How much have we learned 10 years on from the banking crash?

Most commentators and bankers now accept that big mistakes were made in the middle of the last decade allowing commercial banks and investment banks to borrow too much money, to lend too much money out to people and companies, and to develop too many clever financial products that recycled the debts around the market. The favourite excuse at the time was the globalisation of markets and the creation of mega banks allowed them to run more overall risk, because it was spread over so many different instruments, currencies, jurisdictions and borrowers. Those of us who worried about these things were told we did not understand how good financial markets and banks had become at spreading and managing risk.

As it turned out, the older idea that a bank should keep a decent amount of cash and reserve capital against future losses was a better one. That has now become fashionable again, with banks typically required to keep more than twice as much cash and capital as they did at the peak of the boom relative to their risk assets or loans, with many of them choosing to have rather more than the minimum.

Fewer commentators accept that a second important mistake was made in 2007-9 by the Central banks and government authorities. They decided to raise rates and reduce liquidity in the markets too much, bringing down the over exposed balance sheets by deflating them too quickly. If Central banks withdraw cash from the market, it lowers the value of assets like property and shares. These are the backing for loans banks have advanced. As they fall in value so the solvency of the borrower is put at risk. As interest rates rise, so more people and companies struggle to pay their debt interest. Banks end up with a pile of bad loans and insufficient collateral or backing to meet the losses on the loans.

For a period of unreality in 2007 many were talking about a necessary correction for the masters of the universe in finance who they thought deserved to lose, in the belief that this could occur without harming the “real economy”. As a few of us warned at the time, bringing the excesses of the financial sector down would also bring down the real economy, closing factories, collapsing businesses, costing people their non financial sector jobs. So it proved. The corrections, administered by the authorities in the first instance, soon became self fuelling. The advanced countries affected entered a severe depression.

The Finance Ministers and Central banks awoke to the full dangers early in 2009 and started to make large amounts of cash available to the markets to prevent more banks and other businesses failing. They went on to pioneer programmes of state money creation and government bond buying, as their way of replacing the money destroyed in the commercial banking crunch with public money issued via the Central banks. It was better than nothing. It lifted asset prices, which prevented more bad loans and failed banks.

The Central banks are now discovering that it is easy to distort economies by providing cash to boost asset values, but more difficult to wean an economy off such medicine. The USA is furthest advanced in this cause. It stopped money printing the earliest, and is now planning a gradual reduction in this stimulus as commercial banks take up the slack and as more real activity takes place. The UK has also now stopped QE, though it had an additional programme which was started last summer. The European Central Bank and the Japanese Central Bank still carry on with their Central Bank money creation.

One of the crucial lessons of 2007-9 must be that acting too stridently can cause grave damage. If you have high levels of debt, you need to tread carefully to get them down, in ways which most borrowers and lenders can handle. Any other course causes major dislocation for people who had nothing to do with the excess credit in the first place.

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83 Comments

  1. Lifelogic
    Posted August 10, 2017 at 5:16 am | Permalink

    The back are still hugely uncompetitive and irrational less than 0.5% on unsecured deposits and base plus circa 3% + if you want to borrow well secured and the bank is usually the hogher credit risk! Get some real competotion.

    I see a report is out showing that Hammond’s stamp duty, at up to 15% is doing huge harm. Well of couse it is what did he thanks it would do but kill mobility,damage the economy and reduce transactions?

    Why for example is rbs selling of old loans to Shawbrook bank but still lending new money to some?

    • Lifelogic
      Posted August 10, 2017 at 6:30 pm | Permalink

      Perhaps I am too old and my fingers now too fat to type on a smart phone now. How do you stop it guessing wrongly!

      • Edward2
        Posted August 11, 2017 at 7:20 am | Permalink

        Go to settings and turn off predictive text.

        It is the best thing I ever dad…..

  2. Lifelogic
    Posted August 10, 2017 at 5:23 am | Permalink

    Good performance on Newsnight yesterday, but why were you not asked to comment on the absurd ramming of the Welsh language down people’s throats at tax payers expense and again their will. Killing much investment there too. Harldly anyone in Wales even speaks the language or ever wants to.

    • graham1946
      Posted August 11, 2017 at 11:26 am | Permalink

      The Cornish are at it as well now. They don’t think they are part of England. No doubt all just to get more money.

  3. Mark B
    Posted August 10, 2017 at 5:28 am | Permalink

    Good morning.

    The real lesson from that time was; “Never try and fix something that was not broken.”

    If the old systems of doing business worked well, then why change ? For example. One of the biggest changes was the take over of all the old Building Societies that went to become banks. The Abbey National & Alliance & Leicester (Santander), Northern Rock, the Halifax and so on. I think the problems may have started there. Nothing wrong with them being banks, but I think they all tried to be too big too soon and was easy prey to larger concerns. This stifled competition which is what we are now lacking.

