The Spectator Inquiry into the causes of the recession

Rob Atkins

I welcome this inquiry, but I am unhappy about the rigour of the questions. It is a politician's trick to posit false dichotomies : e.g "Was it a bling culture that needs to change, or just the inevitable consequence of excessively cheap money?"

An inquiry should ask open questions : e.g. "Why did personal debt ballon in Britain?"

I have my own views of the reasons (which put the present Prime Minister directly in the firing line) but these conclusions should come out of the Inquiry, not be part of the terms of reference.

James Burdett

This is an excellent idea. But if it is to be a comprehensive dig into this crisis surely it needs to also look at the broad mix of the economy rather than just the financial aspect? Surely some of the reason for why we are where we are is that our economy is tilted towards the financial services industry?

RMH

Perhaps a key issue is the lax lending of credit, which fueled excessive growth of firms and fed into excessive wages.

This started at the top (look at how CEs were earning 150k in 03 got double that in 5 years in 08) and all paid for on credit.

Low interest rates fueled more and more debt, and to mask any issues firms merged and then demerged where required, or simply bought an asset.

This means that change was constant and it was impossible for valuations to be assessed, or perhaps the big accounting firms were complicit in the building of the bubble.

The influx of overseas labour kept wages down at the bottom end, but at the top end short term pumping of profits means excessive rewards created a boom at the top, which dragged things along in the middle as the buy to let boom went crazy.

Look at the commercial property PLC market, one company is now at 3% of its value two years back, and all that has changed is the market conditions.

crownblog

In around 1999/2001 lenders started to lend more than the 2.5 joint income on mortgages.

As house prices kept on increasing due to this credit, lenders stopped requiring all applicants to prove their income and then marketed self-cert mortgages where no income proof is required. This allowed individuals to borrow many times their actual income to buy a property. The US were doing the same with their NINJA mortgages. The securitisation of these mortgages would not have been a problem if they had been sold to people who could prove their income and borrowed 2.5 joint income as was historically done.

The lenders are at fault for throwing away their rule books and over lending.

Gordon Brown is at fault for creating a regulator that was totally useless and full of ex bankers.

Lending will not start again until property comes down in value to allow the mortgage payment on a 95% repayment mortgage over 25 years to be less than the rent on a similar property.

I have been blogging about this since April 2008 and been on the house price crash forum since january 2007. It is not true that nobody saw this coming.

Ivan D

Okay, here's something to add your 'inquiry': where were the watchmen? Why did financial hacks let us down quite so comprehensively? Why was our brilliant, investigate, highly paid press so utterly ineffectual? Add that to your list, because some of us are happy to muse on it at length.

mart

Fraser, my 2p worth.

The paper value of our houses made us feel richer than we were.

Take a look at the graphs of house prices. My personal memory is, c. 2000 noticing that I was prevented from buying a 3-bed semi because prices were rising quickly and I, on a reasonable middle-class salary, could not reasonably afford one.

The location I'm talking about is within 10-20 miles of the South coast.

Reasonably meant, for me, within a 3.5 times salary multiplier mortgage on roughly 80 LTV. Within these parameters the price of a 3-bed semi was out of reach of a reasonable middle-class salary. Not just mine: anyone's.

I couldn't justify stretching my finances thinly for an asset that was inflated in price compared to a year ago (just to remind you this was my thinking in c. 2000).

The rest is history, as they say: house prices rocketed for (with hindsight) no good reason except that buyers could obtain the bigger loans needed, and of course they thought that prices would only go up from here.

So, whatever the mechanism might be for government to dampen this, they should have done so from c. 2000. IMHO.

As we have seen recently, the interest rate is only one lever of control that can be pushed. The more important one for banks today is confidence and leverage factors.

So my amateur observations lead me to say that the government (whether via proxy or directly) should watch property prices and take action to control demand within reasonable bounds. They should make use of the levers of interest rates and regulation of lenders' leverage ratios when the collateral is someone's house.

Lastly I would like it if you focussed on the explanations that were given for the house price inflation of the last decade, during the decade in which it happened. People without any economics background (including me) groped for reasons, and the only ones we heard were: family breakups meaning more households, people owning more second homes, and buy-to-let. The problem, on this analysis, was a simple one of supply and demand imbalance - not of money, but of the houses themselves. The government presumably shared this analysis because the only solution offered by them (IMHO) was to encourage the building of more houses. But where is that policy now? We now can see that house prices can indeed fall while at the same time the stock does not increase so much. It is not simply supply and demand.

So an analysis by yourselves of the explanations given at the time - whether by government or media commentators - would be most welcome.

That's my opinion and you're welcome to it - looking forward to the outcome of the wiki idea.

Fraser Nelson

Rob, great point - the final version will be open-ended - we'll do a second version of this later, then edit it down some more.

James, just so I get you right, are you proposing a line saying "Did the UK economy become over reliant on financial services?"

RMH, you raise great points too - could you distill them into potential lines for inquiry? ie, are suggesting "did overactive M&A activity disguise the extent of corporate leverage?" and "Were there flaws in the way company balance sheets were audited?"

Ray

I'm not an economist or a financier. However, insofar as my humble insights are of any worth, here's my checklist to reassert that - regardless of what bankers and Treasury officials are saying about having been unable to have foreseen the current crisis brewing back in 2003 - many ordinary people did foresee it coming.

1. House prices doubling in five years. Even counting the demand for housing generated by this Government's mass immigration policy, that state-of-affairs surely could not continue without one almight correction - especially once first-time buyers were effectively priced out of the market.

2. Banks offering 125% mortgages. A sure sign of lax money supply if ever there was.

3. Credit card companies mail-shotting my daughter - a student with little by way of regular income - every day begging her to open a credit account with them. I've noticed that since the crash, these sort of junk-mailshots have now almost completely dried up.

bill

As Rob Atkins says, I am unhappy about the rigour of the questions.

However, I shall answer them as briefly as possible. Here goes!

1a NY, 1b YY, 1c Y, 1d YY, 1e Y, incompetence, 1f false claim.

2a The treasury was politicised, and took orders from Downing Street.
2b Y, 2c Y

3a Y, 3b Y, 3c wrong-touch, 3d Y.

4a The TSC was and is fixed.
4b N
4c The right questions still haven't been asked.
5 Both

Tim Hedges

You have to start with Brown. He changed the regulation architecture, taking away Bank oversight from the Bank of England and giving it to people who didn't understand it. Again, Brown, pretending to give the Bank of England MPC independence, told it which measures to follow, even changing horses when the numbers were inconvenient. The MPC wasn't supposed to look at asset prices and so continued with cheap money.

The Banks are to blame in two areas: outsourcing the credit analysis function to ratings agencies (then threatening to sack them if they came up with the wrong rating) and in not knowing at any given moment where their exposure lay. This last was negligence.

There is a bling culture in England but raising rates earlier would have caused a few bankruptcies and more caution.

Tony Colvin

The question is not whether dirty tricks were happening in London and not New York, but what the banks were up to in both places when buying CDSs.
A bank can/could buy a CDS without having a stake in the underlying asset, which is gambling. The US, British and other governments should legislate such CDSs as nul and void, and thus eliminate trillions of dollars of toxic debt that are held by banks as gambling chips.
It is significant that no one has been told what the trillions of toxic debt comprise.
Bankers will say that CDSs are contracts which cannot be nullified.
Oh yes they can and must be legislated out of existence.

Conlige suspectos semper habitos

According to Michael Fallon at ConservativeHome (and rightly so), "The proximate cause of the banking crisis was the increase in couple co-habitation and the banks supine acceptance of the government's promotion of 'every choice of lifestyle'. The banks lent money to couples who were unlikely to stick together."

jsfl

I think it's a worth while idea but I would add another key question:

Did the actions of the Government, the Labour Party and in particular Gordon Brown lead to a general lack of confidence that helped undermine the economy and the general morale of the country.

Areas I would consider:

1) The decision to massively increase public spending in 2001.

2) Undermining pension funds by using a considerable portion of them to fund public spending and the ongoing ballooning of public debt? Indirectly did this encourage the housing bubble by making it the safest form of investment?

3) Leading this country into an expensive war on false pretences and attemptingt to run two major wars concurrently?

4) The timing of the change of Prime Minister (3 months before the downturn commenced), the selection of a greatly unpopular leader and the undemocratic manner by which he took power?

5) The heavy burden of taxation?

6) The general hubris, arrogance, condecension and nepotism within the Labour Party?

7) In the post Blair era the general lack of competence and talent within the Government potentially caused by the departure of numerous senior members of the party from the from the front bench when Blair left?

8) The long standing divisions at senior levels within the Labour Party caused by the Granita deal?

BrianSJ

Some of it goes back to the implications of electronic trading. It made the competition between London, NY, Frankfurt much more intense. It lead to the employment of lots of people with no finance background to write algorithms which the financiers didn't understand. The behaviour at the NY end of things seems to an outsdider like myself to be extremely reprehensible, putting more pressure for regulatory capture at the London end.

You are not alone in this endeavour, and it might be best to form an alliance with other sensible parties (rather than a walled garden).

Jonathan

I think any inquiry needs to distinguish between the root problem and problems / mistakes that arose out of that and were made by other people.

These subsequent mistakes exacerbated the crisis, they were not the cause of it.

My view is that this is a monetary problem - the money supply has got out of control and this has lead to all sorts of other mistakes - e.g. the inflation and bursting of the house price bubble. The house price bubble was a symptom of the underlying problem rather than the cause of our current one.

Unfortunately our politicians and reporters seem transfixed by surface problems rather than looking deeper.

PayDirt

When I asked for explanations for the credit crunch a month or two ago on CoffeeHouse I recall the one answer pointed to capital adequacy rules based on the Basle II agreement.
“Bit by bit, the EU has left an indelible mark on the City – setting rules that affect every bank, investment fund and insurer in London”. Ref: 2007 FT article: http://www.ft.com/cms/s/0/e97819bc-f7fc-11db-baa1-000b5df10621.html
Alistair Darling a month ago talked about waiting for the next Basle agreement:
http://www.ft.com/cms/s/0/d6523866-dc2c-11dd-b07e-000077b07658.html

Ian C

James Burdett

The economy was not tilted to Fin Servs. but became so because of the 'surge' in 'profits' in the sector since the early part of this century. Before then the sector was a far smaller % of the economy and manageable as such. What went wrong included the break out from this situation.

Rhoda Klapp

No mention of the rating agencies? They should have downgraded those dodgy instruments, and failed to do so. Packaged debt sold with a good rating was in reality impossible to grade.

Gawain

Any review should also look at the tax structure.

Did the taxation on pension funds help to destroy company loyalties and drive the bonus culture ?

Ian C

Fraser, I was one who called for more discussions on the bigger picture - but it seems to me that you are missing Today of all days what is probably the biggest story so far.

The Crosby affair is in effect a 'smoking gun' sitting in Gordon Brown's trousers. He is so implicated in this depression by his blatant disregard for what was going on and the love-in that the Crosbies were given.

The outcome for GB of the Moore revelations could/should kill him off.

James Burdett

Fraser - Yes that's the sort of thing.

London Calling

Good idea Fraser, I would also welcome this enquiry, especially after enduring pitiful sorrys by four senior Bankers with no Banking experience.

Crash, Crunch, Christ?

What did we learn from the 1929 Wall St crash? The verdict as expressed at the time was one sentence, 'Low standards in very high places'

The cycle repeats itself when you don’t learn from past mistakes and no doubt the verdict for the 2008 Global Crunch will also be 'Low standards in very high places'

Meanwhile millions of evangelists worldwide see recent world events combined with natural disasters as a sign for the second coming of Christ and are looking up into the sky in anticipation of Christ’s return.
I would rather believe a good look in the mirror would be more beneficial right now.

We can only break the cycle by cracking it wide open and looking within however uncomfortable that maybe for all concerned, otherwise its spin cycle and start all over again.

As a retired senior Stock Trader expressed, the problems in the financial sector were far too complex for any current senior Bankers to grasp, in which case the question we should be asking is why?

