Ten years on the klep­toc­racy still reigns

Sunday Herald - - COMMENT - Iain Macwhirter

Many of us are laps­ing into a form of debt pe­on­age ... We are be­com­ing like Me­dieval serfs, forced to work for a par­a­sit­i­cal land own­ing class

TEN years ago to­day, a rel­a­tively ob­scure French bank, BNP Paribas, blocked with­drawals from two hedge funds. It was the be­gin­ning of the big­gest fi­nan­cial cri­sis in 80 years. Within weeks, queues of wor­ried savers were form­ing out­side North­ern Rock, a Bri­tish bank that had spe­cialised in lend­ing 125 per cent mort­gages.

Its rocky busi­ness model de­pended on short-term loans which other banks were no longer pre­pared to pro­vide be­cause they no longer trusted its abil­ity to pay them back. Soon banks stopped lend­ing to each other al­to­gether as they re­alised the en­tire sys­tem was busted, in­sol­vent, ka­put.

The prox­i­mate cause of the global fi­nan­cial cri­sis was sub­prime mort­gage-lend­ing. Through­out years of ir­ra­tional ex­u­ber­ance in the prop­erty mar­ket, banks had be­gun lend­ing to peo­ple with lit­tle or no as­sets. In Amer­ica, you could fa­mously get a mort­gage even if you were a “ninja” – No In­come, No Job, No As­sets.

Banks con­nived with bor­row­ers to mis­rep­re­sent their fi­nan­cial means in or­der to sell mort­gages, or “liar loans”. Bankers be­lieved prop­erty val­ues would rise for ever and cover the debts. So when prices col­lapsed across Amer­ica and the UK, the banks were left with oceans of bad “non-per­form­ing loans”, ie un­re­payable debts.

Thanks to some­thing called “se­cu­ri­ti­za­tion” it wasn’t clear ex­actly who was hold­ing the debt losses. Toxic loans had been pack­aged up with vi­able ones and sold on to in­vestors as in­ter­est-bear­ing bonds, or Col­lat­er­alised Debt Obli­ga­tions.

Fa­mously, nei­ther the buy­ers nor the sell­ers of these pack­ages of mort­gages re­ally un­der­stood how these ob­scure in­vest­ment prod­ucts worked.

How­ever, it was clear that some banks, such as RBS, were fully aware that sub­prime lend­ing in­volved pass­ing on ex­ces­sive risks. RBS is still pay­ing the cost to­day.

Last month, the bank – which had to be na­tion­alised dur­ing the fi­nan­cial cri­sis – agreed to pay US au­thor­i­ties £4.2 bil­lion for sell­ing sub­prime mort­gage bonds be­fore the fi­nan­cial crash. Royal Bank of Scot­land was one of the big­gest banks in the world in 2007 with a bal­ance sheet big­ger than the en­tire GDP of the UK.

Un­der its buc­ca­neer­ing boss, Fred “the Shred” Goodwin, it be­came syn­ony­mous with risky lend­ing and mar­ket­ing du­bi­ous fi­nan­cial prod­ucts.

Scot­land had the un­happy dis­tinc­tion of lend­ing its name to two of the worst banks in the world. HBoS (Hal­i­fax Bank of Scot­land) also fell vic­tim to the con­se­quences of its own ex­ces­sive lend­ing and col­lapsed in 2008.

The for­mer gov­er­nor of the Bank of Eng­land, Mervyn King, as­sessed the scale of the Gov­ern­ment bailout of the UK banks at £1.1 tril­lion.

The Gov­ern­ment had no choice but to step in. When the banks col­lapsed like ninepins in the au­tumn of 2008, the Labour chan­cel­lor Alis­tair Dar­ling had to pour public money into the banks or risk see­ing ATMs dry­ing up and eco­nomic ac­tiv­ity grind­ing to a halt be­cause of lack of cash and credit.

The vast bulk of the £1.1tn al­lo­cated to the res­cue of the banks in the form of loans, liq­uid­ity and cap­i­tal in­jec­tions was sub­se­quently re­cov­ered.

But what can never be re­cov­ered is the lost out­put in the re­ces­sion that fol­lowed the crash, which the Bank of Eng­land es­ti­mated as be­tween £2tn and £7tn in the UK alone. Wages have un­der­gone a lost decade of stag­na­tion un­matched since the 1860s.

