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Governments have made errors. Much blame deserves to be laid at the feet of Alan Greenspan, former chairman of the Federal Reserve, who liked to warn of ‘irrational exuberance’ but who then fed that exuberance by handing the economy the punch-bowl of low interest rates. Greenspan found his echo in Gordon Brown who, although handing notional independence to the Bank of England, hand-picked members of the Monetary Policy Committee he could rely on to champion the case for low rates, and fiddled with the official inflation index to ensure downward pressure on rates throughout the years of the credit binge.
But no one should be under any illusions that the chief blame for the crisis which has progressively engulfed the global economy over the past year can be laid at the door of the bankers themselves. Left alone to innovate, they did an astoundingly good job at devising themselves complex tax-breaks and devices such as hedge funds to sidestep what light regulation remained. But when it came to devising useful financial products to oil the wheels of industry and help families manage their finances they have shown rather less healthy ingenuity. The subprime mortgage, from which so many of the current problems evolve, is the ponderous Bristol Brabazon and the exploding Ford Pinto all rolled into one.
Even this week, as the financial system continued to unravel, the unacceptable side of the financial services industry was on display. In a repeat of events in March, when false rumours of an emergency loan from the Bank of England set off a collapse in the share price of Halifax Bank of Scotland (HBOS), HBOS’s shares appear to have been the victim of a short-selling spree by chancers who would happily reduce the banking system to chaos for a quick profit.
The banking industry inevitably faces greater regulation: when the Republican candidate in the US presidential election denounces Wall Street as a ‘casino’, that can be taken as read. Yet financial services is a notoriously difficult area to regulate, and the regulators have often proved ineffectual. The Financial Services Authority was supposed to bring a new era of probity to the City — following the Bank of England’s miserable failure to see what was going on at BCCI, the corrupt bank which collapsed in the early 1990s. Yet where are its teeth? The hunt for those who spread the false rumours about HBOS in March rapidly went cold. Perhaps it would have been better if the government, rather than bailing out Northern Rock, had spent the money buying HBOS shares, thereby driving the price up and the short-sellers to ruin.
It would be thoroughly miserable for the global economy if the current situation were to be exploited by those who would happily roll back the free market. Grim as current conditions are, it should not be forgotten that greater and more prolonged problems resulted from the years of strong government intervention. This week’s slide in the stock market is nothing compared with the panic of 1974; this week’s inflation figure of 4.7 per cent (according to the Consumer Prices Index) would have been gratefully accepted by consumers in 1975, when inflation touched 29 per cent. While unemployment is certain to rise, it is highly unlikely to reach the three million it stood at in the early 1980s recession — in any case, the basic unemployment figure ignores the fact that the number of jobs is so much greater now, and that so many more households have the cushion of two incomes.
Then, as now, the problems of the 1970s resulted from a speculative boom which went bust. But in that case they were hugely exacerbated by the burden of a centrally planned economy, highly inflationary government spending and trade union law which allowed workers to dictate to management. There was no sitting back and enjoying the sight of greedy bankers getting their comeuppance in the 1970s: the struggle was in making ends meet.
Ultimately, the best regulator of the free market is the fear of failure. By declining to bail out Lehman Brothers this week, the US government made an important statement: that no one is too big and grand not to be allowed to go bust. That decision has since been partially compromised by the bail-out of AIG. But there is still reason for hope that this week’s events will be the kick up the backside required for the banking industry to get its house in order.
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