AS: But you must have seen that while you were Chancellor. Surely those alarm bells should have been ringing for you?
PM: Well, I am angry at the behaviour of banks because we did not know what was actually happening behind the scenes. We did not know that they were operating all these investment
vehicles.
This is just not credible. He was Chancellor during all these years and many politicians and economists were telling him exactly what was happening. He also trawls out his "it started in America line" but then goes on to explain it. It's very revealing...
PM: We do need a lot of blunt speaking at the moment about what has happened.
Something happened in America, it then spread across to Europe and to Britain
and now it is engulfing the whole world and it is unique. It is the first global
financial crisis.
AS: Did you ever in your wildest dreams believe that you were going to walk into this hornet’s nest as far as the financial crisis is concerned? Why have we in England got this problem? I mean what has it got to do with America?He says it started in America, but this is exactly what was happening in this country at exactly the same time. And his own regulatory system, which he set up, failed to address the issue. It wasn't just American banks which were offering mortgages at 125%. UK banks were too - under his watch. Opposition politicians pointed this out but were slapped down. Yes, it did happen in America, but it happened here too - at the same time.
PM: Out of America, a lot of people were persuaded to buy mortgages, they couldn’t pay for them, nobody quite knew when they bought these mortgage products that they were totally worthless. They parcelled them up so you had thousands of mortgages, and some of our British banks made mistakes. They were spending hundreds of millions of pounds of their own customers’ money buying products that they thought was going to make them a big profit.
UPDATE: A reader alerts me to THIS fabulous piece in today's Telegraph by Irwin Stelzer, which makes the points I make above, but far more eloquently. It concludes...
Gordon Brown's search for a villain might better take him to the nearest
mirror than to Washington, DC
27 comments:
This crisis has nothing to do with sub-prime and everything to do with overall debt. Britain as a whole owes four times its national income to overseas investors.
It was not just the Loan to value, but the not checking incomes that caused the problem. I have an e-mail from Northern Rock sent to me that says they would GUARANTEE not to check the incomes of my clients if their LTV was below 75%. this is where the scandal lies in this country and the regulations here. Not checking incomes and lending 6 times unchecked incomes.
Brown and Labour need to go, Blair betrayed the platform of hope that they were elected on and Brown in particular has let an out of control financial sector and a housing bubble create a disaster that threatens to become a full depression.
The problem is, who replaces Brown's Labour? John Redwood released a policy review for Cameron's Tories just before the train wreck advocating even more deregulation of the financial sector.
Neither of the big two can be trusted on the economy and the Lib Dems are really struggling under Clegg. I don't know who will sort the mess out but we need someone to come in a reregulate the entire economy so economic mismanagement on this scale won't happen again. Well at least until the next time people think they can rely on the market not to implode through positive feedback.
Irwin Stelzer covers this devastatingly in The Telegraph this morning.
"Brown should blame himself, not the US".
Sorry I can't give you a link.
This is much better stuff Iain. The Broon alternates posing as a total moron and assuming that we are total morons.
His feigned lack of previous knowledge about collatarilised debt and massive derivative speculation must surely be exposable - I imagine he must have mentioned them at some previous juncture in the context of light-touchism.
Would this also be a suitable moment to mention that the Tories too have always favoured light-touch and claimed many times that it was the basis of the City's (and therefore Britain's) success?
All now exposed as a total fallacy - Spanish, French and German banks that avoided such high-risk speculation are now solid and the much-critiqued German social-market economy is in strong shape and would be even stronger were it not being dragged down by weak Italy and E. Europe.
We are now truly inheriting the consequences of the Thatcher big bang, the Clinton deregulation and the Major/Blair/Brown light-touchism.
For Brown to blame the market (and the United States) in this way is a nonsense.
The development of mortgage backed securities and the lowering of loan standards were a product of mismanagement of the money supply, specifically the lowering of interest rates. That is not a fault of the commercial banks. Its the fault of the central bank which is in effect an arm of central government. Interest rate policy as managed by the bank of England is a classic example of govt price control. So it cannot be blamed on a lack of regulation or market failure.