Enlighten me Fraser, I look forward to any end result of your internal enquires.

Rex Burr

The economy of this country, and to varying degrees other countries, has been subverted by shadowy groups of very wealthy, powerful, corrupt and unaccountable people for purposes that do not include the greater good.
I can understand that.
Greed has no conscience.
What I can't understand is the connivance of elected governments in that subversion, Governments who seek the support of the majority by claiming to work in the interest of that majority.
I would have expected the Government of a party that includes the word ‘labour’ in it’s name, to be especially mindful of their supporters.
I have said before that I believe that, had the Tory party remained in power at the end of the nineties the events in the economy during the years since would have been little different.
Cameron would do well to distance his party from banks, big corporations and financial service providers as they are tainted in the minds of the electorate.
Imagine how many billions in charges and costs would be siphoned out of our pockets if a government brought the State Pension to an end and put everyone in the hands or claws of the private pension industry.

Pete

As far as personal debt is concerned, I would say that it had little to do with 'cheap money' as most people's debt seem to be incurred on their credit cards and when were they ever cheap? In fact, a lot of credit card debt was repaid by people remortgaging, paying off cards, loans etc. and then spending on them again. So, ultimately I blame the housing bubble.

Olaf Rye

We ought to also bear in mind that the calls for increased regulation are likely misplaced--we have regulation in place, but the civil servants at the FSA are generally those economists that were not clever enough to work in the private sector and instead chose to be civil servants and not rock the boat. The bankers rang rings around these imbeciles--until the FSA hires decent people, and does not subject them to the usual culture of cowardice and apathy that prevails in the government sector, no amount of new regulation will obviate further problems. We need the poachers to become game keepers in this instance and pay them properly to do this. It will save us an enormous amount in the end.

I should also like to mention the mindless regulation that prevails throughout the British economy. We have legions of civil servants, or private sector agencies sprung into existence because of legislation, which renders the cost of doing business in this country exorbitant. Perhaps the best example is the cost that the 'Health and Safety' executive has imposed on us. Think also of the planning process and the immense overheads passed to businesses at every opportunity. If we are expected to come out of this recession, this expense must be curtailed. It means that we need to reconsider the nature of the country we want: do we want heavy regulation and economic paralysis, where only the anointed few can make money and have some degree of freedom from the state ? Or do we want to reclaim our liberty and assume responsibility for our lives, leaving the state as a small regulatory agency ? I would prefer the latter, as I think that we are overwhelmed by a mob of faceless civil servants that are profoundly incompetent and corrupt, that are more concerned with their jobs than with doing what is right, and facing the prospect of long term economic decline and the siphoning of ambitious and talented people in Britain to more dynamic and less regulated places.

RODEST

Fraser: whilst at this stage you are looking to discount the blame culture, but, you will need to give serious consideration to seismoligical effects of Gordon Browns' statements that he had ended the cycle of boom and bust.

These statements sent out the wrong messages to the public and the financial sector along with the removal of monetary controls that existsed before Nulabour came to power.

Browns economic policies of borrow and spend created the surge in personal debt and wreckless lending by financial institutions. In my opinion, these policies lie at the heart of the financial crisis.

Since Nulabour came to power there have been an avalanche of warnings in the media about rising debt, the easy access to money and the lack of financial controls.

Good luck with your inquiry, hopefully your time spent will be worthwhile but you may need to set up a seperate webside to include all the factors and contibutions.

Short the UK

Key factors:

1. The Bubble Addicts = ruling elite. Philosophically grounded in Neoclassical Economics. They do not accept malinvestment busts. They are totally focused on creating bubbles and pumping a new one when the old one pop's. They are intellectually bankrupt but rule the roost.

2. The Debt Junkies = consumers. The Bubble Addicts foster unsound "bad" money (debt) on to these bullish capitalists.

At the heart of the problem is a bankrupt plutocracy. They have the power and the money. Tony Blair joining JP Morgan is a plutocratic symbol.

Washington DC is almost run by lobbyists. Look at the head of the Senate banking committe to see total corruption.

I see only two ways to change the status quo:

A. Revolution.

B. Terrorist attacks against the plutocracy, to scare them to change course.

I think B is more likely as the depression intensifies and riots and terrorism force the plutocracy to look for a new economic bedrock.

Printing Money is an insane symbol of how bankrupt we as a nation have become.

We must cut:

1. The State.
2. Business taxes.
3. Business regulations.
4. Bank leverage.

We must also nationalise the banks and cramdown the capital structure. Then spin out new banks with shares given to the public.

Otherwise we are a walking zombie who will waste away as we become an Undeveloping Nation.

We need radical action now!!!

Aidan

Can you expand 3d please? I would want to answer the question: "Did incentive structures in the City encourage short-term behaviour and/or excessive risk-taking?"

Patrickinken

The tri-partite structure of regulation in the UK to some extent set out responsibilities for financial stability - from memory a shared responsibility of the Treasury, FSA and Bank of England, with the Treasury at the top and with the Bank having a monitoring role (which it performed through its twice yearly Financial Stability reports). The Bank identified rising risks to financial stability in these reports and the Governor declared before August 2007 that the "NICE" decade was over, but it does not appear that any actions were taken to deal with the rising risks to the financial system. The FSA seems to have concentrated - ineffectively, as it turned out - of the solidity of individual firms.

Maybe the lack of systematic action was because it was not clear what policy instruments should be used to reduce the rising risks to financial stability - it could not be interest rates, because they were committed to the inflation target, and the FSA/ Treasury appear not to have been prepared to implement any general policies (eg in relation to capital requirements, liquidity requirements or loan coverages and applicable to all banks), whose specific objective was to bolster financial stability. It is difficult to believe that the Treasury and FSA did not have the powers to implement such policies, but maybe they didn't. Maybe the Treasury/ FSA were concerned that such policies might harm the international competitiveness of UK financial firms. Maybe they simply thought that the rising risks identified by the Bank did not need addressing at all. I think that it is all worth investigating.

Rex Burr

Nelson.
Is it possible to build a healthy world economic order without a massive reform of the rules of Globalisation, or should I say introduction of rules for Globalisation?
The imbalances in exchange rates, labour costs, living standards and cultures will ensure long term instability and certainly a relative, if not absolute decline in the standard of living in the UK.
The events of recent months will have dealt a serious blow to the credibility of our financial services sector. Our balance of trade takes another hit.
From whence cometh our economic salvation?

DWL

There is a fantastic 'Dalrymple' Essay over at frontpage mag on the psychological consequences of inflation:

http://www.frontpagemag.com/Articles/Printable.aspx?GUID=0CF5E130-67F9-4A4F-8979-068CB7D56CCB

oldtimer

The enquiry into causes should encompass:
(1) a review of the tools used - were/are they well designed for the job (you cannot chop wood with a razor) - and how effective they were when used.

In particular you should pay attention to some key definitions such as inflation. This was, I believe, altered to produce a lower result. A notable exclusion was housing costs. This probably influenced Bank of England interest rate decisions. I have no problem with targetting inflation - anyone who lived and worked through the 1970s will be infavour of a low target inflation rate; but do please pick the right measure.

The definition of government debt was corrupted by the introduction of the PFI and off balance sheet accounting in the government`s accounts.

(2) Tax and spend policies should not be excluded because they profoundly affect human behaviour. The destruction of the savings culture and weakening of marriage as an institution have both been adversely influenced by taxation. The obverse has been the rise of the spend, spend, spend culture evident in the rise of credit/store card debts. The benefits culture is also the product of political decisions with significant implications for government spending.

(3) Relaxed standards for personal lending and borrowing. The obvious examples are house purchase multiples raised from c3x to c5x annual income, and from c75% to 125% of house valuations. Regulation and control was weak to non-existent.

(4) Emergence of the universal bank, combining traditional with investment banking; the introduction of complex and opaque derivatives. It is clear, with a few notable exceptions, that bank behaviour changed to a far riskier mode, fueled in part by bonus systems that did not match shareholder or deposit holder interests. The banking collapse is therefore a central component to be investigated.

(5) Historical study of the boom and bust cycle to assess if, whatever we may now say or do, it will always be with us; the only question being how big, how severe, how damaging will it be.

RobC

The time gap between the recessions is getting longer. mid 70's, early 80's early 90's and now 2008/9.
I think that both the corporate borrowers and personal borrowers have either forgotton what it means to be in a recession, or haven't the experience of being in a recession. They believed 'no more boom and bust'.
I am 36, went to work in 1994 - I consider myself quite experinced at work and in sorting my financial affairs, but this is the first recession of my working life.

Verity

Don't forget mass immigration to our tiny island and the repatriation of funds. I wonder how much leaves Britain every month?

Second, mass immigration has forced the British out of work, meaning they have become an enormous burden on those reduced funds.

I do agree on the behaviour of the bling worshippers. I have never seen such irresponsible expenditure of money among ordinary people in any other part of the world as in the British - or, rather, the English - these last few years.

David

I would also suggest open-ended questions rather than yes/no questions.

But surely the remit has to be far broader than merely financial/poltical aspects:

What are the structural weaknesses in the UK economy making it so prone to boom/bust?

What are the weaknesses of a service-based economy in these conditions?

What was the role of the strong pound over the last decade in weakening the manufacturing base and making UK citizens feel richer than they were?

What role does the UK being outside the Euro play in all this?

To what extent is the UK's vulnerability in a global downturn the flipside of its high growth during a global boom?

To what extent were structural weaknesses in the UK economy masked by the deflationary effect of emerging economies?

What effect did the UK's dependence on financial and service sectors - largely based in London - have on the property boom?

What is the impact of weak unions and low workplace protection on rapidly rising unemployment in the event of slowdown - which then worsens the slowdown?

Hysteria

Fraser - I like the wiki idea (this may have much wider application but let's try it here - the downside is that the contributors may be a pretty self selecting group and so susceptible to Group Think - see Black Swan for dangers of this!)

For inclusion - something about degree of education and undertsanding of basic debt concepts in the public. Why did it become "OK" to have large amounts of debt? - where was the self regulating concept of our parents? Save to buy what you want etc?

Through student loans have we "trained" a whole generation to accept large personal debt levels..?

Hawkeye

My 2p worth?

House price inflation was dropped from the measures of inflation that the BoE was asked to control, yet house price inflation is a major driver of "economic bubbles".

Lending policy of the mortgage banks was insane. They should never be allowed to lend more than 90-95%. If people cannot get mortgages because the prices are too high then the supply of buyers will dry up and prices will drop.

The essential feedback mechanisms to control the housing market were thrown away by the banks and the measurement mechanism was thrown away by the govt.

I regards this as the major contributory factor to the UK's worsening of the debt problem.

Puncheon

It's an old City saying that recessions happen within 12 months of the last person who remembers the last one retiring - this one took a little longer. This mess can be largely blamed on the generation of know-nothing, MBA waving bullshitters who swept into the world of work in the early 1990's, how well I remember them - they didn't know any of the questions but they knew the answer to everything. The Tony Blair generation. I do hope the inqiry will include Brown's world saving solutions, because I think it will be the cure that kills us not the disease. For example, when its obvious to anyone with half a brain that debts needed to be cleared and balance sheets rebuilt we should have raised taxes and interest rates at the same time to encourage more saving. The Government has done the exact opposite. Savers are being punished for the idiocies of the profligate, which conrinues Brown's policy began when he raided the private pension funds. The result is that those of us who remember the last Labour Government's experiment with inflation, or quantitative easing as the current euphemism has it, are spending all our cash. But it's not going on UK goods, because we don't make consumer good here anymore. Finally, I agree with whoever said that the financial media are also culpable because they have been sucking up to Brown/Blair for years like all the other journos. The biggest exponent of the bonus culture and the raid on pension funds was The Economist, after all But I don't expect you will want to go there - honour among thieves and all that.

Simon Stephenson

I suspect that if you have a better educated and more realistically nurtured society, one that is more aware of human strengths and weaknesses, you will then open up the way to altogether better governance. This will occur through a re-establishment of the trust that truly capable people will make the best decisions, irrespective of how intuitively correct they appear to the general population.