    Also. Politicians trying to bask in the reflected glory of the the City. The big banks were saved but at the price of UK manufacturing. We need to start to look after SME’s more in this country and try to ween ourselves off the malign influence of the City and move to a more balanced economy. It would be good to discuss ways in which this can be done.

  4. eeyore
    Posted August 10, 2017 at 5:47 am | Permalink

    What have we learned? Well, we now know that the frenzy of banker-bashing that followed the crash was just beating the victim. The real culprits were governments that demanded bad practice from banks, and regulators not up to their job.

    We learned that bank directors themselves did not understand the products they dealt in. And we learned that when banks are backstopped by the taxpayer they lose self-interest in behaving responsibly.

    I suggest that banks should not get a free taxpayer guarantee – effectively free insurance. A premium should be paid. Depositors in banks which choose not to pay would run the risk and take the consequences.

    Further, bank directors should not have limited liability. One distinguished little bank, Hoare’s, operates like this. The directors are liable down to their last cufflink. Hoare’s was not affected by the crash.

    • Mark B
      Posted August 10, 2017 at 8:28 pm | Permalink

      Absolutely !

      Remember the scandal of LIBOR ?

    • Lifelogic
      Posted August 10, 2017 at 9:10 pm | Permalink

      Indeed the government was giving a guarantee on bank deposits (effectively an insurance policy) but they did not have a clue what liabilities they were taking on.

      As it was not their money at risk, but that of taxpayers, then I do not suppose that anyone cared very much about these risks anyway. Total government and regulatory incompetence as usual.

  5. Bryan Harris
    Posted August 10, 2017 at 6:12 am | Permalink

    .
    One hopes that the BoE governer as well as our government understands these lessons …

    • Fed Up
      Posted August 10, 2017 at 3:28 pm | Permalink

      ha ha – very good 🙂

    • Lifelogic
      Posted August 10, 2017 at 9:15 pm | Permalink

      Understanding and logic is not really Carney’s area. He was, after all, chosen by the total economic ignoramus (and an honorary professor at the Univeristy of Manchester) George Osborne.

  6. Posted August 10, 2017 at 6:26 am | Permalink

    Debt: bad. Bad for government because the interest is simply huge. Bad for ordinary voters becasue we have to repay it with a bundle of interest. Very bad for the people who have been silly because they get put over a barrel and beaten hard (on the adverts the bit about Ts and Cs and blah percent apr is muttered and said very very quickly).

    There seems to be not sign at all of the national debt being reduced.

    This is an appalling example to us all. Nearly three trillion is simply not good enough. And, as you say, it is going to be very hard to reduce it without crashing the economy.

    Maybe Brexit will be the trigger which brings the whole house of cards toppling down.

    • Mitchel
      Posted August 10, 2017 at 9:25 am | Permalink

      It is not intended that the national debt should be reduced (except possibly in real terms through inflation) nor is it possible given the structure of the economy.It is effectively money printed into permanent circulation.When Ed Balls told anyone who would listen during the election campaign that brought Cameron & Clegg to power that paying back the debt (as Osborne was projecting – ridiculous even at the time) takes money out of the economy he was being quite honest.

      I don’t believe it will be Brexit that brings the whole house of cards toppling down as much as the development of alternative financial architecture in Asia such as is currently underway.

      • Mark
        Posted August 10, 2017 at 10:09 pm | Permalink

        It only takes money out of the economy when payments of interest and principal are made abroad, or when borrowed money has been spent unwisely. Ed Balls was of course right – Labour had spent unwisely on an unprecedented scale, and had funded it by getting the economy to borrow abroad.

    • Tad Davison
      Posted August 10, 2017 at 10:37 am | Permalink

      I’m not a big fan of debt either Mike, and we need to bring it down, so it makes me a bit sick when Hammond gives away £800 million to Brazil (as reported this week). And the prohibitively expensive HS2 is going ahead anyway despite it being obsolete already. So much for the chancellor’s claim that he’s responsible and prudent. He makes Viv Nicholson look like a miser!

      Tad

    • Ian Wragg
      Posted August 10, 2017 at 11:29 am | Permalink

      Quite the contrary Mike. Brexit may be the catalyst for the Bank of England to start acting responsibly and normalising interest rates so we who are prudent don’t keep subsidising the feckless.
      The Euro zone is hardly a beacon of success and is only being kept afloat by endless QE.
      Watch for the dominoes start to fall when they stop printing.

    • Edward2
      Posted August 10, 2017 at 12:26 pm | Permalink

      Its our fault because we keep voting for political parties that promise us more and more spending.
      Would a political party promising austerity and balanced budgets ever get elected?

    • Lifelogic
      Posted August 10, 2017 at 1:08 pm | Permalink

      Dept is both good and bad. Borrow and invest in something sensible with a rather better return than the interest good. Borrow and piss the money away on flashy depreciating cars, subsidies for greencrap energy, HS2, Hinkley C, the Millennium Done, indeed nearly anything the government call “investment” very bad.