Reductions in interest rates based on public policy decisions rather than consumer time preference will simply create a glut of money in the markets that has to be got rid of somehow. Banks have no choice but to extend their loans. Market factors will admittedly play a part. Any bank that tries to stand back and not make dodgy loanes will find them ground into the dust by competitors who will. But this is not market failure - had the govt not intervened in the first place and forced interest rates below their natural, market rate the problem would not have arisen.
To look at it another way: Had interest rates not been artificially reduced then loans to private indidivduals would have been issued at higher rates of interest which would itself have deterred the development of debt on the scale it now stands at. The terms on which those loans were made would also have been harsher as banks would have feared the possibility of default more. Instead interest rates were cut right back. That fuelled a house price boom which inturn created a sense of morale hazard, people with excessive mortages expecting never ending increases in house price to bail them out.
All this comes back to Interest Rate policy, responsibility for which lies at the door of BoE and, indpt or not, the Govt.
@ Despairing Liberal
OK, so who has been running the economy for the past decade? The Tories?
Are you seriously saying that Brown has been fighting the consequences of his predecessors' actions for ten years and more? If, so, just WTF has he been doing?
And the sub-prime disaster was unforseen, has suddenly arisen, and is the cause of all of this? And the Conservatives have not been warning of the consequences of Brown's uncontrolled spending for that entire decade?
Utter garbage. I just cannot believe you honestly believe that cretinous rubbish. On second thoughts, maybe I can.
My eighteen year old son who is at college and has no income is still getting junk mail from credit card companies offering him credit cards.... Isn't this on Supergords watch?
Unsworth - I agreed and stated Brown is responsible along with Blair and Major for light-touchism.
Public spending has not been the key issue in the crisis though, although it weakens Britain's ability to fight off it's effects. The key driver of the crisis has been banks and other financial institutions operating outside a regulated environment and building up huge risks in CDOs and derivatives.
Brown shares culpability for allowing that to develop and just as much in love with City deregulators and their mantras as were Thatcher and her Chancellors.
Desparing Liberal:
I am afraid you are confusing the issue regarding deregulation. A lot of the problems arose not because of deregulation but because of poorly implemented or poorly structured regulations. For example, AIG managed to write $500 billion of credit default swaps in a London based sub that fell outside the regulatory ambit of bothe the banking and the insurance regulators. That wasn't a deliberate attempt to deregulate, but simply a flaw in the FSA's structure.
The need for deregulation comes from the application of arbitrary rules. I once spent over forty hours undergoing client acceptance procedures for a long established private UK shipping company with a particularly complex ownership structure involving family trusts just to have a 15 minute conversation on corporate finance deal. That sort of thing gives regulations abad name.
Alex, very interesting - would you say that lack of regulation was due to light touch policies, or because successive governments have failed to strengthen the FSA properly?
Note that in the US, despite a supposedly tough SEC, similarly bad things happened.
Someone needs to take out a large billboard and newspaper advertising campaign.
The Ad
Gordon think's you'r stupid!!
He, thinks you'll believe his lies!!
I'm sure a suitable picture could be found.
Not an Economist, you make a good analysis - would you then suggest that B of E rates be raised now? And if so, what would be the likely effect on mortgage markets, etc?
This is the essence of the problem - politicians are petrified of the public backlash if they have to really administer the painful medicine that is needed, eg, higher interest rates leading to restricted lending leading to slumping house prices and massive debt reduction.
Despairing Liberal
I despair at your pathetic argument.In 1997 Brown changed every thing, particularly the animal BOE was. Brown has been round 11 years 10 of them as chancellor and promised that he ended boom and bust. If bank lends me 10 times my income as a mortgage, if I get offers of loans from all and sundry, credit card companies rush to offer me card fallig on each other, it tells poorly structured regulation. In the meanwhile, Brown was stamping up and down Europe lecturing them how to run their economy as he is doing today. He even gave examples of BOE and FSA set ups he instituted as examples in those peptalks. While you are blaming Thtacher and Tories, why can't you have courgae to say Brown inherited a very sound economy?