The reason we are heading in the opposite direction with our governance is because we are heading in totally the wrong direction with our education and nurture.

Populism is something to be confined, not celebrated.

Diversity

Fraser Nelson.
A good idea, particularly given the limited progress the experts are making in putting the story together.
Some points to consider:

0. Even if the British had got the management of demand, public finances and credit resonably right, would we not - like, e.g., the Canadians - be facing a recession of some degree?

1. The Bank of England
i) Was not the real point that the Bank should have paid attention to the systematic change in the relation of the narrow money indicators to wide money indicators? Was this only explicable in terms of greatly increased leverage within the financial system?
ii) Did not rises in the prices of particuar classes of assets that might pose systematic risks (e.g. the house price and mortgage bubble) fall into the gap between the remits of the Bank and the FSA?

2. The Treasury
i) If Mr Brown at the Treasury had stuck to his rule of zero borrowing for current expenditure over the economic cycle, AND assumed that cycles would continue with roughly the same length as in the past, would this have improved matters?
ii) Why did not and does not the Treasury produce estimates of the current values of all major committments for spending in the future (public service pensions is a near-surface section of the iceberg), and of of all the major revenue streams expected? Would not that give us a chance which we do not now have of making roughly right medium and long term 'Budget judgements'?

3. The City

i) The FSA was the watchdog on systematic risk. Why did it not bark? nor bite? How was the systematic risk posed by a massive growth in opaque securities carrying counter-party risk plus massive increases in leverage not visible?
ii) would tying incentives for top city earners to medium to long term results have made much difference to their behaviour? If so, what differences?

5. Baloon in Personal Debt
i) How far could personal debt have balooned if lenders had maintained the standards for giving credit that they applied in, say, 2001? And how did it come about that lenders ignored evidence from past episodes of loosning lending standards?

3.

Short the UK

Puncheon,

If you google "James Quinn Baby Boomers" you will find a guy who shares your analysis.

TrevorsDen

The buck stops in Downing St - 10 and 11 - and is spread over the last nearly 12 years.

Blairs knowledge and judgement is shown to be flawed since he allowed Brown to wreak his havoc throughout the entire British infrastructure. And of course Brown is totally responsible for his complete incompetence in believing his own pre match publicity and being taken in by every smooth talking barrow boy and loan shark he every met.

Christopher Chantrill

1. Banking is a government program. It's great fun to tweak the bankers but their terms of trade are set by HMG.

2. High leverage means "heads I win and tails we both go down the tubes." Not good.

3. Read "Normal Accidents" by Charles Perrow. He argues that when you have "close-coupled" systems then a component failure tends to lead to a system failure. One reason is that system operators cannot understand all the complicated interactions between different system elements. Sound familiar?

Archie

I would echo Verity above.

1) There has to be a trichotomy between immigration/indigenous indolence/pressure on "resources" and services, and

2) what is the effect of the imbalance between financial services versus manufacturing on the current situation?

Hereford

On the Treasury (and more broadly the Central Government Civil Service) I would ask: Does the Treasury have people with the necessary experience of the business world and therefore the skills and competencies to manage the financial strategy and operations of the country?

I think I know the answer (having worked there)

Anonymous

I don't leave blog comments, but you have hit on something that cld be very powerful if the input is broad enough. Here are my thoughts.

You have to go deeper. Look at the real foundation for this bubble. This means two things.

First you need a section on institutional design and incentives... the nature of public companies / renumeration, bonuses etc. everybody in the industry, particularly relatively young people at the coal face, knew that they were encouraged via the bonus structures to take huge risks. further, the institutional structure of public companies meant there was not incentives for directors to be more conservative - all the execs say now they wd have been fired if theyd tried to keep out of the mortgage markets from say 04/5 when the first major fears (this is a crap excuse for doing something stupid but it is an important fact viz human psychol). did capitalism go down a wrong road in some ways with public companies as now conceived? hedge funds and private equity did not blow the thing up after all - contra predictions of the anti-derivatives people - public companies (supposedly more highly regulated and therefore conservative) did... further - the design/incentives of the ratings agencies - why did they give things fictitious ratings...?

Secondly, you need a section on the history of economics, financial economics and epistemological foundations of both... (emergence of equilibrium thinking cos the maths of 19th century thermodynamics = relativ simple to transpose into economic modelling >> total dominance inside econ and financial econ academia post-war, so the ENTIRE industyr of portfolio management is based on the random walk, bachelier theory of randomness... Problem is, the economy is NOT a system in equilibrium like a cup of coffee cooling on your desk - hence the equations go tits up hence supposed '20 sigma events' less likely than 1 in 13.7 bill age of the universe in the model actually happen every few years in real economies)...

The most important aspect of the crisis is the intellectual foundations - the philosophical foundations - on which the edifice has been built - ie how the evolved human brain senses, understands and processes information in an inherently nonlinerar and therefore uncertain environment. You may think this suggestion is from Mars. You'd probably have said the same if someone told you in 2006 that the Western world was in a bubble about to burst. Just look at the theories. The particular blowups and errors are epiphenomana of the above foundation. If you don't look at this, you won't get to the real problem.

Andrew

I think you might pose a question for the post-crunch regime:

Does the UK need to impose a new variant of Glass/Steagall to segregate retail banking and investment banking?

Tim Ambler

My answers to Q3 are in the paper published by the Adam Smith Institute and available on http://www.adamsmith.org/briefings/economy/the-financial-crisis:-is-regulation-cure-or-cause?-200811272506/

The bottom line, rather to my own surprise, is that the chief culprit is the Governor of the Bank of England. You need to read the paper to see why.

On Q4, you are right: the Treasury Select Committee is part of the problem and, as we have seen, useless except only for the lucky break with Mr Moore.

The NAO does not inspire confidence that another quango would be more effective. We certainly need a debate about how to get rottweiler challenges of a complacent Treasury.

Kate Weal

Is it really relevant that the bankers had no banking qualifications? I have a degree in English and Politics but that doesn't equip or entitle me to push John Prescott out of his seat anytime soon.

So they had no banking qualifications. You got your soundbite. Now move on.

RobinD

1)globalisation created an interdependence that should have been better regulated. The thin margin low cost manufacturing base of Asia was used to supply the developed world with imported deflation.

The proceeds from these goods (our money) were in turn recycled by Asia to buy Western debt, driving interest rates down further hence lowering the cost of capital.

Once in place this mechanism looked to its supproters as if it would fuel a never ending recycling loop of cheap credit so nobody raised an eyebrow as to the end game.

Provide endless cheap credit to the developed world and asset price inflation will enuse; there was a simultaneous rise in all asset classes - commodities, property, energy, bonds, equities.

Here questions should have been asked about the continued availability of cheap credit and what ultimately its effect would be. As it turned out, the property bubble created another problem; there was cheap credit but you needed more to buy the same asset so the rules were relaxed about multiples of salary using the 'affordability' argument. It was no longer the multiple of salary that mattered in one's mortgage but the affordability of the, by now, incredbly low interest rates. People were being allowed to borrow vast multiples of their income with no prospect of ever repaying the capital; just servicing the debt.

Two more problems the arose. Those who had been in form the beginning began to monetise the value of their inflated houses; taking out more debt and spending the money on holidays, cars, kitchens, meals. But then at the same time the securitisation of this debt was going on and the securitisation of someone else's mortgage debt relies on the supposition that the underlying asset offers protection - the price will not fall.

Alas, prices had gone beyond the reach of most, inflation began to return inot the system through non-ending demand for food and energy from the devloping world, suddenly people started to default on their mortgages and the whole edifice began to tumble.

There is nothing else to learn that that all bubbles burst and if you allow yours to be inflated for longer and more than ever before, the only logical conclusion is that it will make even more mess when it bursts.

So culprit number one is Gordon Brown for encouraging the idea that a bubble could be indefinitely sustained.

The others wiill simply reveal themselves through the chronological examination of who was where, doing what and when.

Of course; spending the proceeds of this bubble on a million extra public sector workers because the economy wasn't actually growing, it was only credit that was growing, was another major gaffe on Brown's part.

Fraser

It’s simple: interest rates fell almost consistently from the early 80s to 2003. Typically a reduction in interest rates increases capital values. A consistent policy of reducing interest rates inures people to the value of their debts; they can borrow more for the same cost. Individuals and companies focused on servicing rather than repaying debt, a process positively encouraged by securitisation. Whereas an old fashioned bank would be dependent upon deposits and debt repayment to lend further, securitisation allowed fresh capital to keep flowing into debt creation and banks became production lines for debt. Old fashioned banks also took interest who they were lending to and the chances of repayment. Securitisation abdicated this core responsibility of bankers, risk management, to ratings agencies. Regrettably the banks were also the purchasers of the debt not just the manufacturers, and the ratings agencies were not up to the job whole swathes of debt lent on the basis of debt servicing at ridiculously low levels has been written off.

Anthony Wagg

You ask whether inflation was the right measure to target. I don't see why not. But it was not very clever to follow an index which left out the main overheating element of the economy - the house prices.

F D Wright

Any system which generates an environment wherein the baser human frailties can thrive contains the seeds of its own destruction. The 'bonus' culture, peer group competition where financial reward is the single criterion of personal success, a perception that the well being of the individual is more important than that the whole creates a system which must eventually implode. The financial sector is by no means the only sector to suffer from this situation - even Shell, a highly conservative and prudently managed multinational corporation suffered when over-stated hydrocarbon reserves caused such damage to a brand and reputation which had take decades to build. We have heard a great deal about 'Corporate Social Responsibility' in recent years - most of it platitudinous - but it is demonstrably thin on the ground.
When governments fail to provide a framework in which effective restrains upon antisocial behavior are in place, (rather than to facilitate such actions as seems to be the case with the financial institutions who were encouraged by the government to push the limits of prudence) and where the ethical standards of CEO's and Boards of Directors are so lamentably deficient, it is futile to attempt to apportion blame.
We must accept that, even for 'Masters of the Universe', human nature if not subject it some restrain is pernicious.

Joe Hayward

One of Gordon Brown's first acts was to grant "independence" to the Bank of England so that it could set interest rates free of political pressure. I just cannot believe,however, that whenever the Treasury wanted a change in rates it did not "tip the wink" to the Old Lady and the deed was done! Alan Greenspan, I believe, has owned up to keeping interest rates artificially low in the USA and I believe the same was done here by our government.Low rates,of course, encourage reckless borrowing.

I would like to see your inquiry investigate, therfore, whether the Bank of England was truly independent or merely manipulated by Gordon Brown.

I've no idea how you might do this, but it may throw some light on the problems facing the nation.

barton

It's a sensitive topic, but for that reason one that probably hasn't been discussed anywhere near enough. The impact of immigration on housing has been significant, you mentioned lack of supply, but the demand side is just as important. At the beginning of the decade asylum claims alone were running at over 100,000 per year - and remember, one entire family equals one claim. Government rules stated that accommodation had to be found within 24 hours of their application, and most of this was done through private landlords funded by the NASS. The funding was very generous too, a mortgage could be paid off in about eight years at the rate the government paid. We were involved in supplying fixtures and fittings to several local landlords would do a basic refitting of properties they had bought specifically to house asylum seekers. They were laughing - but very quietly, because the government made them sign extremely strict confidentiality clauses. Of course we have a duty to house those fleeing persecution, but at some point the impact on our society has to be considered.

Its still going on, and of course there are more regular forms of immigration. Councils have a duty to house homeless Polish families, even if they left suitable accommodation in Poland. Any British people who did the same would be classed as intentionally homeless, and not eligible for help. Even immigrants who require no help from the state still add to the demand for housing.

Immigration has definite benefits, but the costs have been ignored for fear of the 'racist' cry.