      • Richard1
        Posted August 10, 2017 at 9:32 pm | Permalink

        Need to be careful of that one – it’s the justification used by leftist leaning politicians to justify all sorts of “investment” due to current low rates of interest making them “economic”. The right test of course is opportunity cost of capital – how else could the money be used. Perhaps it would be better to leave it in taxpayers’ hands and not borrow and spend at all.

        If this test were applied there would be no question of HS2 or Hinkley Point (where the cost is to be loaded onto power bills as an alternative to the tax and subsidy route – the economic effect is of course the same).

        • Lifelogic
          Posted August 11, 2017 at 7:36 pm | Permalink

          Indeed goverment have not got a clue about what is a good “investment” it should be left to people risking their own money.

    • Lifelogic
      Posted August 10, 2017 at 1:13 pm | Permalink

      Or borrow to fix the leaking roof of your house is usually a good plan too if you have no cash. Borrowing to study media studies or gender studies not so good. I understand they earn less than people without any degrees on average.

  7. formula57
    Posted August 10, 2017 at 6:30 am | Permalink

    Not enough!

    Let the place of confused and hence ineffective regulation not be overlooked. As your colleague Peter Lilley has said ( http://www.peterlilley.co.uk/questions/1806/oral-question-money-creation-and-society – the whole well-worth reading): –


    “….I was shadow Chancellor when the Bill that became the Bank of England Act 1998 was introduced. He pointed out that I then warned the House that

    “With the removal of banking control to the Financial Services Authority…it is difficult to see how…the Bank remains, as it surely must, responsible for ensuring the liquidity of the banking system and preventing systemic collapse.”

    And so it turned out. I added:

    “setting up the FSA may cause regulators to take their eye off the ball, while spivs and crooks have a field day.” -[Official Report, 11 November 1997; Vol. 300, c. 731-32.]”

    Let us also recognize that central banks have now blown asset bubbles of huge proportions (thereby to see many banks that should have failed long ago reduced to a zombie state and contributing nothing but risk – witness recent “rescues” in Spain and Italy of supposedly non-systemically important banks) and history teaches us the bubbles bursting or perhaps more hopefully deflating gently brings its own problems of various severities.

    • Denis Cooper
      Posted August 11, 2017 at 12:58 pm | Permalink

      Hush, you are not allowed to blame the FSA rather than the Bank.

    • Lifelogic
      Posted August 11, 2017 at 7:40 pm | Permalink

      Indeed, Peter Lilley is one of the rather small minority of sound Tories.

  8. Narrow Shoulders
    Posted August 10, 2017 at 7:07 am | Permalink

     As a few of us warned at the time, bringing the excesses of the financial sector down would also bring down the real economy, closing a factories, collapsing businesses, costing people their non financial sector jobs. So it proved.

    Is it not possible that the economy would has risen from the ashes quicker if we had taken a capitalist approach and allowed failing businesses to fail? Instead we socialised well off people’s losses and spread the misery longer and further.

    Iceland recovered, we would have too. Failing business and their backers must fail.

    • Iain Gill
      Posted August 10, 2017 at 8:14 am | Permalink

      Narrow shoulders you are correct

    • Fed Up
      Posted August 10, 2017 at 3:28 pm | Permalink

      Narrow Shoulders – I agree completely; what you are talking about is Capitalism/Free Markets – something we used to embrace – rather than the Crony Capitalism we have now.

      • Lifelogic
        Posted August 11, 2017 at 7:41 pm | Permalink

        Indeed.

    • getahead
      Posted August 10, 2017 at 6:19 pm | Permalink

      And banks?

      • Iain Gill
        Posted August 10, 2017 at 6:28 pm | Permalink

        protect the depositors not the directors

        • Narrow Shoulders
          Posted August 10, 2017 at 7:00 pm | Permalink

          Correct. The compensation scheme protecting £50K of deposits in each bank at the time was adequate to keep all but the most wealthy protected.

          Banks only negotiating line was liquidity and clearing. They seem to have played it rather well.

          • Iain Gill
            Posted August 10, 2017 at 7:39 pm | Permalink

            We could have protected deposits 100 percent but allowed banks to fail

        • Lifelogic
          Posted August 10, 2017 at 9:19 pm | Permalink

          And the borrowers who were ripped off by many of the banks (post the crash) to fill the black hole the banks had created.

          The government owened RBS/Natwest treated good customers with complete post the crach contempt causing huge damage to the economy and loss of jobs.

  9. Andy Marlot
    Posted August 10, 2017 at 7:11 am | Permalink

    We’ve learnt that bankers rule the world. We’ve seen them be rewarded for criminal irresponsibility, blatant theft and corruption on a massive scale and yet virtually never get prosecuted. We’ve seen them ruin countries, fund wars, enable drug gangs and people traffickers. Most of all we’ve seen that the political system is not rule by us for us but by and for bankers, politicians and insiders.

