Why there is a need for Bankers Confidence in the banking sector?
At the time of the credit crunch, most economic commentators stated that the aftermath would dominate economics and politics for at least 10 years, and that has been the case.
Leading up to the credit crunch, too much credit entered the system and too much money was looking for investment opportunities. At that time, over ten years ago, much of that money was invested in high risk new opportunities created by innovative financial engineering, that gave rise to high yielding and allegedly totally safe investment pools created out of high risk mortgage lending.
People with limited income and wealth, and poor credit, were given for the first time, expensive mortgages to allow them to buy their own homes for the first time ever. These mortgages were then bundled into creative securities and sold to investors across the economic globe in the belief that they held high yielding yet totally safe securities. Totally ignoring the very basic concept of the risk-return economic equation.
These mortgage bundles were cut and repackaged and resold throughout the financial markets, and eventually questions were starting to be asked.
Who actually owns these mortgage securities?
Were they really worth what they were meant to be worth?
Suddenly, the game of “pass the parcel” stopped! Credit started to get withdrawn.
What followed, very quickly, was the first run on a UK bank since the 19 th Century. Northern Rock collapsed in September 2007. Instead of relying on customer deposits to meet its operational and mortgage growth aspirations, it borrowed short term money in the financial markets. This unregulated action and very basic lack of understanding economics created a mis-match that was doomed to fail. They advanced long term mortgage securities using bought in short term inter-bank loans. When credit became hard, that required funding simply disappeared – so did Northern Rock.
That failure was quickly followed by Bear Sterns in March 2008, followed later by Lehman Brothers on September 15 th . The Lehman Brothers failure was more catastrophic, because as a clearing house, nobody knew who owed what to whom, who was exposed to the risks, and therefore which Banks would it pull down with it. At that point global supply of credit totally dried up.
Economies had never been through the experience before where all credit simultaneously disappeared.
RBS, at that time the biggest bank in the World according to the size of its balance sheet, was within hours of going bust. ATMs would have had no cash and the insolvency of RBS would have brought down many other smaller banks as well.
The only action available, was for government intervention to save the banks. The effects of this disaster are still resonating today.
Consequently, governments across the developed economies had to introduce austerity measures to restore some semblance of economic and financial stability.
The crash brought about reduced credit, economic shrinkage and declining tax revenues, leading to increased government debt. Life got harder for most of the populations, but NOT those in the Banks or the financial system. Those that caused the global crisis “got away with it”, and the rest of society had to face the consequences.
The Resolution Foundation has reported that the last 10 years has seen the longest and most severe period of declining real incomes in recorded economic history. Far worse than the impact of the Napoleonic Wars, the financial crisis that motivated Marx, the Great Depression and the aftermath of the two World Wars. Astounding!
But overall remuneration paid in finance has not gone down, and the bonus pool in the banking sector was £15 billion in 2017, the largest since 2007.
So, the failing banks were taken over by the survivors, so the survivors are now larger, and the effects of failure now, could be far greater than that of ten years ago.
The majority of banking transactions are what are known as “over the counter” (OTC), where they are directly executed between parties, but are not independently supervised, so no one else knows what is being transacted. The OTC market in financial derivatives is also unsupervised and no one really knows the size of that market but it is thought to be in excess of $532 trillion.
In summary therefore, there has been no real change. There is still no bonus regulation or ring fencing of investment banking away from consumer banking; nothing has been done to protect us from the “too big to fail” possibility, and there has been no material reduction in the level of risk present in the banking system.
This is why Bankers Confidence is needed
No change or detriment to those inside the system that caused the failure, but a decade of misery to the rest of us. Austerity only impacts the poor rather than the better off.
The top 1% of taxpayers pay 27% of all income tax, but austerity means they pay less tax. Small changes in welfare or state spending has a far greater impact on the poor. Austerity created to save the Banks, creates increased inequality. There is another monetary policy driver as a consequence of the credit crunch. Quantitative easing (QE), where governments buy back their own debt with newly printed money. The theory is that existing bondholders now have surplus cash on their balance sheets and are obligated to make that cash work; so, they spend it, and that greater liquidity gets spent as it passes through the economic cycle. The wealthy and Institutions generate economic activity in this process, mainly by buying assets such as real estate and expensive luxury chattels.
The impact of this is that house prices and equities increase in price, as a direct consequence only of QE. The Bank of England has stated that UK house prices are 22% higher than they should be, only as a direct consequence of QE. The figure is 25% for equities.
Finally, then, based on the simple accounting premise that for every credit there is an equal debit, for every liability there is a corresponding asset of same value; where’s all the money? Probably hidden by the ultra-wealthy in tax havens. Conservatively, there is sound evidence to suggest that the missing money totals some $8.7 trillion.