Sep 13 2009
The sorry anniversaries of the Credit Crunch and 10 policy errors
Autumn has proved the cruellest season in the last two years, bringing down banks and crushing economic hopes. In the autumn of 2007 we lived through the run on the Rock and the mortgage banking crisis. Last year we were put through the regulatory humbling of the big banks. This year the authorities are setting up the next crisis, by refusing to tackle the deficit.
Both crises were avoidable. Both were forseeable. Of course, if the bank directors had been more cautious, they could have reined in their institutions earlier and we would have been spared the collapses. I hold no brief for directors of failed and bloated banks. Equally, if the authorities had known what they were doing, they could have set interest rates at sensible levels, demanded the appropriate amounts of cash and capital for the state of the cycle, and kept markets sufficiently liquid to handle the demands of financial institutions. They chose to do none of these things.
What did I say to Newsnight about their anniversary programme that frightened them off? I said they needed to include in their analysis of the crisis the following policy errors by the authorities:
1. 2003-6 Interest rates were kept too low, and money was too easy. The Bank should have tightened earlier as it saw the asset bubble growing. The government should not have changed the inflation target.
2. 2003-6 Capital and liquidity requirements of banks were kept too low,and the Regulators negotiated even easier requirements. They should privately have demanded the banks kept more cash and capital as the bubble built. It was easy to see from the main banks balance sheets that Prudence had been thrown out of the window.
3. 2006-8 Interest rates were forced up too high. They were bound to bring the economy crashing down, as some of us warned at the time. The authorities turned to fighting inflation far too late, when they needed to start worrying about recession.
4. August-September 2007 the authorities starved the money markets of cash, making the collapse of the most exposed mortgage banks likely. They ignored those of us who warned and urged them to make the markets more liquid, so the mortgage banks could survive whilst sorting out their excesses. If they had made available the amounts of money they found after the run on the Rock before it, the bank would not have gone down.
5. September 2007- September 2008. The authorities wasted a year. They failed privately to demand more cash and capital from the large banks, and failed to give them the time and space to raise it from private sources or from profits and asset sales.
6. September 2007- November 2008. The authorities obstinately delayed cutting interest rates to stave off deep recession, despite warnings.
7. Autumn 2008. The authorities panic, demanding the main banks suddenly find large amounts of new cash and capital. They make all this public, undermining remaining confidence in leading institutions. This forces semi nationalisation, and huge taxpayer risk. Barclays is briefed against for daring to find its own money and staying independent.
8. The authorities urge LLoyds to merge with HBOS, bringing LLoyds needlessly into the nationalised net.
9. 2009. The authorities panic again, and decide on ultra low interest rates and printing money. Early signs of an asset bubble do not deter them. The authorities seem determined to “do what it takes” to finance the impossibly large public deficit, leaving the painful adjustments to later.
10. Throughout the authorities spin that we are paying the price of deregulation, in one of the most regulated industries of all. In the UK the incoming government in 1997 changed the regulatory system and put in place the one it wanted. It failed in a predictable and disastrous way. We did not lack regulation. We lacked competent regulation of the big things that mattered. They set interest rates wrongly. They set the wrong levels of cash and capital at different stages of the cycle.
None of these criticisms benefits from 20/20 hindsight. This is a short summary of the positions taken at the time by this blog as the crisis has developed. We the taxpayers have been placed needlessly at risk, having to shoulder actual and potential banking losses on a huge scale, which could have been contained and handled by the private sector if the authorities had behaved sensibly. We are living through a much deeper recession than need have been, thanks to the boom and bust interest rate and deficit strategies they followed.
We have had three phases of crisis – the overextended boom, the engineered bust, and now the surreal spend and print phase.
28 Responses to “The sorry anniversaries of the Credit Crunch and 10 policy errors”
John Redwood has been the Member of Parliament for Wokingham since 1987. First attending Kent College, Canterbury, he graduated from Magdalen College...
All good stuff and an excellent historical summary.
But Mr Rdewodo, may I suggest some better editing of your articles before uploading?
The worst thing about this crisis is that it has given Labour an excuse to turn the taps on full “to save the economy” when it was their failure that caused the problem. We all know it is just delaying the pain and simultaneously “scorching the earth” for the incoming Tory Govt. The most self serving Govt we have ever seen and the most anti middles class ever… hopefully the middle classes have learned.
Mark Reply:
September 13th, 2009 at 9:50 pm
Actually, they are probably even more destructive of the working class: they have taken away their jobs, passing them to new immigrants, and replaced them with benefits that can’t be afforded; they have dumbed down their education so they will be less qualified to compete in the modern world; they have inflated house prices so that the aspiration of owning has become an unaffordable dream. I’m sure you can add much more if you think about it. They have treated the working class like a pusher treats a junkie.