    • Iain Gill
      Posted August 10, 2017 at 8:19 am | Permalink

      Correct we also have lots of work visas being handed to India in the hope they will open up their financial sector to our businesses. Silly immigration policies, massive problems for our native workforce, and no hope of them ever allowing our financial business in. So an all round mess up from the leadership of our financial sector and political class.

    • Peter
      Posted August 10, 2017 at 8:23 am | Permalink

      Exactly right.

      One of the worst of them, Goldman Sachs, send their former employees out into important political roles around the world. Trump’s administration is riddled with them.

      In the UK, Mark Carney is a Goldman Sachs man.

    • libertarian
      Posted August 10, 2017 at 4:23 pm | Permalink

      Andy

      Whilst I have some sympathy with your argument more than 100 bankers have been jailed since 2007 and vastly more have and are still being prosecuted. Rightly

  10. agricola
    Posted August 10, 2017 at 7:16 am | Permalink

    We have learnt that economics is a very imprecise science and it’s practitioners more like the priest of a divided faith. That they are allowed through seats of learning to spread their false doctrine I find surprising. Meteorologists make more sense out of the constantly changing data they have to work with than do economists from hard fact.

    • oldtimer
      Posted August 10, 2017 at 8:20 am | Permalink

      I think, from the evidence available, that the meteorologists are not much better once they they try predicting more than a few days ahead. Both groups arrogantly believe they can make sound predictions in what are inherently unpredictable chaotic, non linear systems like the weather, climate and economic systems.

    • Iain Gill
      Posted August 10, 2017 at 8:21 am | Permalink

      You should see the nonsense coming out of those supposedly scientifically analysing immigration.

      • Iain Gill
        Posted August 10, 2017 at 8:24 am | Permalink

        Or indeed the non scientific way treatment pathways are introduced in the NHS, no peer review, no self awareness about the reasons the rest of the developed world does it differently, just random chaotic approaches in misguided attempts to save money.

  11. billR
    Posted August 10, 2017 at 7:44 am | Permalink

    Bankers? all they really have to do is crunch numbers and watch out for bad debts and bubbles- what else could be so hard to do?

  12. Duncan
    Posted August 10, 2017 at 7:47 am | Permalink

    This view may appear rather perverse and destructive but the west needs a dose of bankruptcy to return it to a state in which monetary and physical wealth is once more treated with a degree of respect and afforded a status as a scarce resource. I believe some call it ‘living within your means’

    The State especially treats pubic monies with total and absolute contempt. Governments should take a lead on this and yet it openly abuses its position. The taxpayer has become nothing more than a public sector cash machine to finance the activities of the vested interest that is the State

    To blame the banks is meaningless in the extreme. I blame the State for it knows no limits. It should set the tone and become an example of how to manage resources in an efficient manner. Does it perform this function? No.

    May has just thrown over £1bn at N. Ireland. Labour makes promises of a £250bn ‘Infrastructure fund’ to embolden the unions in vital areas of the economy. Is it any wonder banks and indeed private individuals also behave in the same manner?

    Maybe the State should stop taking our monies in ever greater quantities through higher taxes so that we wouldn’t have to fill the gap using personal debt?

    I refuse to become nothing more than a cash machine for the convenience of politicians in Govt who care not one jot for the cash it throws around

  13. ScottW
    Posted August 10, 2017 at 8:21 am | Permalink

    After ten years of those in charge ‘learning lessons’ it appears that the taxpayer is still ‘at risk’ from the next crisis in the Financial Services sector. Society needs a secure payment system, a means of saving, (with fair returns), and affordable borrowing for a home and necessities. Were not these activities to have been ring fenced from the riskier investment activities? What became of the Challenger Bank idea?
    Home ownership seems to be the way for the Financial Sector to enslave the young. It diverts disposable income from being invested in productive assets and stalls a virtuous circle of economic activity. A lop sided economy that is sucking in capital looking for easy, low risk profits. When all U.K. productive assets and businesses have been sold to foreigners how are the young to save for their old age?

  14. A.Sedgwick
    Posted August 10, 2017 at 8:22 am | Permalink

    I come back to my recurrent theme: ignoring the blindingly obvious. Selling of gold reserves, RBS taking over Natwest, PFI are examples that were clearly mistakes at the time . Osborne’s stamp duty rates are now being seen as ridiculously immature and ill advised, again many warned of a reduced market and lower tax take and going from one poor scheme to a worse one.

    Interest rates were reduced too far and they need to be increased slowly but steadily to avoid the very real risk to government and household finances of a sudden substantial rise.

    If Corbyn & Co. came to power the financial markets would implode en Venezuela.

  15. oldtimer
    Posted August 10, 2017 at 8:31 am | Permalink

    There is still evidence of sub prime lending in the US car market where a significant (20 to 30%) proportion of car loans have been for extended periods like five years and some as long as seven years.

