THIS week, September 15 marks a decade since the onset of the great bank crash of 2008 when the global financial system teetered on the edge of collapse. That’s collapse as in you going to the cash machine and finding it empty and your bank account along with it. Crash as in a meltdown in the payments system leading to empty supermarket shelves and wages not being paid. It didn’t happen but we came very close.
Perhaps because financial Armageddon was postponed, a kind of amnesia about 2008 has kicked in. In those 10 years a whole new iGeneration has reached adulthood who simply don’t remember the old, pre-austerity world or the whys and wherefores of a fiendishly complicated financial disaster – so complicated even the bankers didn’t know what was happening. September 2008, when Biffy Clyro, Rihanna and Pussycat Dolls were topping the charts, seems an age away for a generation who’ve never known anything else but rock-bottom interest rates. So here’s my guide to the myths of the 2008 crash, its aftermath and why it will happen again:
Myth #1: The financial crisis was made in America. This mantra has been repeated ad nauseum by Gordon Brown to avoid his personal responsibility for 2008. Certainly, US banks helped destabilise the financial system by inventing those infamous “subprime” loans; i.e. granting mortgages to folk without the income to repay them. These subprime mortgages were then bundled with less risky loans, spliced into separate packages and sold on to other financial institutions. Now comes the interesting part.
Banks weren’t interested in making money from mortgage lending, which generated peanuts by way of profit and bonuses. Instead, they made a fortune selling and reselling insurance against any of the original subprime loans going sour. This involved insanely complicated financial arrangements called Collateralised Debt Obligations, or CDOs. However, a lot of transactions involving CDOs were of questionable legality under US financial regulations.
So they were done “off balance sheet” (i.e. secretly) in London. In other words, the crisis was made in the UK because chancellor Gordon Brown had happily de-regulated the British financial system on behalf of his banker friends. The heart of this de-regulation was to allow banks to bet with their own money (i.e. their depositors’ savings) in risky ventures such as CDOs. In return, bankers gobbled huge personal bonuses and Gordon Brown (temporarily) garnered higher tax income that made him look good. In gratitude, Brown gave knighthoods to eight senior bankers, including Fred “the shred” Goodwin of RBS.
Starting in 2007, this house of cards began falling apart. The tiny percentage of toxic subprime mortgages infected each bundle of standard loans. Suddenly, banks found themselves having to pay out on a cascading series of CDO insurance packages. In turn, because they did not know the extent of these insurance claims, banks stopped lending to each other. On September 15, 2008, Lehman Brothers investment bank in New York – which was heavily involved in subprime mortgages – filed for bankruptcy. Result: stasis in the global banking system.
Myth #2: Gordon Brown saved the world in 2008. No, Gordon was part of the problem. True, he nationalised RBS and HBOS-Lloyds in 2008, to stop them collapsing. But Brown had been instrumental in pushing both banks to the edge through de-regulation and encouraging their focus on casino investment banking.
It was Brown himself who persuaded Lloyds to take over the failing HBOS operation, after the latter used depositors’ cash to buy stakes in the dangerously unstable London commercial property market. Also, Brown’s obsession with expanding the city’s financial sector was at the expense of the traditional manufacturing industry – two million manufacturing jobs were lost in the UK between 1997 and 2010.
Gordon has cultivated the myth that it was he who persuaded the rest of the big nations to join in a common project to lower interest rates and pump cash into the global economy, to avert a complete collapse of capitalism. Reality is very different. In the UK itself, recovery was made difficult because Brown’s reliance on the banks meant that around 14% of taxes came from the financial sector – but this cash now disappeared. As a result, after 2008, UK public debt mushroomed from 40% of GDP to double that figure.
Brown found it difficult to boost public spending in a way that would secure a transformation of the economy away from banking and back to manufacturing. In the US, on the other hand, the crisis produced a plan to invest heavily to save the US car industry.
In fact, the global trading economy after 2008 was saved by China. A massive, Keynesian-style boost to Chinese investment lifted global demand for raw materials while flooding the world with cheap goods.
As for the UK, the aftermath of the crisis saw us just as much in hock to a corrupt banking system as we were before 2008. One of Brown’s final acts before he lost the 2010 General Election was to veto a proposal from Labour MP Harriet Harman to remove Fred Goodwin’s gargantuan pension.
Myth #3: Everything is fixed now. No it isn’t. Globally, banks have been forced to hold more capital, to provide a float against unexpected losses. Simple souls think this means there is cash in a vault somewhere.
Not so. All the new capitalisation rules mean is that a bank must have sufficient reserves after (hypothetically) selling all its assets. This is supposed to make potential creditors feel safe. Fair enough, if we are talking about one bank in particular. But if there is another systemic financial crisis, and every bank tries to sell their assets simultaneously, then these hypothetical capital reserves will evaporate.
Bankers have spent the last decade spending millions on a PR exercise to water-down tougher regulations. They have succeeded. For instance, there was a plan to place a reverse burden of proof on senior bankers in the UK: in the event of a major scam or scandal, the top management would be held responsible unless they could prove they really did know nothing about it. This sensible idea was dropped by George Osborne when HSBC threatened to move its head office out of London.
I spent a lot of time in Parliament fighting this watering down of bank regulations. You can understand my surprise when I discovered that the SNP’s new Growth Report recommends adopting wholesale the current, weak UK banking regulations – the very ones the SNP Parliamentary group fought against tooth and nail. Just saying.
Casino investment banking has not gone away. But since 2008, more and more financial trading is done by robots. Trillions of investment dollars have migrated from traditional, human-managed funds into passive, tracker ones supervised by algorithms and executed in nanoseconds. By some estimates, 90% of all US trading volumes are supervised by robots. The next financial crash will occur before we know it has happened. A decade of artificially-low interest rates has also resulted in a sea of bad investments that will only surface when rates are normalised – as is now happening. All good reasons for Scotland to quit a UK economy still in thrall to the City of London – and soon.
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Callum Baird, Editor of The National
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