Donald Fraser

Reflections on your Inquiry into the 2008 recession

I would question the specificity of the framework you propose. I think this type of analysis will only become useful in the distant future, when monetarism is re-invented and lessons from past mistakes require inclusion in a new model. I would question, what I assume to be your underlying assumption, these results might be useful in creating a recovery. However I recognise you require some type of framework to work within. So I respond just to your first heading, the Bank of England. It is the most important because it concerns money supply, inflation, globalisation and the future of Sterling. So not as to confuse things, my heading is renamed because the points made do not match your own. I just hope they might serve for you to extract some value and perhaps inform your thinking.

1. Pound Sterling and Inflationary Control
a. House price inflation was obvious and many critics were warning in 2004/5 that earnings were historically out of line & a correction would be required. Then such critics shut-up because house prices kept rising (for about another three years) and it made critics appear stupid to continue to point this out. Why were such critics so excluded from what was happening behind the scenes (sub-prime lending and avoidance of the legislative restrictions on the “deposits to lending ratio” via bundling-up and re-selling) they failed to cry wolf? I certainly followed the “historical earnings to house price ratio” was “out of synch” and going to require correction arguments back in 2004. When house prices rose for several more years with no correction in sight, I then followed the reports that lenders were even encouraging self-certified mortgage applicants to overstate incomes. This partially explained why prices kept rising, because with limited stock, prices were being driven artificially high by such activity. However something still seemed amiss in the overall explanation of why the correction had still did not come about. What I did not understand (not working in the financial services) is that a sub-prime market existed and that banks were no longer governed by any type of effective “deposits to lending ratio” legislation. That rule is basic Economics “A” level stuff! Maybe it was abandoned a long time ago, because I did my Economics “A” level in 1987. But when the sub-prime market collapsed, the light went on for me as to why the correction had not occurred. So it surprises me the doomsayers from 2004/5 commenting on an inevitable correction had not managed to make me aware (as just an ordinary member of the reading public) that this sophisticated sub-prime market was in play and that it was an enormous part of the whole general equation. Can free markets ever be effectively made bust proof? The relation between components is only clear after the crash, no matter how hard everyone is looking for the cause of an anomaly (in this case rising house prices). Would it be viable to build into future Monetarist theory some modelling of the likely consequences of a predictable correction, without needing to identify the component that is likely to fail first? It was predictable house prices would face sharp correction even though it was near impossible to see what component was out of control and thus going to fail. Future Monetary policy might be able to computer model the consequences of the most obvious market corrections that are ahead (and thus improve contingency planning) without first attempting to identify the component that will cause it.
b. The economy on a war-footing from 2003 exaggerated the value of mineral resources (especially “peak oil” theories). War encourages speculation on the prices of supplies that could be cut off by the escalation of conflict. It is worth noting the surge of stock market value in response to the Iranian capture of British sailors in April 2007 and the North Korean nuclear test in October 2006. It holds therefore that a possible surge in value might occur (or indeed encourage) a Russian-NATO conflict over Georgia this year. This element of economic “confidence” being outside of any of the monetary policy measures you are attempting to re-model treads the borderline of Marxist analysis techniques. However it is important that you are aware of the limitations of your modelling scope. One difference in the current financial speculation on the outcome of a military conflict (such as Iraq) is that winning is judged entirely on abstract ideals such as democracy. There are “no spoils for the victor”. Hence the Chinese and pro-Western Arab States gain equally from “oil security” without paying financially for the war effort that has done so. Not surprising then that the ownership of capital has shifted dramatically to those using Arabic and Chinese scripts. I’m not sure offering to manage “their capital for them” is viable in the long term because computers are increasingly proficient in the use of those scripts, so they can manage it themselves. Globalisation does not in itself end the distinction between nations and where the capital resides in terms of ownership. This is a problem shared by both pound sterling and the dollar. It is more related to the politics and outcome of the military decisions made than internal monetary policies. The colonial model of the British Empire did equate military success with some notion of “spoils to the victor”. America has tried to govern recently to a Cold War model of defending democracy without considering the costs of doing so. The distinction in a nuclear age is that the shift of capital ownership to Chinese and pro-Western Arab states does not lessen America’s overwhelming military superiority. The logical conclusion might be the temptation for the USA to enter into a Second Cold War with China (via developing competitive satellite shields). This would correct in America’s favour the shift of capital ownership to China as the financial trading systems would no longer be linked (similar to how it was between Russia and America during the First Cold War). In such a scenario, the UK might belong to the Chinese rather than American trading block. Hence divergence of UK and American foreign policy, governed by the current need to “borrow from the mountain of savings in China” – as you mention, is likely to be the most important political issue over the next few years related to money supply.
c. Why not look closely at how the Phillips curve (the inverse relation between the rate of unemployment and the rate of inflation) has been increasingly managed by re-categorisation of the unemployed as “with mental health problems”? The TUC is putting the figure at about 2 million. On the surface it keeps unemployment figures at politically acceptable levels but retains the deflationary effect. More analysis is required if this distortion of the original model is having unforeseen consequences. Remember to replace the deflationary effect of the low-paid “despising the unemployed” with that of despising those “on the sick”. It may for instance accentuate the deflationary effect of East European labour, mentioned in point e below.
d. Investment in property was seen as a “safe investment” after the dotcom model, where “bricks & mortar” did not suffer the same collapse in 2000 to 2001. Before America could propose new legislation to re-establish public confidence in dotcom investments (which in my opinion remains at the core of the new type of Keynesian model to replace Monetarism) 9/11 happened. One area of legislation being considered was about reducing the burden of litigation by encouraging new trading floors to develop. Domain name disputes resolved by lawyers were seen as an expensive business burden. Currently lawyers are making lucrative profits pursuing digital image infractions and enforcing webhosting contracts. There is a lack of legislative power to prevent sharp legal practices. This burdens our economies and restricting the maturity of the dotcom investment platform.
e. An often missed point is the deflationary effect of East European labour. Their wages are sent home in order to reconstruct their countries. A Marshall plan for Eastern Europe (proposed many years ago but never pursued) might be a more efficient way to start recovery. The enlargement of Europe in 2004 provided an easy answer to pay for the continuing efforts to fund the reconstruction of Eastern Europe – allow their workers into Western Europe to earn high wages and send those wages home. This may have saved the need for further capital injections at the top, but it has deflated the economies of Western Europe at the bottom. Local economies were hit hard (pubs etc) by less surplus income being available to spend amongst the low-paid. One effect was a new call upon credit facilities as temporary solution to maintain their living standards in face of such a dramatic increase in labour supply. It is worth noting that not all immigrants are equal. The Eastern Europeans work the hardest and succeed in sending the biggest proportion of it home. From the point of view of Keynesian demand deficiencies, East European labour has created (and continues despite politicised reports to the contrary) a large and unprecedented deflationary shock to our economy. That is if you favour the traditional Keynesian model with emphasis placed on demand rather than the supply side economics of Monetarism.

Jonathan Douglas

I fear I will come across as one of those peculiar bores like the ancient mariner, but you have to go back to fundemental economics, and the failure of politiciains to repsect what this implies.

Banking is not wealth creation. When bank profits started to get truly obscene in the period 2000-2007, the regulators should have moved in. It is not the bonuses which cause any problems, although they are inflated, it is the excessive profits which suck profitability out of wealth creation business.

Real wealth creation is done by farming, mineral extraction, and manufacturing. These industries take land, earth, and sunshine and turn them into food, medicines, and useful goods. Banking takes one person's money and lends it to another. Banking is a useful service, but if it is excessively profitable there is something wrong. The profit of a bank should be the small difference between two very large numbers. If the difference is too big, real wealth creation will suffer.

So the signs of difficulties ahead were evident many years earlier, when bank profits became excessive.

On top of this, this profligate government has increased taxation and regulation on business, and reduced its capacity to make profits and develop better products, thus increasing the risk profile of businesses, allowing the banks to justify higher interest rates on the borrowing necessary to keep product development moving.

It has all been very short-sighted. Brown and Blair and people like Geoffrey Robinson and Stephen Byers are very much the worst of these people, but other politicians and parties cannot take much credit.

Anthony Thompson

I hope you will challenge the taboo against discussing the decision to give the Bank of England independence. More than that I hope you will challenge the whole concept of central bank independence.

The central banks had the power to stop the asset price bubble. They knew it was happening and they did nothing because their responsibility was to control CPI inflation. Clearly the inflation index should have included asset inflation but the problem is deeper.

Central bank independence creates a fiction that setting interest rates is something that can be delegated to "experts". It makes it appear that their work is similar to that of structural engineers doing the calculations for a bridge, the crucial difference being that when the bridge falls down we don't blame them.

The great disadvantage of central bank independence is that by a sleight of hand it removes the decision making on interest rates from the arena of public debate. And by taking interest rate policy out of the cockpit of political argument and handing it over to unelected technocrats, no one is responsible for failure. It is a classic stitch-up: comfortable for politicians, comfortable for officials, no fierce public debate. No one feels the heat and and no one fears for their career if it goes wrong. (Obviously when politicians have the last say on interest rates there can be abuses but these can be mitigated, as we saw with Kenneth Clarke's wise men.)

Had Gordon Browne retained ultimate responsibility for interest rates since 1997, there would now be innumerable exchanges on the record between him and the likes of Vince Cable, John Redwood, John Humphries and Jeremy Paxman on the floor of the House, on radio and on television. They would all show him defending a low interest rate policy against mounting evidence that it was leading to disaster. Either he would now be gone or the intense pressure would have caused him to take fright and snuff out the asset price bubble much earlier.

Everyone climbed aboard the bandwagon of believing that making the Bank of England independent was a bold and brave move. Now no one will question it.

disillusioned

Ok, so private equity questions:

a) What happened to standard leverage ratios in private equity deals over the economic cycle?
b) How much did the tax benefit of interest paid on debt influence the appropriate capital structure in private equity deals?
c) How many otherwise viable businesses have been dragged down under the weight of debt put on them by over eagre banks and private equity firms?
d) What did the government do to regulate private equity firms? Could they have done more to limit this build up of debt?

Edward Hocknell

In 2007 only one third of UK mortgages were financed by British deposits. There is a funding problem. This will be addressed by higher UK saving and devaluation - which is now happening. But the boom will not return.

Naomi Langford-Wood

Hooray for the inquiry! It should help as long as we don't create another fudge factory. So, if we look at what appears to be disparate and unconnected matters they all actually contribute to the problem.

1 The city. First things first, the banks have a huge conflict of interest if retail high street banking is yolked with the casino banking. They need to be separated on the same basis as the accountancy practices had to be split off from the consultancies. The sooner the better.

2. The city has been brilliant at trading in financial products, but the bending over backwards towards trading and sales has been unbalanced. I don't blame the bonus culture at all. There is a basic problem if you promote traders into managers though.

3 There are imbalances in financial products too which have contributed. For instance, the structure of pension products means that the pensioner has to purchase an annuity within a short window of time, which is dire for the pensioner but also dire for the insurer as both have to manage on what they get. That's why annuity rates have always been awful and quite the worst part of pension schemes.

4 The companies act needs a revamp. The leming like lurch toward maxing out profits whether by M&A activity or by real productivity, has been skewed because the chairman's priority is to look after the shareholders rather than look after the longevity and vitality of the company itself. If that were to be changed to focus on the longevity and vitality of the company then quite a lot of what has happened would not have turned into reality. Would RBS have been recklessly on the acquisition trail if the longevity and vitality of RBS had been the priority of the Chairman and the rest of the board? I don't think so.

5 Shareholder value is an imbalance which should fit in with the longevity and vitality of the company too. Pension companies would not have been able to almost dictate what boards did, if that little change of focus for the chairman of any company were to come about.

6 The government will get their cup uppance, as my mother would have said. It is obvious they really didn't know what was happening. It is all the more obvious that G Broon hadn't a clue either or he would not have appointed people he did to positions that they have since had to vacate. He would not either be now talking about the G20 in April which is going to simply be superseded by the roller coaster ride that will sweep away what he appears to be currently intending to be Broon's time in April in London.