    In the UK the Cameron government failed to deliver on its promise to get its borrowing under control on its own declared timetable. The current government appears to be no better. It continues to commit £billions on wasteful projects. The UK is not well placed for the next financial crisis or a rise in interest rates. The chances must be high that whatever government will be in power when that happens will resort to high inflation to “solve” its debt problem.

  16. Peter
    Posted August 10, 2017 at 8:39 am | Permalink

    John Redwood was on ‘Newsnight’ on BBC2 last night.

    The subject was the lack of transparency and overspending on expenses by European Commissioners.

    Evan Davis chose to play the whole discussion as if it was ‘much ado about nothing’. The BBC agenda is becoming ever more blatant.

  17. ChrisS
    Posted August 10, 2017 at 8:50 am | Permalink

    I sold my IFA practice four years ago and before I retired, over 22 years we arranged lots of mortgages. I therefore feel qualified to comment on the affect of government policy on the mortgage market and the risk it poses to the economy.

    Those with mortgages have not seen their wages rise in line with prices and, as a result, many household incomes are under pressure. Add the fact that families are now used to ultra low interest rates, any increase in their mortgage repayments will have a serious affect on their spending habits and therefore the economy in general. The answer in a market economy would normally be to remortgage to a cheaper discounted of fixed rate deal when moved onto the standard variable rate. However for many this is no longer an option thanks to government dictat.

    Before the reduction in interest rates, it was easy to re-mortgage to a cheaper deal, so keeping on a very low rate. However, the regulators, egged on by the BOE and Treasury, have enforced much tighter lending criteria so that it would now be impossible for many to remortgage, ev en though a new deal would redue their repayments substantially. As a result, they will be stuck on their existing standard variable rate which lenders have steadily increased and could now be as high as 4% over base rate. ( Typically before the crash the standard variable rate was 1% above base ). My own 12 year old mortgage is at 0.89% over base which is why I have not yet repaid it ).

    This tightening of criteria was foolish because there was no repossession problem. Politicians and central bank governors were simply trying to limit the increase in house prices by treating the symptoms rather than the cause which remains too much immigration and over-tight planning policy resulting in a lack of housing supply.

    We now have the idiotic situation that someone applying for a remortgage that might save them £100-£500 a month in interest payments will be turned down on affordability grounds because they don’t meet the tighter conditions that now prevail !

    For interest rates to rise without severely damaging the economy, mortgage criteria needs to be revised. It should be made clear to lenders that if someone wants to move their existing mortgage which they have paid without fault for a number of years, they should be allowed to do so, using the criteria that applied when they first arranged the loan.

    There should also be a limit on fees charged for remortgaging which have increased greatly in the last ten years. Often these run into thousands of pounds which is added to the loan thus increasing indebtedness and greatly increased the total interest that will be payable over the rest of the term.

    Without these changes, the eventual rise in interest rates will do far more damage to economic growth than it needs to.

  18. JoolsB
    Posted August 10, 2017 at 9:07 am | Permalink

    John, when are we the taxpayer likely to see our money back from RBS, if ever? I am sick of seeing my brother-in-law, an ex RBS employee who retired at 50, swanning around the world at will on his gold plated index linked pension especially as the RBS pension fund is still in deficit. Is this where our money is going? To provide pensions for Fred Goodwin and his ilk that the rest of us, well those of us in the private sector anyway, can only dream of especially as the banks and politicians have destroyed our pensions.

  19. Caterpillar
    Posted August 10, 2017 at 9:09 am | Permalink

    “…Central banks are now discovering …”, I think there is little evidence that the BOE / governor really recognise/admit this.

    “… major dislocation for people …”, the voiceless careful/prudent have had their lives and life plans ruined by the past 10 years (and on going) monetary policy aimed at encouraging (perhaps meaningless) consumption. Such situations are unrecoverable at the individual level, I suspect major dislocation understates the nastiness of the past decade’s monetary policy towards the innocent.

  20. Bert Young
    Posted August 10, 2017 at 9:14 am | Permalink

    History cannot be denied and we should learn from the past . Lending has increased substantially to the individual via credit card and loan companies ; much of this is irresponsible and should not have happened ; Banks may have improved their reserves but nothing – to my knowledge , has been imposed to restrict the lending organisations . QE may have kept the markets alive but our overall debt has increased .

  21. hefner
    Posted August 10, 2017 at 9:36 am | Permalink

    For or against the complete separation between commercial banks and investment banks?
    Yes or no?
    It is possible to discuss the role of Central banks but since 2007 they have acted, with admittedly more or less success, to clean up the mess originally produced over at least 30 years by the lack of oversight/understanding by US, UK, EU, … politicians of the risks of ever closer interactions between the commercial and investment activities within individual banks.
    So, is only blaming the Central banks not a smokescreen? What about the supervision by elected officials in the various countries? Sleeping at the wheel? Or is it that their background makes (some of) them blind to these problems?

