The people who brought us the banking crashes of 2007-2008 that became the credit crunch 2008-2009 and the economic wreckage we’ve lived in since are having another go. The very credit arrangements that brought us so much grief are fashionable again.
I was in Washington last week and was queuing for my frappucino when my eye was caught by the following headline half way down the front page and over in the right hand column in last Friday’s New York Times:
“Wall St. Redux: Arcane Names Hiding Big Risk”
No, I didn’t know what it meant either but some instinct linked “Wall St” and “Risk” and told me that, somewhat nervily, I wanted to read it. My jittery instinct was handsomely repaid by the first sentence:
“The alchemists of Wall Street are at it again.”
In a way that’s all you need to know. After those nine words that spell another looming disaster, stop reading and phone your MP, Congressman, deputy, representative. And if you are one of those, convene a debate or a committee, or pass law or get someone fired but for God’s sake do your job.
For that very small handful of readers who are still with me, let’s read on:
“The banks that created risky amalgams of mortgages and loans during the boom – the kind that went so wrong during the bust – are busily reviving the same types of investments that many thought were gone for good. Once more, arcane-sounding financial products like collateralized debt obligations are being minted on Wall Street.”
Same people who did it before and with the same instruments – other things being equal, I see no reason to expect the outcome to be much different. And lying behind it, says the NY Times, is the same sense of opportunity and optimism that drove the credit bubble in the first place. As the article also points out, the resurgent popularity of bundling debt and sharing out the risk among many investors shows how these “structured financial products () have largely escaped new regulations that were supposed to prevent a repeat of the last financial crisis.”
Their re-emergence suggests that banking reform has barely got started and banking regulation remains as chronically weak as ever.
Three thoughts occur. The first is that I am not quite sure whether the time I have spent over the past four or five years getting my head round the arguments of luminaries such as Robert Peston, Martin Wolf and Philip Coggan is now well rewarded or just a damn waste. At least I have a sense (thanks to Peston) of how the idea of these credit instruments of spreading risk was fulfilled all too wonderfully, so that the risk was actually carried by hundreds of millions of people beyond the investors. What was not borne out was the idea, probably no more than wishful thinking, that spreading risk meant the price if the loans went bad would be thinned out. Far from it, it has been heavy and widespread. And I understand (thanks to Wolf) how this is part of generating an enormous financial imbalance in the world economy, so that our European and North American propensity to spend is wholly dependent on China’s propensity to save. Sadly, if they stop saving and start spending it will screw them (by destroying their markets) as badly as it will screw us (by leaving us with nothing to spend). And beyond Wolf I now know (thanks to Coggan) that the financial imbalance reflects some much deeper economic imbalances, with deeper roots, that will take more far-reaching reforms to fix than politicians think they can get the public to support.
So I’m wiser than I was. But I have to say that “redux” headline took me by surprise.
The second thought is about language. Why are bankers allowed to get away with calling credit arrangements that have wrought and in all probability will wreak widespread destruction on economies, livelihoods and lives by the name of “structured financial products”? Why can they label things that have removed job security from untold millions of people and are denying a secure future to young people in so many countries “securitization”? Orwell took us into this in 1984 but that great socialist erred by thinking it was the state that would destroy the language; he never thought bankers would be to blame.
Of course, back in the 1940s when he wrote 1984, a banker was a very different being.
And the third thought was about what happened in the USA last week, for while I was there the front pages and the airwaves were dominated by the Boston Marathon bombing, the manhunt, the shoot-out and the wider ramifications. It was a strange time to be there, yet also not only moving but even in some way rewarding, as a nation spent a considerable amount of time, thought and energy to address how it could be that two young Chechen men, lost in the wild seas of America, could do such a thing.
I make no argument that there is any connection between the background conditions, let alone the motives and thinking, that led to the crime in Boston and the re-emergence of destructive loan activity by the big banks in the USA. I just wonder where on a comparative moral scale you put the two young men and the multiple confusions that led to their crime, compared with the mostly young-ish members of the USA’s social and economic elite (and ours won’t be far behind, I’m sure) who are setting out on a very different yet also profoundly destructive path.
- Nathaniel Popper, “Wall St. Redux: Arcane names Hiding Big Risk,” New York Times, April 19, 2013
- Robert Peston and Laurence Knight, How Do We Fix This Mess? (London, Hodder & Stoughton, 2012)
- Martin Wolf, Fixing Global Finance (New Haven & London, Yale UP, 2009)
- Philip Coggan, Paper Promises (London, Allen Lane, 2011)