7 Lack of trust in the banks, per se. From misselling PPI, and a myriad of other insurance products, through to overcharging for overdrafts, returned cheques, et al. The banks look greedy and have a lot of mileage to make up if people are to trust them again. Watch out for the rise and rise of Credit Unions and local municipal banks who will fill the place the high street banks should have retained with integrity, but went chasing rainbows in a 'me too' fashion - in particular in buying CDSs which were simply not constituted in the same way toward the buying frenzy as they had been at the beginning of their being part of spreading the insurance and risk.

7 Losing the plot as regards classic banking. It was always part of the good old bank exams that there were two basic maxims: don't lend long and borrow short, and don't lend more than 75% of the asset value. So looking at the banks who were lending 125% of value, it was the percentage of their business that should have been kept small so that it did not create a precipice for the bank to fall over.

8 The banks were and are, like all businesses, responsible for managing their own business model and business plan to ensure that it would be sustainable. Therefore, the folks who are to blame here are the main board, the operating or executive board and those who voted for their schemes - the shareholders. The people at lower levels are just doing their jobs. If any other business skews its business model, it deserves to become either an acquisition target or die. The banking system needed to be rescued. What they must do now, is decide whether they want to take the long and hard road to the future or whether they want to look after their customers, build relationships and have good solid businesses. It is up to them to chose to change faster to save their own bacon and provide the services we all need.

9 G Broon, of course, for three things in particular i) the annual raid on the UK private pension schemes to the tune of %bn pounds which put untold stresses on the pensions schemes and almost dessimated them in 1997 when he first ran a dawn raid. ii) for his mad scheme which took the ultimate responsibility from the old lady of Threadneedle Street, who had catered for banking collapses before without it wrecking the economy of the UK, let alone the world. iii) For not letting Lloyds TSB take over Northern Rock in August 2007 - as the reason given to refuse the takeover was that Lloyds would make too much money, it proves he was totally unaware of the collapses to come. His attitude and words during the Select committee hearing last week prove also his lack of understanding of what and when happened. Too little too late.

10 Feeding these thoughts in and reflecting on the ripple effect of them all is only part of it. Will you be willing to broaden the scope of the questions you are setting for this inquiry so that all factors, motivation, perception, etc can be brought into play so that a holistic as well as detailed understanding might be arrived at? And beyond that, for us to build a strategy for coming out the other side in a strong and focused way so that we come out clean?

Let's assess three things:

1 Where we are now
2 Where we really want to be
3 How we are going to get there in the best pssible way.

Naomi Langford-Wood

Whoops! Forgot a key one!

Broon's profligacy and his refusal to reform the public sector when 'New Labour' had said they would. Had it been reformed we might not now have the burgeoning public sector nor the huge pension drain from the private sector taxes which is supporting the public sector DB pension scheme. Sorry I missed that one - it is a large contributory factor.

BrianSJ

You'll need a tab when you get your wiki going so people can find it.
Good comment on Guido this morning that shouldn't be lost.
Anonymous said...

Why is Gordon saying that it was the global (US) economy was to blame for the credit bubble?

Gordon gets away with it as only a few people understand the multiple complex margin lending rules that apply to the global regulatory systems (perhaps Paul Moore is one of them).

Here are those rules put very simply...

- The US has strict 50% margin lending rules to corporations. The US bank does not have to take beneficial ownership of assets lent on margin.

- In the UK, margin lending by banks can be up to 90% of collateral. However, in the UK (unlike the US) the bank doing lending must take "beneficial ownership" of the collateral.

- US branches of international banks can transfer assets from US corporations to their UK branches and lend at the higher (90%) level.

- The UK rule encouraged lending at massive levels globally.

- Much of the easy credit for the US bubble came from the UK.

- The value of these transfers were measured in multiple $BN a day. The banks were making huge fees for these services and paying huge bonuses to those doing the work.

- The regulators didn't know this was going on.

- Many banks did not report this asset movement properly to the SEC or FED as they didn't understand the rules themselves or covered it up when they did find out.

- In some cases the ownership of strategic US energy and utility assets were transferred to the UK banking entities without being reported.

February 15, 2009 9:57 AM

Sally Stewart

Why did the accountants and rating agencies, who were meant to judge whether the banks were sound, not twig that they were so vulnerable? I think we need to get the heads of Standard & Poors and Moodys grilled as to why they gave out triple AAAs so indiscrimately. And the four big accounting firms who certified the banks as "sound".

Richard Gates

Fraser, thank you for your investigation. There are many technical details that can be attributed to the CC but I can't get it out of my mind that this situation has not in some way been engineered. Yes let's look at the causes but is anyone suggesting that with all the recorded experience of lending credit, the finesse and global banking expertise accumulated through the centuries of the British Empire has completley gone to waste? I find that very hard to believe. The Americans were at first to blame for the wholesale of toxic debt to the UK - this may be true but I find this even more hard to believe as the Americans tend to be very sharp cookies and yet they would appear to be in this as much as we are.

It is well known that global financial operators of the last century would engage in 'hand brake manouvers' to influence the populace toward one theme or another - can we be sure that this is not happening now? Best of luck with the inquiry, I will watch closely.

PS What do the Rothschildes have to say about it by the way?

Excuse typos - tapping on a very small keyboard! (edit as neccesary!!)

Richard Gates

GC

The current collapse in financial markets was not caused by politicians nor by central bankers nor by bankers in general nor by global currency inbalances or their consequent eras of cheap money of which there have been many in our times both recent and past which have not lead to bubbles.

Rather, just as in the last major stock market crash of 1929, it was ultimately caused by us and specifically by the not unreasonable aspiration of the middle class (i.e. all of us if you believe TB and his god thing) to improve themselves but an aspiration hopelessly perverted by a naive belief which took hold that this could be done painlessly and magically by investing in property. A householder in a property worth £200,000 could expect it to inflate in value by as much £40,000 over the course of a year i.e. by as much as the annual income required to obtain a mortgage to purchase the property in the first place so lax did our lending practices eventually become. Few if any paused to consider the pyramid-like ponzi absurdity of this state of affairs and it can fairly be said that if we did not believe money grew on trees we certainly believed it grew in houses, in the conservatory we had put in perhaps or sprouting like mushrooms in dank cellars but somewhere anyway for sure we all agreed and talked about nothing else at dinner-parties which were never ever more than mere séances we called in to invoke the spirits of materialism and mammon and their foul-mouthed television gods in the form of such as Gordon Ramsey (and the word out on the cocktails circuit is that he's bust now - well toasted and fuck you m8 who cares you're history).

Politicians know this of course and certainly do the messers McBroon and Cameroon. Their problem is that they need electing and the trouble is we're not just quite ready enough to hack it all.

But we're getting there gord (ram I mean not mac). You can see it in the occasional pronouncement from bishops newly discovered the vice of avarice and the virtue of corrective homily, from mothers newly encouraged to suggest that the nurturing of children is not a part-time pastime to be engaged winding down / chilling out with a bottle of sainsbury / home grown roll-up : and coming soon, what I suggest will be the defining moment given the nature of our times : by all of us newly discerning that life, even tv celebrity life, is a gift not to be indefinitely prolonged by judicious consumption of fish-oils and cranberry juice and that it's up to us to make something good of it to pass on to our children and forward and this timely reminder will indeed be Jade Goody's strange lasting legacy and gift to us all.

But a caveat. Our own catastrophe is indeed the direct consequence of the American one but that one, as future historians will easily eventually instruct us, was one ultimately engaged and directed by their underclass and President Obama is their triumphant champion who will indeed change things there for the better.

But not so for us (not for nothing are we so taken by Obama) but rather we remained their poodle throughout and indeed, as it so happens, their dirty little dog doing their dirty financial work by proxy in rendition as our regulators and hopefully not just our historians will eventually uncover sounding the closing bell once and for all ok on our pathetic aspiration to act as centre of global finance: that was never going to happen on terms favourable to us buddy - sorry and have a nice era.

We sold our oil and we sold our souls and if we're not mindful we're going to end up selling our kids into the bargain as well.

We need authentic politicians (and Simon not just intellectual ones - honest trust a genius on that) and so far I don't discern these emerging in the pages of The Daily Telegraph or The Spectator and when they do I'm not betting even money they will necessarily be Conservative.

In Scotland, Wales and Ireland voters can sensibly opt for their national parties. In England the only sensible and realistic present alternative must be the BNP.

But it will change. I know it will and I can feel it will and in three short prayers heart-felt and uttered from the depth of my being and not just some symbol sort thing of mine I say thank god thank god thank god.

www.GutClean.com

Alex G Briggs

The government want the banks to accept and apologies for the financial mess.The UK Government told us the best financial man in the UK was Brown.He continued at every budget to recommend his budgets to the country.He was the one who gave control to the Bank of England told us all this was right and he knew it would be successful.The regulators were not regulating.We were told Brown would be the IRON FIST.He has proved to be the extreme opposite.The government disregarded Parliament.Cabinet by coffee and armchair meetings.Campbell Mandelson ran wild with spin.The global claim never came to light till 2007.Many were saying in 2004/5 theeconomy was heading for a collapse.Brown the Media all report great success.Now we have the worst situation in memory.Why is Brown not responsible he was the one and only MrPrudent.Now he blames the world.Everyday he has more egg on face.Any other country would be marching -peacefully - to get him out.Plus he was never even elected to lead his own Partry.Back in his student days he wrote papers of how to bring the fall of the system.Now he has acheived it we let him carry on.WHY?
FOOT NOTE:- Who sold the gold off cheap yes BROWN yet again a failure.

Alex G Briggs

The government want the banks to accept and apologies for the financial mess.The UK Government told us the best financial man in the UK was Brown.He continued at every budget to recommend his budgets to the country.He was the one who gave control to the Bank of England told us all this was right and he knew it would be successful.The regulators were not regulating.We were told Brown would be the IRON FIST.He has proved to be the extreme opposite.The government disregarded Parliament.Cabinet by coffee and armchair meetings.Campbell Mandelson ran wild with spin.The global claim never came to light till 2007.Many were saying in 2004/5 theeconomy was heading for a collapse.Brown the Media all report great success.Now we have the worst situation in memory.Why is Brown not responsible he was the one and only MrPrudent.Now he blames the world.Everyday he has more egg on face.Any other country would be marching -peacefully - to get him out.Plus he was never even elected to lead his own Partry.Back in his student days he wrote papers of how to bring the fall of the system.Now he has acheived it we let him carry on.WHY?
FOOT NOTE:- Who sold the gold off cheap yes BROWN yet again a failure.

Andy Hobbs

We need to look at two things. Firstly, why have both Labour and Conservatives been obsessed, since at least the "Barber Boom" of the early 1970s, with the idea of generating growth purely through internal consumption, and neglecting exports not only of manufactures but other British products with a high USP such as plays, television programmes, films and other forms of cultural output. The subsidy of of rubbish "modern art" is a prime example of funduing of internal consmumption at the expense of exports.
All this results in is balance of payments deficits and excessive Government borrowing - think about it.
The other idea I would like to see considered is the concept that Marx got it the wrong way round - it is imperialism that has caused the problems with capitalism rather that the other way round. Professor Chalmers Johnson in his book "Blowback - the Costs and Consequences of Amercian Empire" is very good on this angle.

Ken Boyd

With the benefit of 20/20 hindsight are you at all surprised that the whole sad pathetic humiliation this Country is suffering has come about? New Labour’s aim was to govern without responsibility so that no one could be blamed. Teflon Tony and all his henchmen embraced the sofa cabinet, the lack of minutes, the misuse of power with an enthusiasm unheard of in this Country before. Not even the Restoration of the monarchy was greeted with such recklessness. Today every office of state is, in the Reidian phrase, unfit for purpose!

It is as if New Labour has attracted only very small men, who are frightened to grow so coat their actions and themselves with Teflon. It is as if they do not believe they can govern. You have only to look at their friends to realise how little they believe in themselves – the Hindijas, Mittal, Deripaska et al.