  22. ian
    Posted August 10, 2017 at 10:10 am | Permalink

    Lending money to people to buy houses at 120 percent of house value on interest only loans, with no earning checks, allowing banks to buy out other banks and becoming to big, and RBS buying a dutch bank ABN AMRO with two other banks two weeks before the crash in 2008, with RBS handing over 76 billion in cash, which was biggest bank buy out the world had ever seen. If it was not for that deal by the boardroom of RBS for bonus, RBS would of not been taken over by the gov. Don’t see bank buy out anymore, a few lessons might of been learn, but not by the governments.

  23. Epikouros
    Posted August 10, 2017 at 10:19 am | Permalink

    Learning by mistakes has a checkered history. It is as likely we will as we will not and when we do sometimes to not good effect. Our financial services and our management of our economy as much at the mercy of the vagaries of this behaviour as any anything else and unfortunately is probably the most important exercise our society indulges in, that and warfare. Both we consistently either learn too slowly or completely misinterpret the lesson taught or forget and repeat. Usually some improvements are implemented. However we tend to address only the symptoms and not the root causes. So do not create a system that has it’s own built in checks and balances and therefor be not subject to the whim of the very fallible politicians and so called experts. Armies may have to be run that way but certainly not the economy.

    That is the situation we find ourselves 10 years on from the last financial crisis still clinging to Keynesian economic theory. Some of the old bad habits having crept back in and monetary policy and interest rate manipulation creating another boom and bust cycle. We have learnt the lesson that we must socialise the cost of bust it we are not to have a complete economic meltdown. Creating yet another problem. A lack of adequate care as the financial sector is now aware that government will come to it’s rescue if run into financial difficulties regardless of how cavalier they have been in the management of their businesses.

  24. Tad Davison
    Posted August 10, 2017 at 10:23 am | Permalink

    Interesting. You should be Chancellor!

    Tell me John, are these people who are clearly of poor judgement, the same ones who keep telling us what a good project the European Union is, and that we ought to be full-blown members of it, despite its dire predicament?

    And what of fractional reserve banking and the growth in the money supply it brings about?

    Tad Davison

    Cambridge

  25. Prigger
    Posted August 10, 2017 at 10:27 am | Permalink

    Vince Cable, perhaps tapping into his experience,1966 -68, Treasury Finance Officer to the Kenyan Government…has in the last 18 months periodically been enthusiastic for banks lending more money, sarcastic to their not so doing,and, hyper-critical especially most recently in the last few months of “unacceptanle levels of debt to consumers and commercial enterprises due to banks over-lending.” He wants his pobs and and eat them.

  26. Sakara Gold
    Posted August 10, 2017 at 10:40 am | Permalink

    A quick google search establishes total world debt at about 300% of global GDP – with total global debt at $230 trillion. Ultimately, there will be no escape from a reckoning with the debt markets. It is never a good idea to allow governments to print money, because they get addicted to it due to the fact that they want to get re-elected.

    Running an economy with twin deficits means that BoE has to constantly borrow money to keep kicking the can down the road, but ultimately it will all end in grief. Globally, central banks have been quietly buying up gold – by the tonne – probably because they follow Ludwig von Mises and the Austrian School and know there will be a debt cruch one day soon.

    The amount of debt in the system forces central banks to keep interest rates low, punishing savers and making those retiring take risks with their life savings in order to get some meaningfull income. Did Helicopter Ben really think this through properly?

  27. ian
    Posted August 10, 2017 at 10:46 am | Permalink

    Governments are the problem, not banks. Banks just do the governments biding to keep growth and inflation up what ever the cost. That’s why government bail bank out with peoples money, with bankers given get of jail free cards.

  28. JH
    Posted August 10, 2017 at 12:27 pm | Permalink

    Galbraith’s well written book on the 1929 Crash is a good read and a humbling one. It is obvious that lessons of history go unlearned. Greed is ever thus. We are still all these years later at the mercy of the casino arms of the banks manipulating the market by short selling. Perhaps a large tax on short selling as a disincentive is long overdue.

  29. Mark
    Posted August 10, 2017 at 12:46 pm | Permalink

    If you have high levels of debt, you need to tread carefully to get them down, in ways which most borrowers and lenders can handle.

    Absolutely! But I haven’t seen anything in the way of policies that have that aim in recent times, and overall a totally inadequate effort. How can we get the burden of debt down? Only by repaying it, or increasing incomes faster than debts to reduce the debt burden.

    We should have required banks to reduce their exposure by taking advantage of the low interest rate environment to secure repayments of principal on riskier loans. Done gradually, it would have been a tolerable burden. Now we’re 10 years further on with nothing being achieved.

    Meanwhile, it seems government is determined to do everything possible to dent the productivity of the economy by insisting on wasting money on expensive energy, HS2, and now electric cars.