First of all, this is nothing new. I was here when you said it. Your line has been consistent throughout. Well done indeed! I cannot think of any other source which I can find so easily which is so clear, consistent and understandable without one whiff of jargon.
Second, this seems to me to be a crisis in regulation.
When I first started teaching, I was under a mentor sort of person who helped me along and, while always backing me up in public, nevertheless took me aside from time to time and sorted me out! This was always done in a kindly and helpful way by someone who knew how very hard teaching can be when you first start off. I had three different mentors at three different times. All three were excellent, but completely different.
Isn’t the banking system the same? Doesn’t it need just one at a time? A quiet word, perhaps, before the crisis happened might have done the trick? If you can see what needs to be done, then I am sure the Governor of the Bank of England can too.
That is why the plan of restoring the Bank of England to its traditional role must be right.
What is your prognosis for our future economy and what will be the effects on the people of this country based on current policies? How could it be changed in a beneficial way?
Robert K, Oxford Reply:
September 14th, 2009 at 9:10 am
Disaster. The dotcom bubble morphed into the banking bubble morphed into the credit crunch and now another asset bubble. The only solution is lower taxes and much lower public spending, but the books are now so imbalanced it will take years of pain to resolve.
It is scandalous that ‘Newsnight’ demands to know what guests will say, and then to withdraw the invitation when they don’t like the message. This blog has mentioned many similar instances of this, and it is appalling that JR is kept off BBC channels by appartchiks whose main aim is clearly to suppress any non-left views and to protect the current government.
The huge bias, now plain to see, in the BBC in the choice of news items and how they are ’spun’, of guests and interviewees on news and current affairs programmes, of members of discussion panels, and so on, is such that I am increasingly of the view that some external control must be put in place by the next government. The status quo can no longer be tolerated, and the inevitable cries of “political interference” will just have to be borne.
Mike Stallard Reply:
September 13th, 2009 at 11:40 am
What worries me is this:
I totally agree about the BBC.
But at Church we had two very devout Serving Girls. Now, after three years at “Uni” learning to be teachers, they are no longer interested. You see, they are training to be teachers……
Are you sure that we aren’t fighting the new Middle Class of teachers, “media experts” and University Professors?
In other words, the left have taken over the means of production of middle class people.
Robert K, Oxford Reply:
September 14th, 2009 at 9:11 am
Better, sell the BBC to the highest bidder and scrap the distortion it represents to a free market in broadcasting
John,
I think your analysis is OK in as far as it goes. Equally important issues involved our role in the world, handing over our intellectual capital to other nations, undermining our unique skills and selling points, all of which conspire to ensure that many of the activities we have led the world in, and which have been worth money to other nations, have been systematically given away. The underlying assumptions about us being a first world nation will not work when we have failed to educate our own people, and where we have passed IP to uncoming nations in a simplistic desire to cut short term costs.
We are going to be left shortly with no skills of any value to the rest of the world, and that will be a bigger problem than the debt figure longer term.
But hey what do I know.
[...] Redwood has written yet another excellent blog post this morning outlining the ten errors made by the authorities that led to the financial crisis and [...]
Martin W
That is what the Daily Telegraph do too- try saying anything on their blog forums that does not please and wow yes you are moderated and deleted. The same with the Guardian, there is really no such thing as a free press any more.
We are on these boards at the discretion of our kindly hosts, for which I am very thankful.
I have tried writing letters to the broadsheets, and now I firmly believe that Tory politics is a misogynists arena!
Mike Stallard Reply:
September 13th, 2009 at 5:18 pm
I got chucked off Labour List when they found that I also commented on this blog. And it was with personal insults too!
(PS Last time I looked, I was a man).
Make the BBC licence fee voluntary.
The BBC claim that everyone loves them, and they are wonderful value for money.
So everyone will keep paying won’t they?
“Problems are solutions in disguise”.
If you do not analyse a problem properly, you cannot come up with a proper solution.
You have produced a marvellously succinct summary of the main factors that have lead to the current appalling mess.
Would you now be willing to follow this up with another article putting forward what action the conservatives should/would have taken since 1997 to avert what has actually happened?
And would you like to whisper what you think of Vince Cable’s stated opinions on events over the same period of time?
reply: yes of course I have spelt out at each turnign what they shouold have done -
1. Don’t break up the Bank of England
2. Don’t change inflation targets
3. Demand more cash and capital as balance sheets increase too quickly
4. Raise interest rates sooner
5. Cut rates sooner if economy was going to fall
6. Don’t naitonalise banks
7. keep markets reaosnably liquid to avoid collapse
8. Require banks to sort out cash and capital through private regulatory interventions
David Belchamber Reply:
September 13th, 2009 at 5:50 pm
Thank you for the courtesy of a reply.