The FSA is a Brownian construction. It enjoys the greatest powers of any arm of government, has immunity from suit and thus lacks any incentive to master its brief or raise its game. Like all other New Labour creations it is not required to report to anyone so is unaccountable. This allows the inmates to take over the asylum. Every year since the Financial Services Act 1986 was introduced the regulator has made a monumental mistake. These include broker bonds, the pension review, the FSAVC review, Equitable Life, Professional Indemnity insurance, Farepak, Northern Rock to name but a few. As Brown doesn’t understand the simplest idea of how markets work, how regulation could work the mess gets bigger and bigger and the country drifts from sound money to profligacy on a theory yet to be proven.

Even with the evil genius of Mandelson there is no genuine attempt to reintroduce sound money, only a policy that requires no discipline only extravagance. Were Sants and Turner sacked, Tiner and McCarthy impeached the world would believe Brown had the makings of one who could sort the mess out. How much easier it is to live in denial and continue the policy of spend, spend spend knowing it hadn’t worked for the last 10 years and has no chance of working in the next 10.

In the retail side of financial services the Independent Financial Adviser (IFA) accounts for 80% of the turnover of around £92 billion. He is responsible for some 3% of the mistakes. Yet of the 2,800 staff at Canary Wharf only 6 supervise the banks. The banks want the IFAs business so HRA 1998 has been torn up and FSMA 2000 is anti IFA. The draconian powers of the FSA would deter any right thinking man from becoming an IFA.

The majority of IFA firms are a cottage industry, fiercely protective of their clients and utterly contemptuous of the rape and pillage business model adopted by the banks. Yet the FSA is empowered to fine or make awards against an IFA of up to £100,000 who has no right of appeal. . This despite Article 52 of the ECHR regulations governing investigations into negligence in financial services stating that all awards must be reviewable by the Courts. The men who have this power are predominantly men who have failed in financial services and have no legal training. In the real world to remove £100,000 from my back pocket you would need to be a High Court judge with many years of legal training and experience behind you

The IFA’s only recourse to justice is a judicial review, a rigged procedure that is very expensive. Clearly such recourse is a breach of the IFA’s human rights.

There exists strong evidence that Brown signed off FSMA 2000 as being HRA 1998 compliant without seeking legal advice.. He has been ordered by the Information Commissioner to publish counsel’s opinion as to it’s compliance but the matter has got bogged down in appellate procedures.

What did Brown hope to gain by such arrogance? Did he expect the banks to reward him for such folly? Did Moonie, Taylor, Truscott et al. sell their magic services to the banks and insurance companies so that FSMA 2000 would be so slanted against the IFA and pro the banks. Even today the FOS claims it is fair and reasonable, impartial and independent. Were you to be investigated by the FOS you never get to see the evidence submitted by the complainant nor see the correspondence issued by the ombudsman. You only see your own evidence leaving the ombudsman to make it up as he goes along!

In 2008 Merricks the Chief Ombudsman, commissioned Lord Hunt, currently President of the CII to produce a report on how the IFA was being treated by the FOS. Mirabile dictu he, a practising lawyer, came up with the devastating conclusion that there was no need for an appellate process in FOS’s dealings with the IFA.

Everywhere you look the stink of filthy rotten corruption oozes out from all their machinations. When I requested a judicial review of an award that was made by the FOS, despite such an investigation being outside their jurisdiction and I was unable to comply with the rules and regulations extant at the time of my alleged failure I was left with the very clear impression that the High Court’s refusal to grant me leave had more to do with my telling Merricks and his henchmen during their investigation into my case that they were corrupt and incompetent. Yet another freedom taken from me, i.e.that of freedom of speech.

Guy de Moubray

The roots of our present troubles go back a long way. The bank of England should not have let the Building Societies demutualise and become banks. Or at least they should have imposed strict rules on the type of banking they would be allowed to do. The next source of trouble, already over twenty years ago, was the invention of securitised debt. That invention led on to derivatives and hedge funds.
Next mistake occurred in 1997. Eddie George should have resigned as Governor of the Bank of England rather than accept Gordon Brown's removal of the Bank's independence. For any body in †he know it was obviously a prodigious bit o f spin to claim †hat the Bank had been given its independence.The FSA should never have been established and should be abolished now. Heavy detailed regulation is ineffective, †he more detailed the more cleverclogs will find ways of doing business that is not covered by them.
The Governor of the Bank of England should never be an economist. The Bank needs †o be involvd in the money market everyday. The management of the National Debt should revert †o †he Bank as soon as possible.
Professor Forrest Capie of City University is writing the latest history of the Bank;his remit doesn't cover the present crisis but his interviews with lading City people will have given him a lot of insights into what has gone wrong.Do seek him out
My views may be very old fashioned. I was Head of the Economic section of the Bank of England in the mid 1960s!

John Merrick

This inquiry should also look at why given some of the fundemental problems with some of the banks business models did the FSA not say anything until it was too late

Was the problem down to the make up of the FSA or its remit. Does the bank's health check actualy work.

If the FSA cannot get the quality of staff to do the job then perhaps it should return some of its remit to the Bank of England.

Brian J Singleton

Independent Bank of England was created by Brown in 1998 in NL's haste to join the Euro. One precursor is required by Maastricht Treaty Article 109e (5) which says that during the second stage of EMU “Each member state shall as appropriate start the process leading to the independence of its central bank".
He was then required to add the FSA as the long arm of the EU, in order to monitor implementation and compliance with EU financial directives.
Like so many EU institutions it failed to regulate as the minutes of its few meetings with Northern Rock demonstrate when the conversion from a Building Soc to a Bank should have required extra vigilance.

Ergo, the rot started with the EU, as in 1990 when we joined the ERM leading to massive unemployment, business losses, negative equity and devaluation of sterling until we left in 1992.

Naomi LW

After my previous diatribe, this is my deflated 1p’s worth to answer your questions, Fraser. It's the philosophy and attitude that reveals the most as attitude determines action.

1. Bank of England.
a. In isolation, inflation targeting is not going to work as all these measures, in isolation, create momentum for the swing of the pendulum and make the prospective swing greater. All globalisation creates the equivalent effect of a big bang.
b. Asset prices should have been taken into account.
c. Aha here we have assessment of risk again. It was the libor rate and the internationalisation of some of the banks that affected all national organisations. The Bof E suffered the same as other nationally ring fenced organisations rendering it not fit for purpose?
d. A tight remit, indeed. However, there has to be a risk that as most MPC members are picked by the government, they might be partially poodles. Independence – yes and lateral thought and visual understanding of the way that the movements in trade of currency depending on perception of value, are bound to be subject to chaos and therefore only a percentage of risk should be employed.
e. I am sure the Bank noticed the asset bubble, but Gbroon had said the end of boom and bust and whilst speaking from his ‘level playing field’ he needed the asset values to keep climbing so that he could keep deluding people. I think the Bank didn’t want to act because it would have been at odds with the government and then the MPC would have been against the people who appointed the members. No, actually, I don’t believe the Bank saw it coming at all or it would have acted, if it could. It might have known that with the independence its setting base rate could have little or no effect on the libor rate which would be dictated by the money supply.
f. I think the Bank ‘mis spoke’ at that time. Of course consumer spending was partly as a result of the housing bubble. People were remortgaging so that they could keep on spending. If the Bank really did not think the two were connected then the Bank is not fit for purpose and made more mistakes than the actress and the Bishop.
2. The Treasury
a. It was a subtle change of approach to debt linked specifically to when G Broon started referring to government spending as ‘investment’. That then made it not debt. Delusional but very simple. A bit like when personnel officers started being called Human Resources, the focus changes and suddenly there is no one who is able to fire people, only think up more training courses for the Resources.
b. No it was not right.. There has been a lot of skating around the huge future debt of PFI which is so large we should almost not count it in at all. However, that was ‘investment’ in Broon terms and therefore, again the focus changed toward it not being debt.
c. Public sector pensions should be quantified. Again the only reason they are not is because it did not suit G Broon who wanted to keep telling people that we were well off and the finances were well managed on his watch. Sadly, his refusal to allow the reform of the public sector just after New Labour were first elected, is part and parcel of the sleight of hand in accounting practices, which skewed the statistics and the accounts to give a false impression of the status quo.
3. The City
a. I really don’t know.
b. There were no runs on banks when the Bank of England had its full regulatory role so it would have been better if it had retained it. The FSA has been singularly lacking in communicating with and working with the Bank . Had it been possible for the FSA to be fully functioning then it might have been a better option. On balance the Bank of England having its regulatory role back in toto would be better than the FSA. More confidence would be raised if the FSA were to be subsumed into the Bank of England, with plum staff taken with it.
c. It was out of touch regulation. The regulators are not the right people as far as we can see. It is much the same as putting sales people in risk management, as their attitudes are not right and they were far too cozy with the banks they were regulating. Don’t forget that each of the people working for the FSA would want a career path and that would need to include possibly moving to one of the banks….
d. The Treasury did have an incentive to look the other way but, apart from the 40% of all the bonuses that were going into the coffers, Treasury officials loved the bankers and so they needed to think they were good guys with white hats on.
4. Parliament
a. The Treasury Select Committee has to have gaps in its scrutiny because of the way it is constituted. The variety of MPs on it with their many skills is interesting but without an objective of ensuring that the committee is constituted of MPs who cover the whole spectrum of skills and experience needed to enable complete scrutiny, it is difficult. I believe it is under-resourced anyway but there is something clean about making people sit in front of MPs to answer for themselves. It is easy to see deference when it is there but some questions will get missed if it is left how it is. Its membership should be elected by 6 MPs from each party, so that it is equal representation and MPs who are elected as members of the TSC would then be seen to be as the best for the job.
b. Any quangos must be accountable. I hate quangos. All agencies and quangos should have to abide by a duty of care and be ultimately accountable without more fudge.
c. John Redwood, Vince Cable, Ken Clarke. All asked questions in 2004 and they were alone partly because they were opposition MPs and we all know that G Broon had only one tactic when challenged which meant that any true debate, which could have saved all of this, was out of the question.
5. Personal Debt
a. This ballooned as firstly it was encouraged that people took on mortgages and even council houses were sold off cheaply. It became acceptable to have large debt as long as you also had large assets. Whereas the public perception if you had a big house had previously been that you must have lots of money, it became the norm to have mortgages of more than £500k and the servicing of debt became the key issue. Equity release, with increasing property values, and promoted by the insurance companies as well as the banks, made it easy. Most people didn’t think twice about it as everyone around them was doing the same. It was not just cheap money but easy conditions too. Then it went mad and banks were lending more than assets were worth – chaos and the sand pile started slipping with the extra weight of the imbalance.

Andy

Here's my take on it:

Bank regulation was divided in 3 so nobody was responsible. It's the "I thought you were doing that ..." syndrome. The inflation measure was deliberately set to ignore the housing bubble for a feel good factor fuelled by cheap money (interest rates needed to go up, really). The Chancellor ignored warnings about an overheating economy because it didn't suit his claim to have ended boom and bust. A culture of risk was deliberately encouraged by the govt - because how could it fail if there was always a boom? At the same time, morality (ie personal responsibility and the culture of thrift) was being trashed and the celeb culture encouraged "because you're worth it". Combined with the elimination of difficult stuff like percentages and compound interest from maths teaching and an erosion of consequences for one's actions, we were left with a gullible clientele who were convinced the only way was up. Waste was endemic in the public system, there was no accountability, government figures were unreliable to put it politely, and debt (including bankruptcy and IVAs) had lost its stigma. Over the water, the Clinton law had encouraged banks to take on bad debts, which were then packaged to disguise them and sold on. Since our ship was already holed below the waterline and listing, the extra, unbalanced cargo was all that was needed to make it keel over. Once that happened, refusal to face facts and the need to be seen to be doing something (anything!) for party reasons compounded the problems. If UK Plc were the Titanic, the iceberg might have been American, but the design fault, overconfidence in unsinkability and lack of lifeboats were definitely British.

Douglas Bulloch

I have 2 suggestions.

1/ Debt is obviously central to the current problem, so instead of changes to the way debt was accounted for after 1997, I think there should be a deeper examination of how debt - and particularly changes in aggregate debt - is accounted for in GDP calculations more generally (pre and post 1997). How Government debt is distinguished from the broader measures of debt borne by the economy more generally. In other words, perhaps the constant reference to Government debt is unhelpful when - as the recent crisis has shown - the Government ends up standing behind a great deal of private debt.