  30. zorro
    Posted August 10, 2017 at 1:21 pm | Permalink

    https://www.theguardian.com/politics/2017/aug/09/brexit-political-party-james-chapman-david-davis

    Thank God that this person no longer works for DEXEU. I’ve never heard such ridiculous, unjustified hyperbole in my life! David Davis’s ex CoS!?!

    zorro

  31. Denis Cooper
    Posted August 10, 2017 at 1:34 pm | Permalink

    Off-topic:

    https://www.conservativehome.com/thetorydiary/2017/08/is-osborne-behind-chapmans-idea-of-a-new-democratic-party.html

    “Is Osborne behind Chapman’s idea of a new Democratic Party?”

    “This morning’s Times (£) brings word of the latest twist in the Tory wars over Europe: James Chapman, until recently a special adviser to David Davis, has called for a new party to block Brexit.”

    Has there been no check at all on the loyalty of civil servants and special advisers and trade envoys, no kind of positive vetting to weed out the disloyal so they can be either sidelined or sacked?

    • hefner
      Posted August 11, 2017 at 6:59 am | Permalink

      He is no more a public servant, and now works for a PR firm.

      So what do you expect when a sitting MP with his own investment firm had been candidate for Head of the Treasury Select Committee, and (almost) everybody found that normal.

      That people move from private to public to private is a good thing if there are strict safeguards (in time and/or topics and/or domain of responsibility). The current mix between business and politics is a “real beauty” of this country. And the UK is scolding some “banana republics”. What a laugh.

      • Denis Cooper
        Posted August 12, 2017 at 8:50 am | Permalink

        That doesn’t relate to, let alone answer, my question!

  32. Denis Cooper
    Posted August 10, 2017 at 1:44 pm | Permalink

    On-topic:

    Surely the greatest single cause was the abject failure of the credit rating agencies to do what they said they were doing, and being paid to do? There were huge bundles of assets being traded around for a long time with unquestioned official AAA credit ratings, which over months were rapidly downgraded and in some cases ended up as junk.

  33. ian
    Posted August 10, 2017 at 2:46 pm | Permalink

    MPs think it all over, shake up with gov bonds coming, banks, institution, with countries, fed up with having to buy gov bonds every year for next to no gain, when they could be investing in something more productive, with bigger profits. The idea of retiring gov bonds at the fed & boe is not what they want.
    Politician sitting back doing nothing for 8 years as this crisis brews, with uk gov talking about deficit going out to 2027, when banks & institution were told that the deficits will be gone by 2015.
    This is how gov buys votes, with no money or taxes to cover there spending, that why gov getting everything ready for sale to keep the bonds sale down, but banks know it won’t last for long.

  34. Ron
    Posted August 10, 2017 at 2:48 pm | Permalink

    One of the biggest consumer debts now is credit for car loans, particularly for status vehicles often driven by the nouveau-riche minor-private-school Remoaner type whose vehicles would become worthless if we stayed in the EU and the inevitable drive to Ever Closer Union meant we had to change to Left Hend Drive.

    • Iain Gill
      Posted August 10, 2017 at 6:34 pm | Permalink

      To be honest lot of supposedly prestige cars are cheaper than more modest cars on lease or PCP deals, all on the basis that the finance company expects them to have a higher resale value when they are handed back. Of course a downturn in the economy could make a lot of these resale projections nonsense, and lead to a lot of problems for the banks and finance companies that have funded these deals.

      A kind of automotive sub prime bubble of sorts.

  35. PatW
    Posted August 10, 2017 at 3:16 pm | Permalink

    What is this JR? are you pretending that you’re some kind of expert on banks and finance? Havn’t we got enough experts in the country including with Carney in the BOE..he also thinks he knows it all? and now you. Well we know what Michael Gove thinks about experts- unfortunately for us too many people listened to him and his 350 million on the side of a bus…all extra for the NHS he said??? Expert liars all.

    Reply I have been a bank director and wrote After the Credit Crunch, which I assume is why you bothered to read this post

    • rose
      Posted August 10, 2017 at 7:01 pm | Permalink

      Michael Gove didn’t say we had had enough of experts. He said we had had enough of experts from organisations with acronyms…who then turn out to be wrong. The reason you have the wrong meaning in your head is that the Sky presenter interrupted him mid sentence.

      • rose
        Posted August 10, 2017 at 7:03 pm | Permalink

        PS how can an illustrative suggestion be a lie? And we haven’t got the money back yet either.

    • hefner
      Posted August 10, 2017 at 8:24 pm | Permalink

      Although a reasonably interesting book, it suffers from the usual bias from a politician: everything (or almost) is because of the other side, Labour in this case, with very little historical perspective and relatively little of the content addressing the problems linked at the complexities of the investment products (which even some responsible in the banks could not fully understand).
      Personally, I found “Swimming with Sharks”, 2015, by Jorid Luyendijk, far more entertaining, and much more to the point.