But we should be wary of gues­ti­mat­ing the fi­nal cost of the fi­nan­cial cri­sis be­cause in many ways it is still with us.

The Gov­ern­ment saved the fi­nan­cial sys­tem by throw­ing vast sums of public money at it and hop­ing for the best. It was panic, not pol­icy, and left us with a fi­nan­cial sys­tem founded on moral haz­ard.

The les­son of 2007 is that if a bank is big enough then it can be con­fi­dent that the Gov­ern­ment will al­ways step in to pre­vent it from go­ing bust.

IN 2013, King said: “It is not in our national in­ter­est to have banks that are too big to fail, too big to jail or sim­ply too big” – and he should know. But far from be­ing bro­ken up, banks like Lloyds got even big­ger as a re­sult of merg­ers fol­low­ing the crash. Bank be­hav­iour has not changed; in many re­spects it has got worse.

Unse­cured lend­ing – that is, on things like credit cards, over­drafts and car loans – has in­creased in­ex­orably, and rose by 10 per cent last year alone. Con­sumers now owe more than £200 bil­lion for the first time in his­tory.

You can’t get 125 per cent mort­gages any more, but you hardly need them since banks will lend at ever-in­creas­ing mul­ti­ples of earn­ings.

One in 10 home loans in Bri­tain is at mul­ti­ples of over 4.5 times an­nual earn­ings, com­pared with one in 15 in 2007.

The Bank for International Set­tle­ments, a kind of global bank reg­u­la­tor, warned in June that the seeds of another fi­nan­cial crash may al­ready have been sown.

The banks do not fear another cri­sis, as they did in 2007, partly be­cause they have big­ger re­serves and be­cause they know the tax­payer will al­ways pick up the bill. Af­ter the Great Re­ces­sion, gov­ern­ments started to dis­man­tle the wel­fare state through aus­ter­ity poli­cies, while con­struct­ing a wel­fare state for the banks.

Hun­dreds of bil­lions have been cre­ated through quan­ti­ta­tive eas­ing (QE) – ef­fec­tively the print­ing of money. The banks get al­most free money and then charge three per cent in­ter­est on lend­ing it.

Bank­ing has be­come a zero-risk ac­tiv­ity that is in­com­pat­i­ble with any con­cept of how a cap­i­tal­ist mar­ket econ­omy is sup­posed to work.

Busi­nesses are sup­posed to op­er­ate in a com­pet­i­tive en­vi­ron­ment, in which the threat of fail­ure makes them in­no­vate and in­crease ef­fi­ciency. Bankers just hand out loans willy-nilly and then play golf.

Mean­while, many of the rest of us are laps­ing into a form of debt pe­on­age – pay­ing an ever-greater share of our wilt­ing in­comes to the fi­nan­cial sec­tor, whether through credit cards, mort­gage pay­ments, tu­ition fees (in Eng­land) or rents.

We are be­com­ing a lit­tle like serfs in the Mid­dle Ages, who were forced to work for a par­a­sit­i­cal land-own­ing class.

Feu­dal serfs lost their free­dom when the land was stolen from un­der them; our free­dom is at risk be­cause the fi­nan­cial klep­toc­racy has ef­fec­tively hi­jacked the fis­cal re­sources of the state.

Own­ing fi­nan­cial as­sets is now a sure way to get rich with­out work­ing. In­equal­ity has been tur­bocharged by the crash.

The top 1,000 fam­i­lies in the UK have seen their wealth in­crease by 112 per cent since 2007, ac­cord­ing to the Sunday Times Rich List. These fam­i­lies now own £547bn – more than all the bot­tom 40 per cent of house­holds.

An ever-greater share of wealth is go­ing to cap­i­tal (fi­nan­cial as­sets), while mil­lions of work­ers have been plunged into low-wage in­se­cu­rity. His­tory may judge that what re­ally hap­pened af­ter 2007 was that the wealthy ma­nip­u­lated a fi­nan­cial cri­sis to re-engi­neer so­ci­ety in their in­ter­ests.

We have emerged poorer, more di­vided, more un­equal, and more in­se­cure.

For many, es­pe­cially the un­der-35s, the real fi­nan­cial crash is only be­gin­ning.

Photograph: Danny Law­son/PA Wire

Fred Goodwin led RBS to calamity as it be­came syn­ony­mous with risky lend­ing

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