You could add the taxation of dividends in 1997 which altered the relative price of equities and cash and encouraged the use of debt capital as opposed to equity capital, and the consequential and predictable flat return on equities 1997 – 2007. That is zero reward for risk.
An excellent summary. I do hope George Osborne and David Cameron read your blog. The trouble started even earlier. Twenty years ago the Bank of England should not have allowed the mutual building societies to become joint stock banks or should, at least , have imposed strict rules on the of the sort of banking they were allowed to do. Another contributor to the banking troubles was the disastrous invention of “securitised debt”.
As for Newsnight, or much else from the BBC, it is about as reliable as my lottery number system, and I remain poor. The reason they did not want you, was on the basis of this analysis, you are largely right. Why has so much of the media been terrified of the truth?
Where I would argue was that the onset of the crisis was at these dates. In my view the disaster was under way immediately after the internet crash, when the loose money and credit creation flushed into other sectors.
“Early signs of an asset bubble do not deter them” (see JR above).I do not remember politicians of any stripe ,save latterly Vince Cable ,warning of the disastrous bubble in house prices, which was encouraged by Homeowning Democracy proponents to calamitous effect in the case of Clinton and Bush Jnr. leading to a momentary collapse of world capitalism.The banks by lending to people who could not afford mortgages were only doing their political masters’ bidding.If certain Labour politicians had their way another house price bubble would be in place for the next election; the Conservatives want one to erupt after they have been elected a while.
As for “We the taxpayers have been placed needlessly at risk”(ibid) it is surely the case that the taxpayers are having to repay in trumps the money saved by not having to pay a proper property tax such as Schedule A of Income Tax which the Conservatives,then beset by some magnificent sex scandals, abolished in 1963.Enoch Powell said abolishing this would be a disaster and right he was.
I thought that interest rates were being tweaked to control general price inflation.
Asset prices (esp. Houses) have always been a problem. Ramping up and down interest rates to control house price inflation would have left other sections of the economy very vulnerable.
The only solution to House price inflation is to relax planning rules that stifle supply. Why successive governments have ignore supply and demand betas me. As for the NIMBYs …..
The biggest victims of the credit crunch have been the Northern Rock shareholders who have had their shares stolen by the government.
Dennis Grainger an ex Northern Rock shareholder wrote an excellent article in “This is money” regarding this subject. If you have a chance I urge to read it and the 721 comments on the article mostly from shareholders disgusted by this theft.
What I would like to know is what the Conservatives would do about this if they came into power.
Personally I think the best course of action for all involved would be for the government to return the shares to the shareholders.
http://www.thisismoney.co.uk/rock-shareholders
I couldn’t fathom WHY they didn’t see it?
From 2005 i was sure the crash was coming, thank GOD for Peter Schiff & his book “Crashproof, how to profit from the coming collaspe”.
Am 33% Euros/£
33% overseas stocks
33% Gold/Silver
Mike
It would be interesting to hear Redwoods opinion on his site about Nick Griffin appearing on question time? Should He? It would be nice.
I’m glad I’m not the only one who makes typos John. Great article all the same.
“. Autumn 2008. The authorities panic, demanding the main banks suddenly find large amounts of new cash and capital. They make all this public, undermining remaining confidence in leading institutions. This forces semi nationalisation, and huge taxpayer risk. Barclays is briefed against for daring to find its own money and staying independent.”
This risk could yet lead us into the very worst of W shaped recessions or even a WW recession. I think its very likely even.
Newsnight may be influential among a small “intellectual” audience. However, I think these issues deserve the attention of a much wider public: something on BBC 1 at 9pm for an hour where the issues are explained and illustrated – not some “debate” with a BBC attack dog at the helm. Perhaps a think piece from Roubini, yourself, even Cable and Frank Field to make it cross-party.
An excellent summary. I may keep a copy of this for reference whenever the Leftie blogs start trying to say Labour had nothing to do with the recession.
Could you please provide Mr D Cameron with a copy of the above to study so that he can lay blame for this recession firmly at G Brown’s feet? The great shame of this recession is that the Great Leader has managed, somehow, to avoid blame for his part in it.
I would only disagree on one point. The inflation target should have been changed to require the Bank to have regard to asset prices and excessive liquidity in the economy. It was the focus on the CPI which drove interest rates low which in turn pushed savings into assets rather than deposits looking for better returns. The RPI is slightly more sensitive to housing but not enough.
Excessivly low interest rates and rising asset prices inevitably led to a housing and borrowing boom which ultimately caused the collapse. It is essential that the remit of the Bank is changed so that they can raise interest rates even when prices are falling if they see any repeat (and they need only look at current stock market and commodities markets to see it right now).