Saturday, 18 October 2008

Time for Clarity

This financial crisis has had some strange effects. It has allowed Team GB to appear decisive. It has caused a temporary political truce - broken, incidentally, by Gordon Brown and Jim Murphy with their anti-Indpendence rhetoric rather than David Cameron and Alex Salmond. (One suspects that both the timing and content of these remarks will come back to haunt the Labour men.)

But, for me, the major effect has been a simplistic reporting of the crisis that has sought to fuse two entirely separate issues into one. We have an economic downturn, recession, depression - call it what you will - and we have a banking crisis.

Turning to the latter first of all. I'm not going to blame Gordon Brown for this directly. As has been widely reported not even FSA auditors were able to understand how the banks were selling their debt on. It is therefore not realistic to expect someone like Brown, with no economic training or industrial experience, to understand it. However, it does mean that the regulatory framework was deficient and, ultimately, the man responsible for that is the now Prime Minister.

Lets be fair. Now he knows what the problem is, he is trying to do something about it and he may even sort it. If he does, then in my book he comes out of the banking crisis even. If he doesn't fix it then he has to carry the can.

But the far bigger issue is the general economic downturn. Forget how the banks were raising the finance for a moment. For years, the US Federal Reserve and their accomplices in the leading economies of the world have been allowing consumer spending to be funded by ever increasing mortgages and remortgages. For almost as long, some of the most successful contrarian investors (Warren Buffet anyone?) have been warning that this was not sustainable in the long run. It is difficult to argue with their analysis.

So why did Alan Greenspan, Gordon Brown et al not pay any heed and put the brakes on this flood of unearned liquidity into the economy? Quite simple really - to do so would halt the much heralded period of continuous economic growth dead in its tracks.

No more boom and bust was the cry and Greenspan and Brown knew that as long as house prices kept rising, then people could continue to withdraw equity and drive growth in the economy. And there is plenty of evidence to suggest that house prices were being driven higher through policy measures - lack of new house building and the raid on pensions resulting in the rapidly increasing buy to let market, for example.

Eventually, though, as the contrarians were warning, it was always going to come crashing down. Real earnings couldn't possibly keep up with runaway house prices so, eventually, nobody would be able to afford them which would inevitably result in a downward adjustment, negative equity and general misery. was always in the plan for the banks to just continue to lend as much as we needed to keep the housing bubble afloat. Surely not? But then why relax all the regulations and drastically increase the permissable lending/deposit ratios.

The economic growth of the last decade has been founded on a pipe-dream and is undisputably the root of the current economic difficulties. The simple fact is that those in charge of the US and UK economies are the architects of today's recession. That's Greenspan, Bush, Blair and Brown. Sadly for Gordon, only one of them will be in office long enough to pay the price.

I could go further and suggest that it was this fatally flawed economic strategy that forced banks into more and more 'imaginative' financial instruments to allow them to keep funding the house price boom. In that case, the roots of the banking crisis are also in this crazy economic 'plan' but the benefit of the doubt leads me to believe that the banking crisis is down to a combination of light regulation and individual and corporate greed.

In summary, Gordon Brown deserves support in his attempts to resolve the banking crisis as I believe that no Chancellor would have known to take corrective action earlier. But, he also deserves a pasting for presiding over a sustained period of irresposible consumer credit which has now driven us into a what looks like being a long and deep recession.

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