2/ Related to 1, but perhaps there should also be an examination of the language of financial reporting etc. Most particularly, but just as an example, what are the origins of the phrase 'Consumer-led growth'? And why was this not more clearly understood as, if not quite propaganda, then clearly contradictory? GDP, after all, is a measure of productivity, not consumption.

Most importantly, the Spectator inquiry should investigate the failings of the press, for if blame is being spread around, then the press coverage and general state of financial journalism has to be considered a crucial part of the general permissive context. And where better than the Spectator for an examination of its peers?

Blimpish

I did my response last week...

http://blimpish.wordpress.com/2009/02/12/the-spectator-inquiry/

G Chaundy

Many thanks for this excellent thread. I have only ONE comment on the cause of the current debacle. That is to suggest a close look at the incestuous relationship between the Banks and the FSA.
Then look further at the Retail Distribution Review which clearly is designed by the FSA to grant even greater control over the distribution of financial services products to the architects of this disaster - The Banks.
When Hector Sants stated that the retail distribution model was 'broken' he also stated that he "looked forward to working with the banks" to correct it.
NOTE not with IFAs - who are responsible for 80% of distribution but only 4% of complaints.
The FSA have long been in love with the Bankers - hard;y surprising when it is staffed at senior levels almost solely by former bank employees.
In 2005 I sent a Freedom of Information request to the FSA asking how many of their employees were former bank employees, what were their salary grades and status. The FSA refused to provide the information (although accepting that they had it) on the grounds that it would cost more than £450 to produce the data.
£450 seems a very low price now for a proper understanding of the relationship between banks and the FSA.
Sir James Cosby is a very small tip of a very large iceberg. (Appointed my Gordon of course)

Patrick Mountain

The whole sorry story is being overcomplicated. The reason for the present problems in UK is that government failed in it's prime duty to protect the people.

The FSA was set up by New Labour, under the auspices of the Treasury at a time when Gordon Brown was Chancellor and therefore in charge.

The fault lies entirely with him as he failed totally to ensure that the FSA was carrying out the duties for which it was formed.

He should perhaps remember the words of President Truman 'The buck stops here', instead of blaming all and sundry for a fault which is entirely of his own making.

Lord Turner seems to have no conscience and is following the lead of the Prime Minister in apportioning blame everywhere except within his own organisation. It is deplorable that the same Lord Turner is now demanding huge increaases in the staff levels of the FSA -yet again at more expense to the hard pressed taxpayer. He himself has been rewarded at a ludicrously high level for his failure and is and has been, yet another beneficiary of the bonus culture which has impoverished the very people for whom he was supposed to care.

The system is rotten to the core and we now have a deeply divided society in which the majority of ordinary workers, white and blue collar, are subjected to ever higher imposts on their income and essential spending in order to fund the extravagant lifestyles of a coterie of feather bedded politicians and the business men with whom they are hand in hand.

As a long time Conservative I am deeply depressed that no-one in the corridors of power had the sense or foresight to prevent this disaster.

We can look back now over the nearly 12 years of New Labour and note the huge expansion of the client state, including the employment of some 800,000 additional unproductive bureaucrats, costing now almost £100 Billion every year, more than the cost when New Labour took control. At a realistic estimate, the total sum now wasted by Gordon Brown on this exercise amounts to some £700 Billion. Had this sum been available to the government now, Great Britain would stand head and shoulders above all the other nations affected by the recession and would be in prime position to initiate a recovery. As it is, we are probably amongst the worst of the suffering nations and very poorly placed to find a way out of this self inflicted sickness.

Patrick Mountain

The whole sorry story is being overcomplicated. The reason for the present problems in UK is that government failed in it's prime duty to protect the people.

The FSA was set up by New Labour, under the auspices of the Treasury at a time when Gordon Brown was Chancellor and therefore in charge.

The fault lies entirely with him as he failed totally to ensure that the FSA was carrying out the duties for which it was formed.

He should perhaps remember the words of President Truman 'The buck stops here', instead of blaming all and sundry for a fault which is entirely of his own making.

Lord Turner seems to have no conscience and is following the lead of the Prime Minister in apportioning blame everywhere except within his own organisation. It is deplorable that the same Lord Turner is now demanding huge increaases in the staff levels of the FSA -yet again at more expense to the hard pressed taxpayer. He himself has been rewarded at a ludicrously high level for his failure and is and has been, yet another beneficiary of the bonus culture which has impoverished the very people for whom he was supposed to care.

The system is rotten to the core and we now have a deeply divided society in which the majority of ordinary workers, white and blue collar, are subjected to ever higher imposts on their income and essential spending in order to fund the extravagant lifestyles of a coterie of feather bedded politicians and the business men with whom they are hand in hand.

As a long time Conservative I am deeply depressed that no-one in the corridors of power had the sense or foresight to prevent this disaster.

We can look back now over the nearly 12 years of New Labour and note the huge expansion of the client state, including the employment of some 800,000 additional unproductive bureaucrats, costing now almost £100 Billion every year, more than the cost when New Labour took control. At a realistic estimate, the total sum now wasted by Gordon Brown on this exercise amounts to some £700 Billion. Had this sum been available to the government now, Great Britain would stand head and shoulders above all the other nations affected by the recession and would be in prime position to initiate a recovery. As it is, we are probably amongst the worst of the suffering nations and very poorly placed to find a way out of this self inflicted sickness.

Fiona

my concern is over question 5, which has an underlying assumption that credit was spent on "bling". Stealth taxes, high commodity prices, food price increases - these may hall have led to family basics going onto a credit card in the last week of the month. This questions needs to be much more searching and less judgemental - if you want to find information, phrase the question to get information, not to reinforce popular prejudice.

Simon Mansell

THE FSA IS NOT FIT FOR PURPOSE

The FSA has a banking bias. For example, thousands of consumers have complained to the Financial Ombudsman Service about payment protection insurance and bank charges. However, no action was taken and it was the Office of Fair Trading (OFT) that finally took on the wider implications role in the case of bank charges.
The FSA in an internal report into the handling of the collapse in confidence of customers of the Northern Rock Plc describe themselves as inadequate.
The FSA was criticised in the final report of the European Parliament's inquiry into the crisis of the Equitable Life Assurance Society. It is widely reported that the long awaited Parliamentry Ombudsman's investigation into the government's handling of Equitable Life is equally scathing of the FSA's handling of this case
The FSA ignored warning signals from Northern Rock building society and continued to allow the bank to operate without a risk mitigation programme for months before the bank's collapse.

The FSA has been criticised by some within the IFA community for increasing fees charged to firms and for the perceived retroactive application of current standards to historic business practices.

There have been questions raised about the competence of FSA staff.
The composition of the FSA board appears to consist mainly of representatives of the banks and career civil servants. There are no representatives of consumer groups or IFA’s.

Although one of the prime responsibilities of the FSA is to protect consumers, The FSA has been active in trying to ensure companies' anonymity when they have been involved in misselling activity, such as endowment shorfalls preferring to side with the companies that have been found guilty rather than consumers.
It was announced in November 2008, that despite self-acknowledged failures by the FSA in effectively regulating the financial services industry, IFA fees would be handed out to FSA staff in bonuses.

On 11th February 2009, FSA deputy chairman, Sir James Crosby resigned after it was revealed that he had fired a whistleblower, Paul Moore, who had warned of dangerous lending practices at HBOS when he had been in charge of risk regulation.
Lord Adair Turner, current FSA chairman defended the actions of the regulator on the BBC's Andrew Marr show on 13th February 2009. His comments were that other regulatory bodies throughout the world, which had a variety of different structures and which are perceived either as heavy touch or light touch also failed to predict the economic collapse. In line with the other regulators, the FSA had failed intellectually by focusing too much on processes and procedures rather than looking at the bigger economic picture. In response as to why Sir James Crosby had been appointed deputy chairman when his bank HBOS had been highlighted by the FSA as using risky lending practises, Lord Turner said that they had files on almost every financial institution indicating a degree of risk.

JamesL

I think you should also look at the role of the internet in the whole process:

- increasing the availability of credit
- reducing the cost of credit
- increasing awareness of financial products/investment opportunities
- ease of funds transfer (and the consequent difficulty for banks to see large capital flows coming)
- speed of information flow (particularly in alerting people when things started to unravel)
- an amplifier of panic

and

- potentially it's role in truncating the whole recessionary period (hope?)

Adrian Garai

Causes of the credit crunch include:
>Huge balance of payments deficits leaving funds in Chinese and Middle East hands compeating fiercely for borrowers.
>UK Government economic and fiscal policies leaving the UK ill-prepared to cope with an economic shock.(What Golden Rule?)
> The policy of both US and UK Governments of ever greater home ownership.
>The growth of the CLO market and the moral hazard for primary mortgage lenders and brokers.
>A fiercely competitive banking market leading to lower and lower credit standards.
>Bank Directors (particulary non exec's) who did not understand the new range of products and risks - nobody learny the lesson of Barings?
>A public willing to take on ever higher levels of debt.
>An FSA created at a time of concern about bankers unfairness to consumers but lacking the B of E's visceral understanding of markets.
> the FSA failed to understand that capital is no substitute for liquidity.
>An FSA that had a box ticking approach to regulation and was not respected by bank risk managers.
>Regulators that allowed UK banks with little of no International experience to 'bet the bank' on risks in markets they did not understand: remember Midland! It is the truely international banks that are least affected - HSBC, Stan' Chartered and Barclays.

Mervyn Guille

No one seems to be talking about the shareholders responsibility in this fiasco. Do they not have a roll to play in keeping companies in line. I am a small active shareholder and was amazed to hear one of my friends in 2005 telling me that he had borrowed £500,000, on the internet to buy two flats in London without seeing or speaking to a human being. The trouble is that shareholders in the original sense of the word no longer exist or, at least, are swamped by the Funds Manager who have huge investment in these companies on hehalf of the rest of us and therefore huge leverage over the Boards, but it’s not their money. And, because there are so few of them in comparison to us small share holder the Board can cosy up to them which is not, in my opinion, healthy. They are same people as those who run Boards of Companies. My view is that only beneficial owner should be allowed to vote at meetings –no Nominees.

M Guille

Keith M.

1.As Chancellor, Brown replaced anyone in the Treasury who stood up to him or who threatened his authority and replaced them with his acolytes. As a result, there are now few people left with any experience of dealing with a recession. Could this explain the lack of thought given to the new contracts with RBS and others? How many more mistakes to come from this inexperienced crew?
2.Why did Brown not arrange for those in the Bank of England who knew about bank supervision to be transferred to his new FSA instead of recruiting new staff without the Bank's accumulated knowledge?

Charles Bazlinton, Author The Free Lunch - Fairness with Freedom

Should banks be allowed to create the credit in our system? That is what makes the bubbles which will recur as long as this system endures. The Bank of England should create the credit and hand it to the govt who would spend it into the system by democratic control. The banks would become retailers of loans. Please give space in the Spectator to people like Richard Werner, James Robertson so that at least an alternative system can be considered.

I submit this extract below from the Opalesque website . It is from Prof Richard Werner of Southampton University:
''Banks act as accountants of the economy and have the ability to individually create credit – out of nothing. “This is how MOST of our money is created – out of nothing,” Dr Werner added.
Good and bad credit creation The credit market is rationed by banks and supply-determined. “There will always be demand for credit,” he said. As credit is created, its quantity is the key budget constraint on activity and thus determines growth, asset prices and should be used for policy.
Dr Werner proposed that in the standard equation of exchange (money supply = nom. GDP), ‘money’ should be replaced by ‘credit’ and that we should distinguish between credit used for real economy transactions and credit used for financial transactions. Unproductive credit creation should be avoided and productive credit creation should be the focus, as credit flows are the source of boom and bust cycles.
The types of speculative credit creation include margin loans, loans to non-bank financial institutions, credit for real estate speculation, loans to SIVs, to hedge funds, to PE funds, for M&A and direct financial investments by banks.''

