Alarm bell that makes me fear a new crash
EXACTLY ten years have passed since the building society Northern Rock crashed into the buffers and had to be bailed out by the Government.
Though it was a desperately worrying time for thousands of Northern Rock depositors, most people brushed aside the collapse of the relatively small building society as a one- off event.
But then came the financial crisis, sparked by the failure of investment banking giant Lehmann Brothers a few months later.
With the benefit of hindsight, Northern Rock was the canary in the mine: the warning sign that something was hideously wrong with the global financial system.
This week, a seismic event in the City has forced us to confront the question of whether history is about to repeat itself.
Shares in Provident Financial, another northern financial institution, suddenly went into freefall without warning or — however much the company might argue to the contrary — proper explanation.
The FTSE 100 company’s share price plunged by two-thirds in a day as profits collapsed, wiping £1.7 billion off its value.
Worryingly, Provident Financial specialises in supplying loans to poorer customers who do not qualify for credit with mainstream banks. These are just the kind of people who were given ‘sub-prime’ mortgages on a massive scale in America a decade ago. The realisation that thousands were never going to be able to pay off those mortgages helped to spark the global financial crash.
So are we in for a repeat of the catastrophe which crashed markets and drove millions into unemployment in 2008?
ATFIRST sight, the signs are reassuring. The experts say that Provident Financial’s problems seem to have had more to do with internal management difficulties than loans that have gone bad (and it’s sadly no surprise that chief executive Peter Crook was paid £6.3 million last year).
However, probe deeper and I believe we all have reason to feel very alarmed indeed.
For, once again, the global economy is being driven by the same huge demand for credit which sent markets over a cliff last time.
Take the appalling situation in the United Kingdom, where the average household had unsecured debts of an average of £13,200 at the end of last year — just a fraction below the £13,300 level it stood at in 2008. That figure is rising all the time, and is set to exceed £14,000 next year.
With Britons owing more than £68 billion on credit cards alone, debt is now growing at the same ferocious pace it did on the eve of the great financial meltdown.
The situation is even worse in the U.S., where consumer debt already exceeds the unsustainable peak it reached in the autumn of 2008.
Globally, debt levels are simply out of control. According to the International Institute of Finance, the global association of banks, they have soared by £60 trillion (that’s £6,000 billion!) over the past decade, to a record level of £174 trillion.
That’s more than three times the gross domestic product of the entire world.
In other words, the global system is even more financially vulnerable now than was the case on the eve of the financial crash ten years ago. There’s a chilling reason for this. When the financial credit crunch happened, nation-states still had the financial strength to bail out failing banks by taking ‘bad’ banks — like RBS and Lloyds — and effectively putting them on the national balance sheet.
Unfortunately, that kind of hugescale bailout is no longer possible because governments are far more indebted today than ever before.
This means that during the next financial crash, politicians and central bankers will be helpless to intervene and prevent a banking meltdown because they just don’t have the ammunition to do so.
Such are the ugly financial truths that all responsible people must confront in the autumn of 2017.
Indeed, they are so dark and troubling that most financial experts prefer to look away.
To his credit, Bank of England Governor Mark Carney has spoken out, warning that banks are ‘forgetting some of the lessons of the past’.
That said, his record is marred by the refusal to raise interest rates to anything like normal levels, which has encouraged people to borrow money they cannot afford more cheaply than ever.
The travails of Provident Financial aside, there are other troubling indicators in the financial system. It’s only two months since the Italian banks Banca Popolare di Vicenza and Veneto Banca had to be bailed out after they fell into trouble in Italy.
There is every reason to fear that fresh financial disasters are on the way in Southern Europe. The national economies of Greece, Italy and Portugal carry debts of more than 100pc of gross domestic product.
Collectively we are facing a financial emergency.
For ordinary people, the sensible course of action is pretty clear. We should rein in spending and avoid taking on unnecessary debt.
BUTthat brings us to the terrifying paradox: if everybody across the Western world did this, spending would contract so sharply that national economies worldwide would slump into depression.
That is the irredeemable consequence of a world which has become addicted to debt.
The pressing question now is what our political masters can do to stop the rot.
It is a problem which Chancellor Philip Hammond must address in this autumn’s budget.
But he faces an unpleasant dilemma. He needs to curb consumer demand for credit in the interests of the long-term stability of the British economy. But curbing demand and the spending that goes with it risks tipping the British economy into recession. I make only one prediction. In the years ahead, Brexit will not, as many think, continue to be the dominant problem facing Britain and Europe.
Global economic turbulence is the really serious problem that must be tackled in the near future — and the storm we will have to weather could be fierce indeed.