It is important for us not to confine our thoughts about the future regulation of the British banking industry to an attempt to ensure that a crisis such as that at Northern Rock does not recur. There are more fundamental problems affecting the industry, along with its opposite numbers in Wall street and other financial centres.
It has been notable in recent times that the representatives of the British banking industry, whether appearing on television or radio or contributing to articles in newspapers—backed up by their supporters' club consisting of most of the financial commentators—have been making very gloomy predictions about the economy, about profits, about jobs, about growth, and about the likely impact on taxation in this country. They say that it is all being caused by the credit crunch, but scarcely ever go on to acknowledge that they themselves are solely responsible for the credit crunch— the banking crisis that we face. Their usual targets when things go wrong are public sector pay, trade union militancy, alleged failures in public services, the national minimum wage, which they say will cripple the British economy, and part-time workers seeking security of employment, who will apparently ruin the economy. However, not even the failure of Northern Rock will damage the British economy in anything like the way the banks are damaging it.
The credit crunch—the financial crisis, the banking crisis, the international banking crisis—was caused because United States financial institutions lost fortunes on what, after things all went wrong, they started to call "sub-prime mortgages", or, in plain English, "lending money to people who could not pay it back", which has generally been frowned on by bankers in the past. Having lost their money, the banks packaged up the loans in new financial instruments with the wondrous title "collateralised debt obligations" and sold them on to a collection of mugs hitherto known as "international bankers".
CDOs are rather like pre-prepared and pre-packaged supermarket salads, with different assets all chopped up and mingled together, but these packages contained very few genuine assets. The remaining elements were worthless, or rather worse than worthless: they were liabilities. A CDO was a bit like a pre-packaged Caesar salad in which there is one anchovy and all the rest is lettuce, apart from the fact that the package containing the salad is transparent. There was nothing transparent about the CDOs; however, they were sold on as top-quality and bought by idiots as top-quality, and the credit rating agencies invariably gave them triple-A ratings. They were risk-free. The banks bought them out of recklessness or stupidity, or perhaps they were deceived, but what is more likely is that they suffered from the worst form of deception—self-deception—and it is they who have got us into this mess.
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