Nic Ralphs

This inquiry seems to be a good idea, but the real question should be whether or not anyone with the power to make changes will take any notice of its findings.
However, I shall give my own take on the current situation, hopefully without descending into the unintelligible wittering of some previous commenters.
First, let me say that, unlike the majority of the population, my husband and i were not sucked into the orgy of debt, and are now well placed to ride out the recession.
We bought our first house in October 2003, under the council house right to buy.
It was valued then at £50,000 so with discount, we paid £30,000. We had a 50% deposit, and a flexible mortgage of £15,000. By the time we sold it in October 2007, we owed less than £500. While everyone else was borrowing because of cheap credit, we used the advantage of low interest rates to pay off extra lumps while we had the extra cash, so that at the height of the boom, we sold our house for £128,000 having paid very little interest on the outlay of £30k.
The purchase price of our new house was £145,000, so we remortgaged for £28,000 giving us a little extra for costs and improvements, and thanks to base rate now being so low, our interest rate is 1.6%, meaning that already the capital is down to £23,000 and falling.
This means our house's value would need to fall below £60k before negative equity is a problem.

Given that we are obviously better at financial prudence than the bankers, the FSA or Gordon Brown, here's what I suggest:
The recession does not have one single cause, because without the ridiculous property boom and accompanied reckless lending practices, it is unlikely that securitised mortgages would have been a problem, and equally, without the securitisation of debt, bank losses would have been restricted to those that made the bad loans.
The commenter who made the comparison to the 1929 crash is spot on, the only difference is that then reckless loans were made to people to buy stocks, and this time it's property.
A few extra questions that need looking into are:
1. How much did the change in measuring the inflation rate from RPI to CPI in late 2003 exacerbate the housing and credit boom?
2. Why is high inflation in a general sense seen as a bad thing (wages and prices) but runaway inflation in the property market either ignored or seen as good?
3. What effect did the explosion of buy to let and developing have, if any, on forcing prices ever higher?
4. What of the role of estate agents and surveyors in the property bubble? They have not been mentioned yet.

Solutions to the current crisis I suspect may be few, and the recession probably will have to largely run its course. We should instead prepare for the recovery when it comes, rather than trying to force it.
On the economy, I suggest that the FSA be scrapped and its powers (ha,ha) returned to the BOE, the responsibility for economic policy and interest rates to return to the chancellor, so he is accountable to parliament and the people. We need either a return to RPI as the inflation measure, or inclusion of property prices in CPI or to be considered alongside. Housing, and indeed commercial premises for businesses are a necessity for a properly functioning society and economy, and we have seen the folly of allowing them to become unaffordable.
Property prices need to continue to fall to a more affordable level, with the UK average house price no more than between 3-4 times UK average pay. Once this point has been reached, prices should be included in inflation measures so that they rise sustainably over the long term.
Lending rules should be tightened, returning to the long-held sensible formula of 3 times income and no more than 90% of value. I also think it would be wise to have lenders share data so that all of a customer's borrowing with all lenders can be looked at before issuing any new products. This should avoid people getting into multiple unsecured debt.
The insolvency rules need tightening, as responsibility should be encouraged.
Home ownership should continue to be encouraged, in an affordable manner, but property speculation as a way to get rich quick should not. This may mean many of the recent buy to let investors resigning themselves to long term gains only, or selling up.
The fashion for perpetual remortgaging to fund lifestyle must be ended.
Finally, all government debt including PFI and public sector liabilities must be on the balance sheet. This fiddling of the figures cannot continue. Either the government owes money, or it doesn't. It's that simple.
Basic financial management, debt and credit, interest and inflation should be taught in schools.

Nic Ralphs

I should add to my previous comment; cut business rates and taxes, raise personal allowances and review business regulation especially regarding health and safety.
The tax credits and benefit systems need serious overhaul, simplifying them and reducing their running costs.

Graeme Codrington

In your original article on 14 February, you suggest that the BoE will be a primary target of the inquiry. I believe that it should be put to them that a few countries around the world were not sucked in by global gluttony. Countries that have previously successfully gone against the global central bank consensus include Malaysia in the 1990s and early 2000s, and most of the Middle East for the same time period. Were these models ever considered? Were these central bankers ever consulted?

More importantly for your inquiry, though, is the recent example of South Africa.

For the past 5 years or so, the central banker, Tito Mboweni, had been publicly concerned at the high levels of credit in the economy. Consequently, he raised interest rates every few months, to a high of over 11% a year ago, in order to slow down borrowing. He did this specifically and deliberately in the face the global trend towards easier credit. Consumers howled, those with mortgages wept. But he slowed demand for credit (and increased foreign investment, too, as an unintended consequence).

At the same time, the finance minister, Trevor Manuel, instituted an Act of Parliament known as the National Credit Act (NCA). Simply put, this Act required the types of controls that the UK should have had, including strict controls over the proof of earnings required before approving credit, instituting a national credit database so that an individual's total debt exposure was known, and placing limits on how much could be borrowed. Banks, mortgage lenders and high street stores with store cards all cursed the Act. It slowed car sales and house sales in particular.

That Act came into effect in June 2007.

By September 2008, credit demand was in check and debt was at sustainable levels in South Africa. The country's GDP had probably been reduced from what it could have been. But, now that the global credit crunch has hit, South Africa is well placed to weather the storm. Not one South African bank has even seen a dip in expected earnings (although their share prices have dropped in sympathy with global trends). The GDP growth expectation for 2009 has been dropped to about 3% - but given global circumstances, this looks pretty good right now.

So, my contribution is to suggest that not everyone "drank the koolaid". There are some central bankers and politicians who saw the crisis looming and responded in advance with clever policies. Why did their British equivalents not see what they saw? Or even consider what they were doing?

Peter

A few considerations of what contributed to the financial disaster facing our banks. How did the banks, their internal risk control procedures as well as the regulators manage to get it so wrong?
1. The massive change over the last 20 years by which loans and mortgages orginated by banks were on-sold with or without re-packaging: control of risk at a bank expecting to sell 100% of the loan are not the same as at an old-fashioned lend and hold bank.
2. The huge growth of non bank investors, often non-regulated or poorly regulated. Within this vast universe one could include all the trading desks banks which operated on a mark-to-market discipline and so were not subject to conventional bank risk controls. These non-banks provided relentless appetite for credit of every colour.
3.Fees. The reason banks were able to pay the infamous bonuses was that ever-larger fees were being skimmed off during the loan distribution process. In the case of LBO's (aka Private Equity) upto 10% of the value of a company was taken out in fees each time the company was flipped. These fees could total many hundreds of millions of dollars per transaction and were effectively paid by additional debt on the balance sheet.
4. Regulators - especially the FSA. The pressure regulators imposed on banks was nearly always focused on what I would term non-issues. For example money laundering, account opening, public/private information.
The bureaucrats loved all this. It is impossible to exaggerate the heavy impact of these purely red-tape controls imposed on banks. Risk of banks actually losing money became an after-thought as far as the FSA was concerned.

Professor Richard A. Werner

The current banking crisis, as virtually always (and there are dozens of examples just in the past twenty-five years), is due to an excessive expansion of unproductive credit creation. Central banks should be well aware of this.

Banking crises can be avoided if and when banks extend credit for the purpose of productive investment, defined as the creation of new goods and services that have a value added. Only such loans have a high chance of being serviced and repaid in aggregate in the long run. Whenever banks extend unproductive credit - which is often attractive to them in the short term - it must lead to major problems for both banks and the economy. There are two possibilities: When banks extend credit for consumption, which is unproductive, this will result in consumer price inflation. (The reason is that there is no such thing as bank 'lending'. When banks 'lend', they create credit, which is money creation.) Secondly, if banks create credit and advance it to speculators, who use the money to speculate in financial markets or engage in real estate speculation or in any other asset transaction that aims at achieving a majority of returns from capital gains, this will result in asset price inflation and the usual asset boom/bust cycle: all such credit creation must turn into non-performing loans since a slowdown in such speculative credit creation will reduce the asset values; non-performing loans will rise; banks will become risk-averse and reduce all credit creation, even to productive borrowers; the economy will shrink; non-performing loans rise and banks become insolvent in the process, unemployment rises - a major economic crisis.

Thus, as I have pointed out for almost twenty years, central banks need to monitor not just the quantity of credit creation, but also the allocation of credit, and distinguish between productive and unproductive credit creation, the latter divided into consumptive and speculative credit creation.

Central banks in most countries used to monitor all these very closely and restrict unproductive credit creation. However, aided by misguided economists, they then decided to allow unproductive credit creation to expand unhindered for many years.

Politicians and governments tend not to be experts on monetary economics. The experts are at the central banks. Large-scale resources have been used by the central banks to build up vast research departments. But central bankers have shown no interest in researching these issues, ordering their many hired economists to research other esoteric topics, usually based on highly unrealistic models, while research on the topic of credit creation and its diverging impact when used productively or unproductively, has been discouraged to the extent that it is non-existent.

Over the past thirty years central banks have significantly increased their political and legal independence and hence power. I have warned for a decade that this trend was likely to result in ever greater economic disasters, as the track record of independent and un-checked control by certain groups over the power to create and allocate money has historically always resulted in major problems.

Thus there can be little doubt that the main responsibility for the current financial crisis lies with the central banks and their singular failure to do their job. Their independence, lack of proper accountability and often significant powers leave them no more room to hide behind misguided government policies. Secondary responsibility lies with those producing and spreading misleading economics (many have had an economic interest in its perpetuation).

What should be done? Public debate and the appointment of a serious commission tasked with identifying the causes of and responsibility for the current crisis is a good place to start. This should lead to the conviction that wide-ranging monetary reform is needed. The underlying premise that the public good of creating and allocating money should be in private hands (over 95% of the money supply is created through bank credit) does not have a sound economic or political rationale and thus needs to be questioned. Further, the role of central banks needs to be reviewed. Milton Friedman’s advice to abolish the central bank and hire one guy with a desk inside the Treasury to do the task (more efficiently) is not be dismissed lightly.

edtheted

The major reason for the current financial recession is that since the mid 1990's interest rates have been kept artificially low due to the fact that the measurement of inflation has been incorrect. This has led to an explosion of cheap money creating a bubble which has finally burst. The incorrect measurement of inflation is due to the falling prices of cheap chinese imports mentioned in your article. One example is that in the 1980's when inflation was 10% I bought jeans in M @ S for £20 and they lasted me 5 years. Now I buy jeans in Asda for £3 and they last me 6 months. The £3 jeans are actually more expensive than the £20 jeans. This is true of most clothes, toys, diy goods, household goods etc. In the 1980's a good frying pan made in sheffield cost £10 and lasted 10-20 years, now people buy rubbish in the pound shop for £1. The ONS who compile the inflation statistics make no allowance for quality of goods as far as I can tell. Gordon Brown made the situation worse by bringing in CPI (removing housing costs) to fiddle the figures. The bank of england has been targeting inflation figures of 2 to 3% when in the real world I have been experiencing inflation of about 5% for the last 10 years or so. There are of course many other things that have made the situation worse but I believe that the incorrect measurement of inflation is the main reason.

Charles Bazlinton, Author The Free Lunch - Fairness with Freedom

I note that Professor Richard Werner, Professor of International Banking at Southampton Univ. has posted a comment (3 March). I await with interest the outcome of your enquiry. Will it include RW's insights following his extensive world-wide experience?
His book New Paradigm in Macroeconomics' (Palgrave Macmillan)is convincing and shows the way forward. There is hope here.
We cannot blame commercial bankers, they only did what the system allowed them to. The stable door was deliberately taken off and destroyed.
In allowing commercial banks to create virtually all of the money supply, the system has unwound through the way the banks have to compete with each other for short-term gain. Will the Spectator allow an examination of a new monetary paradigm?

Tom

just to reply to edtheted, cpi was brought in because every other european country uses it because it gives a more accurate reflection of peoples expenditure. Also the EU basically forced us