It is pathetic hot air.
Read what the German finance minister is saying. Brown is one deluded villain.
Norman - at the time of course, everyone, including the ex-Tory Chancellor Ken Clarke, praised Brown for liberating the B of E from Govt. control.
Anyway, it wasn't primarily British banking policy or government policy that triggered the mania for derivative trading - that arose (as others have pointed out) from cheap international money, primarily in Japan.
I don't not blame Brown as you put it, but the primary goal of Brown and Blair was the self-professed desire to continue Thatcherite policies. Deregulating the City was always a key Thatcher goal and it's hard to see how you can believe it wasn't.
I would agree though that on reflection Ken Clarke was a much better chancellor. He was also streets ahead of the lamentable Lamont and Lawson. Shame he didn't become Tory leader - I might have voted for him!
Despairing Liberal 1.15
"This is the essence of the problem - politicians are petrified of the public backlash if they have to really administer the painful medicine that is needed, eg, higher interest rates leading to restricted lending leading to slumping house prices and massive debt reduction."
Which is why we need a General Election ASAP. Even in the (unlikely) event of Brown winning some of his nuttier excesses would be dropped as he wouldn't need to buy votes any more (at least not for five years) , and the economic damage would not be as great as that likely to be inflicted by current plans. As it is, any effective (or less ineffective) medicine is probably 18 months away, meanwhile the Ship Of State sails on towards the rocks...
I agree Sir Robin, although sadly with a 9-point lead, it would appear that Messire Broon would be re-elected in a GE just now.
I predicted a while back on this blog that the next General will be in early Spring 2009, immediately following total troop withdrawal from Iraq (which surprise surprise has now been announced for March 09) to cadge the Muslim vote and before the really tough unemployment and closures bite. Just after the clocks change to.
So the likeliest date will be Thursday 2 April. I have placed a substantial bet on this.
@ Despairing Liberal
So how far back do you want to go in this blame-game business? How do you feel about Danegeld, or Window Taxes or the Corn Laws.
These guys have had ten years to fix whatever was 'wrong' and have failed to do so. Now, do we wait for another decade or so before things get sorted? If so, I'm emigrating.
You got an alternative? Let's hear it. Oh, and while we're at it, give us your personal guarantee that whatever crackpot scheme you may put up will work, eh? Cross your heart and hope to die.
wv; pollyp - yes indeed!
OMG - you actually believe this tosh you are writing don't you? I'm still waiting for any Tory to point me at a Conservative type govt anywhere in the world that did keep on top of the banks, and know what they were up to, and prevent their tricks and mistakes. Come on. I'm waiting.
And please don't say Germany after they've started chucking their toys - basically because they're out of step and they don't want to play and despite being right wingers (in general flavour) they've already borrowed to the hilt.
Unsworth - I blame all the governments since 1977 (that was when Callaghan and Healy started down this road) who abandoned the postwar concensus and decided that the social market economy and management were a very bad thing and that unlimited mobility and speculation of capital (but not of course labour!) were a good thing.
Sadly though, it is us, ordinary working stiffs and savers who pay the price. Part of the new deal for governments worshiping at the Golden Calf of neo-liberalism is that the speculators will also be bailed out by the taxpayer.
If you are New Right, you believe that the dole is bad for poor people but very, very good for bankers, brokers and trustfunders.
Dear Ian,
Cameron can't say to the British people who are the culprits for the current economic crisis.
This crisis was mainly caused by the burst of the biggest assets' bubble in world history. This bubble started from low interest rates following the 9/11 attacks, but went unchecked for far too long, as both American and British governments enjoyed the economic growth that it brought.
Worst: both American and British PEOPLES loved it too, including seeing their homes going up and up in value. Hence, the bubble kept growing.
Now it burst. The culprits? American and British, governments AND PEOPLES!