    • Richard1
      Posted August 10, 2017 at 9:38 pm | Permalink

      John Redwood was one of the few (maybe even the only?) MP to point out the disaster of the Labour government’s approach to the financial crisis and the folly of the Brown bank bailout. (The Conservative leadership at the time were, unfortunately, like rabbits caught in a headlight). Had JR’s approach been adopted c £50bn of direct costs plus untold knock-on costs would have been avoided. History will surely record this.

      • rose
        Posted August 12, 2017 at 8:38 pm | Permalink

        And people would not now be saying Free Markets must go, and turning to Corbyn instead. They have been taught to confuse this sort of Corporatism with economic liberalism.

  36. Fed Up
    Posted August 10, 2017 at 3:27 pm | Permalink

    We are at debt saturation John, if all the central banks stop QE (rather than playing pass the baton), where will the new money come from to pay the interest on the debt already accrued? This is why they are trapped and haven’t stopped their printing. When the Japanese central bank finally stops printing, it’s all over IMO. Speculators have borrowed Yen and bought foreign stocks so I’d expect all that to reverse once the BOJ stops printing.

    Unfortunately, Fiat money has always been a giant ponzi scheme the currency supply has to be constantly increasing to provide new currency to pay the interest on the debt or you have a big economic contraction and debt written off until people start borrowing money back into existence again.

    Most Fiat Money systems have failed within around 40 years throughout history and all Fiat money systems have always failed historically; it’s seems plausible that the current one is on borrowed time.

  37. acorn
    Posted August 10, 2017 at 5:26 pm | Permalink

    Have just been alerted by fellow number crunchers, who are still laughing at your government debt reduction plan you posted previously. You have conclusively proved to them and a bunch of techies at the UK Treasury and BoE, that you have no idea how a sovereign fiat currency economy actually works and how it does its real world accounting outside of Punch & Judy Westminster.

    Reply My proposal is the one already announced by the Fed!

    • Richard1
      Posted August 10, 2017 at 9:42 pm | Permalink

      What’s so funny – what is unreasonable about winding down QE through maturities? Please get one of your techie friends to post an explanation for us.

      • acorn
        Posted August 11, 2017 at 7:13 am | Permalink

        (Richard, abstract from a previous explanation I wrote; published elsewhere.)

        […] my comment concerns the current arguments about the “unwinding” of Quantitative Easing (QE). Trying to explain the fact that QE is not a money printing process, but a money swapping process; the net financial assets in the economy do not change at the moment of the swap. The central bank swaps the government bond back into the reserves/cash that bought the bond in the first instance. Money, that is “reserves”, that had been previously spent into existence by the Treasury. The distinction between the Treasury and the Central Bank is useful for such argument.

        In sovereign fiat currency accounting terms the Treasury and the Central Bank are one and the same. Hence, when the central bank exchanges a government bond back into cash, the Treasury gets its own bond back and ends up paying itself the interest on the bond, via its own central bank. A situation now recorded in the National Accounts by the ONS; and, in the Treasury Whole of Government Accounts.

        The bottom line is, once the central bank is holding the bond, it is the same as if the Treasury had never issued that bond in the first instance. There is nothing to “unwind”; the original reserves/cash, is back out in the economy, presumably still being saved on some other platform like commodities; stocks/shares and property. Hence, pushing up market prices and the value of collateral for business loans etc. The latter being exactly what QE was designed to do […]

  38. ChrisShalford
    Posted August 10, 2017 at 9:02 pm | Permalink

    Interesting thoughts: the reference to clever financial products made me think of the quote from Richard Branson. “I always make it a rule not to invest in things I don’t understand.” If only the bankers had followed that in the years up to 2007.

  39. ian
    Posted August 10, 2017 at 9:40 pm | Permalink

    The gov been borrowing money of at least 35 billion with 6 billion a year of assets sale, 5 billion from private pensions since 2001, and still borrowing 50 billions a year, 27 billion a year assets sale last year, and pensions, the 5 billion or more now from private pensions and a 15 billion a year cut in how much can put in to a pension, tax increases every year, with spending cuts every year, what you can see is that the gov took 100 billion out of every bodies pockets last year, not including high taxes and cuts, last year alone, and most likely a lot more that has not reported, and they say, we think it all over, i can tell you that you have not even started yet.

  40. Prigger
    Posted August 10, 2017 at 10:42 pm | Permalink

    Watching Skynews “Press Review ” in what they say are ” ONLY 700,000 eggs are here..and there are so many more eggs which are okay you realise why these journalists get paid hundreds of thousands of pounds per year. Few people would do what they do without a red light being on in the studio and regular health checks.

  41. Lack of Standard
    Posted August 11, 2017 at 11:15 pm | Permalink

    We have learned that an ex-Chancellor of the Exchequer, the editor of a newspaper, appears to have disappeared off the political scene and commentary “As seen and mentioned on TV”
    It must be a summer thing. We must hope he has well-packed his swimming trunks. Did he crash out on some Russian yacht as of old? Did he dock near Rome?

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, He graduated from Magdalen College Oxford, has a DPhil and is a fellow of All Souls College. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.

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