to a strong economy.

We need to look very carefully at the wisdom of an economy based on individual borrowing to finance consumer spending.

We must remain in the EU for access to their markets, for the immigration we desperately need and to work with other countries to face the challenges together.

We have to accept that we have been living beyond our means and so can’t have new cars on finance every few years. We have to share out the national cake more evenly: another point that Turner makes. This will benefit the economy as a whole since the current polarisation of wealth means that millions lie unproductive in property.

It is not only Mrs May, but equally she is not the leader we need to get us out of this complex mess.

Between Debt and the Devil - Adair Turner

Money, Credit and Fixing Global Finance

Don't be put off - this really matters.

Adair Turner was appointed Chairman of the Financial Services Authority following the 2008 crash. He authored a report on the reasons for it and spent the next four years engaging with finance leaders seeking ways to avoid the same problems happening again. He knows his stuff.

His recent book, Between Debt and the Devil, is chilling. I read it in between working with refugees on Lesvos and it is all connected.

He sees a healthy economy as a prerequisite to successful life. It is the lack of this, and the tyranny of oppressive regimes that is sending millions seeking refuge elsewhere.

Inequality is highlighted as a major reason for the problems we face. In the last thirty years the rich have got so much richer and the poor so much poorer; many middle earning jobs have disappeared. Rich people are less likely to buy goods and services, which fuel an economy, and more likely to invest in property which benefits only them and the person who sold it to them. A better distribution of income enables more people to consume goods and services and so make the economy healthy and likely to grow.

Turner's main concern though is the level of debt, both personal and governmental, in the world. It is at an all time high. The UK accumulated massive debt during WWII for reasons we can all understand. This borrowing was not effectively repaid until 1970 and it was only possible to repay it because the UK economy grew strongly with the benefit if technical innovation. The debt now is even higher mainly because of the recession caused by the credit crunch which made people reluctant to spend which reduced government's revenues and so made them borrow more.

He has some revolutionary suggestions for reducing the debt burden and for avoiding it going forward. I will leave it to the Guardian to explain more and to give more detail, but in essence he is suggesting that governments should simply print more money - a one off exercise in effect to wipe the slate clean, or at least to reduce the debt to manageable levels. He is clear that it must not be ongoing as it was in pre war German and which lead to hyper inflation.

I shall follow the debate with huge interest. It really does matter.

The Crunch by Alex Brummer

The interested reader of the financial pages will almost certainly have some idea of the causes of the woes that have hit the world economy. We all knew that borrowing had hit crazy levels; we all knew that house prices were defying gravity.

Words like toxic debt and sub-prime have been the stuff of bar room chat, but Alex Brummer has drawn the strands together and produced a coherent narrative. It is deeply depressing. It makes the calmest of men don the witch hunt uniform.

What is probably the worst of all, though, is that the cream of a generation, the very best brains, have been engaged in what is really the most enormous fraud. It is breathtaking stuff.