Crash Analysis

I watched the second part of Will Hutton's Dispatches Report entitled 'Crash - How long will it last?' last night and was more angered than informed.

It didn't really tell us anything that we did not know or that I haven't blogged about but what it did was put it all in chronological order and summarise the events as seen by the key players. There were a number of quotes and events that are worth remembering from it and Will Hutton's summary was chilling enough that we had feted and lauded the bankers too much in the Labour Government's terms, for what reason it is not entirely clear, but what we have ended up with is the scenario that there is one industry in the world that can create as much wealth as it likes in any way it sees fit and if it fails, having rewarded itself stupendously, then the losses will be redistributed to taxpayers.

Life will then resume for these people - and to a large extent and with few notable exceptions, it will be the very same people who will be allowed to do it all again.

Highlights

It's difficult to know where to start but Alistair Darling's 'little boy confused' look is wearing thin but he claims that mistakes have been made in this business over thousands of years and so we must be 'Older and wiser' for the future. The clue was in the fact that the same mistakes had been made before - so we just repeated them on a grander, more complex scale with more catastrophic results.

What came across from just about everyone was the bewilderment on how the events unfolded and how little idea anyone has of how and when we will get back to normal. The one thing we can agree upon is that a whole generation will pick up the tab. Professor Buiter of the LSE was very pessimistic reckoning unemployment will rise over the next 4 years reaching over 10%, businesses will fail on a catastrophic level and there will be a great deal of austerity - he also was dismayed that taxpayers are left footing the bill for all this.

The one person who foresaw the recession that Gordon Brown denied could happen to us was Danny Blanchflower (not the former footballer but he was on the Bank of England's Monetary Committee). Blanchflower had persistently voted for interest rate cuts long before the crisis unfolded as he felt the Committee's obsession with inflation was masking the wider economic problems which were manifesting themselves - growth was slowing, unemployment was rising. He was publicly shouted down by his boss Mervyn King who has tried to shape himself as a bit of hero in all this but in fact was just another idiot who believed money can create more money, forever.

The most powerful image was of Gordon Brown addressing the City in June 2007 and thanking them for their work in creating a new era of prosperity in the City. Within months Northern Rock would have collapsed and the whole pack of cards began to fall. The enormous hubris and smug self-knowledge was the epitome of Brown for all those years yet as Buiter said, it was Brown who created the conditions for this collapse, it was his policies on regulation and taxation that created the feeding frenzy in the City that he allowed to go unchecked because he really did not consider that it was all built on nothing more than sand.

Sir John Gieve, intimately involved in the Government's handling of the deals with the banks described the crisis as a series of 'drunken lurches' - just when you thought you had got a hold of it, another thing knocked you off your balance. In fact, it was more the Government responses which have been an extended series of knee-jerk reactions from which no-one really knows what the full liabilities are - we have lost count of the billions and billions of our money we have committed in cash, loans, guarantees. We can only assume that the top end figure of £1.3 trillion is the sum of it.

The bank executives held up in front of the Treasury Committee were seen to eat humble pie. The bigwigs surrounded the baby faced former Asda Marketing manager, Andy Hornby, who as CEO of HBOS blew the market leading position of the UK's largest mortgage provider. He should have been sent back to stack the shelves. Fred Goodwin, the arrogant head of RBS, had the last laugh when the Government sent one of his kin in Lord Myners, a professional Non Executive Director who had no idea what he was supposed to do or let himself in for, and so agreed with the other NXDs to allow Goodwin to walk away on his own terms. What an idiot, and he's still there as the City Minister.

Meanwhile Goodwin described the Government's offer for RBS as a 'Drive by shooting,' showing his ignorance. If that had been the case, then surely he would have been dead. As it is, he is far from dead unlike the thousands who lost their jobs and the taxpayers who underwrite his incompetence. It has now been found that around 25% of his bank's lending had been insecure. It's like in our own businesses having to write off 25% of our revenue because our customers would not pay - we would be out of business and never trusted again.

Then there was the brainy Lord Adair Turner, another serial NXD, who sits on more committees than God. As Chair of the FSA he sat by and did nothing and then has been allowed to write the new constitution of the same body when he should have been out on his ear. We paid in excess of £250,000 a year for his part time role and he sits on Boards and other bodies earning an absolute fortune for giving wisdom in hindsight.

Why do we allow incompetence to re-root and grow again? Just because he has a nice accent and went to the right University.

Even in his hours of 'superman' status in rescuing the banks, Brown got the basics wrong which allowed the banks to continue to run themselves, restructure as they wish, reward themselves as they pleased, lend when they wanted to, and give failed executives bumper pay offs in their pensions or lucrative consultancy packages. Brown may claim that he cannot watch every detail but this is precisely the issue. It was the detail that eluded him the last time round. If he had bothered to check he would have understood that lack of diligence and attention was driving the whole financial system to a point that it simply had to implode.

You cannot keep getting something for nothing.

Lessons To Learn

When the last Conservative Government was turfed out, there was much criticism of the way the country had been run, the decisions taken and particularly of fiscal policy (let's not go down the sleaze route for now). What has happened is that New Labour sold its traditional values to a bunch of spivs in the City who took over the reins. With tax breaks and a free passage to do as they please, they created a scam so obvious yet intricate that they made money out of nothing.

The rise of the Private Equity House and Hedge Fund and the emphasis on buying and selling businesses for vast profits through leverage and minor tinkerings overrode the investment in technology, innovation and the future. It was all about the here and now and how rich you can get. Tony Blair could not get away fast enough and is so busy doing meaningless City jobs earning £ millions that you can see what was on people's minds. The old values were gone - 'Champagne Socialism' was here. Peter Mandelson led the charge claiming that the Government would be delighted if people got fabulously wealthy, as he has done curiously as a career politician.

The lesson we have all learnt is that if you allow greed to run the country then ultimately it will cost the rest of the citizens. For while we may like it, but when the cloak is pulled away we just find out we have been robbed.

But now we have had a taste of it, no one wants it taken away. So all the money that will be spent will be to try and preserve the status quo for a few more years before the next big crash. Boom and Bust is here to stay - Gordon's credo was is his own modus operandum.