And THAT is Cameron's main problem. He can’t say to the British people that they share the guilt, or that 2007 house prices level was NOT the normal level, that their houses were never really worth that much, and in fact even now are overvalued, and that they will keep falling to their CORRECT market value, some 20% lower.
More: that actually even the Sterling was over valued. And Britain was overvalued! That Britain was not really “the 4th richest country in the world”. It was a not only a bubble in the housing market, but in the whole economy, the whole country!
If Cameron said THAT home truth to the British people he would be saying goodbye for ever to ANY chance of being elected, ever!
And he would not have the chance of fixing it. The only solution is the traditional way: with the fundamentals of any economy – with quality goods and services, from quality education and infrastructure. Britain will have to re-build the fundamentals. It will take 20 years, but we can get there, one day. But only if we see the problem clearly: fundamentals = productivity.
But that can’t be Cameron’s job. It has to be the media’s job. In this blog, I am trying to contribute a little in that direction. I hope bigger fish will take it from here.
Alan for the Lords - is there a Lady Sugar
S'rallen should have said two words to Brown
"You're Fired".
@ Chris Paul
You talking to me?
Or maybe you're talking to yourself.
Anyway, get a grip for God's sake.
Listen Brown, you twerp. As a simple bloke working at the coal face of financial advice I have been in print, on the local radio and to all clients since oooo say 2000 that the retail mortgage market was bonkers and was fuelled by too cheap and too plentiful money. If a poor provincial bloke like me knew and could see this it is not credible that you couldn't. Unless you are complete jerk, and a mendacious one at that.
PS. I have also said ever since its inception that the FS regulatory structure was bonkers and that the FSMA 2000 is nothing short of criminal
Brown's policies are undeniably at the root of our bit of this crisis. Particularly his:-
* Tax policies - taxing and spending capital
*Monetary policies - expanding the money supply and setting the price of money too low.
* Regulation -I work with the FSA and it is useless. It is trying to implement a policy of nationalisation lite
* Fiscal policies - AKA stealth taxes.
The banks are a defacto cartel. They are a cartel supplier of a monopoly product. They are too close to Brown because he needed them to wildly expand the money supply to enable his bonkers policies to 'work'. Bankers loved this. Lots and lots of cheap money and very lax controls.
On top of that you have the international banking protocols reducing the core capital requirement of banks and allowing them to use all sorts of crap as that capital. Loose regulation again.
Take it from me, a man who has never ever trusted politicians or banks - that they are both culpable, but the core problem is Brown.
The solution is not more regulation but different and better regulation. Banks need to be kept on a very tight leash as regards core capital. The regulator needs capable people who understand risks. The banks need to be kept out of financial advice at the retail end. And the BoE needs it's central returning to it. It needs to be engaged everyt day in the markets so it 'feel' what is happening.
Brown will have none of this because it is a complete reversal of all he has done. It is admitting that he was - and is - dead wrong.
The only solution is a change of management, and that toot de sweet.
The PM evades understanding the issues, as he is to some extent responsible. However, that responsibility is shared by many, including myself, who cheered on the cuts in interest rates in 2000 and 2001 to avoid a recession after the dot.com bubble burst and after 9/11.
The independance of the Bank of England was irrelevent to the issue. The vast majority believed that after the dot.com bubble burst and then after 9/11 it was necessary to reduce interest ratessignificantly to avoid a recession. This worked, but only at the expense of creating a credit bubble, shown in this country both by the housing market boom, and being able to borrow on credit cards at 0% interest. The only one of the commentators who comes close (in my view) to getting things right is “not an economist”
The PM not only followed public opinion as Chancellor, but also the most respected minds in the business, lead by Alan Greenspan at the Fed.
To blame the private banks is nonsense. The structure in which they operated by created by the Central Banks, cheered on by governments and the general public.
THE LESSON TO BE LEARNT.
Central banks must be dogmatically conservative and deaf to public opinion.
In so far as we know how the economy operates, it is always going to be tainted by the need to please public opinion and their elected representatives. Further, a can-do approach is more popular than one that says we are not sure, or maybe it could cause trouble. But collectively, we did not see this one coming.
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