Vince Cable, the British opposition Liberal Democrats’ respected treasury spokesman, said: “There are unpopular choices ahead for whoever wins the next election and doubtless there will be serious political repercussions.”
Not that the onset of the credit crunch came as a total surprise. There were warnings from the Financial Services Authority (FSA) and Bank of England that the housing bubble could burst and that stock markets were not pricing in risk. Some economists flagged up the huge amount of debt that banks and consumers were taking during an era when interest rates had been relatively low. There were the so-called imbalances in global trade with the Americans and Europeans sucking in imports from the east to satisfy their insatiable appetite for goods and services.
“At the time, I was getting a lot of stick for suggesting that US interest rates would have to be cut, rather than raised to ward off inflation ... the nub of it was that I thought the US economy was far more fragile than it appeared,” Lyons said.
The collapse of the British bank Northern Rock in September was followed last year by the US-government inspired rescue of Bear Stearns, the rescue of HBOS by Lloyds after prodding by the British authorities, the demise of RBS and Bradford & Bingley and the takeover of Alliance & Leicester by Spain’s Santander. Then it got worse. The bankruptcy of Lehman and rescue of American Insurance Group st autumn saw the world’s banking system brought to the point of destruction.
“Only at that point did we all fully realize how tightly the financial world was linked up, with institutions feeding off each other, and that if one big bank went down, so did everything else, a bit like a pack of cards,” Lyons said.
A shadow banking system had built up whereby banks bundled up poor quality loans, mixed them with some good quality mortgages and sold the package of debt (the components of which were unknown to investors) in a process known as securitization, with many products wrongly graded by the credit rating agencies.
Now, after a rally in world stock markets that began in March, and a return to health of some US investment banks (with employees on target to receive big bonuses), the question is whether we are over the worst. Vicky Redwood at Capital Economics said she believed we had hit rock bottom and are on the road to a sort of recovery, “but it will be sluggish and fitful.”
Howard Archer at Global Insight said that “progress will be painfully slow; the banks still aren’t lending and that hasn’t shown up in recent data. Banks are going to be careful as the regulators are insisting that they operate with a much thicker capital cushion than before the slump.”
Jim O’Neill, chief economist at Goldman Sachs, said: “We simply can’t be confident of the answer, but overall our indicators imply that we could see some modest positive world GDP growth before the year is over.”
Cable, however, argued that this was “a very profound financial crisis,” and worried that lessons were not being learned: “Six months ago there was unanimity that we needed a global approach to banking regulation and we should break up the big banks and clamp down on bonuses. But it seems that, both here and in the US, we are going back to the status quo ante — and that doesn’t bode well for the wider economy.”
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