IT’S an incontrovertible fact that finance underpins everything we have and do. In a society which has abandoned barter, exchanging goods and services for money and maximising profit on exiting assets is the basis of our economic growth.
Of course, that holds good while the process is steaming ahead with no glitches, greedy lenders, corrupt individuals, commodity shortages, wars and natural disasters. But when things do go wrong, the effects spread right across the economy.
There’s one difference, though. If firms, enterprises and individuals get into difficulties, they go bust, owners and employees suffer, lose their jobs and have to start all over again. Not so, it appears in the surreal world of banking.
Take the current crisis. Greedy, unprincipled American gutter-lenders encouraged the vulnerable into debts they could not possibly repay, hid the losses by selling them on to other, larger, unsuspecting enterprises, which then compounded the felony by dispersing them around the financial merry-go-round. Surprise, surprise – during the accounting process the figures were found not to add up, and we all know the rest: panic, attempts to hush up the extent of the losses, banks refusing to lend to each other, the bandying about of terms such as ‘credit crunch’ and ‘sub-prime’, shareholders queuing up to withdraw their savings, and – oh yes – a demand that the government use its (sorry, our) money to bail them out.
Have I missed something? Yes, of course I have. All along, those responsible for all this bad judgment continued to expect – and be paid – huge bonuses for their skills.
So now this ‘credit crunch’ is officially a year old and continues to hobble economies all around us. And the hindsight brigade is having a first anniversary field day.
First the Central Bank and then the Financial Services Authority have been pilloried for not spotting the fissures in the underpinnings of Northern Rock. Then came the predictable call for heads to roll right to the top, to the director of the Bank of England, Mervyn King, although no one dares to suggest who would replace him. Now the blame-game hunters are baying for convictions of those who may have disseminated false financial information with ‘whistle-blower’ inducements on offer akin to the witch-hunt following the Enron scandal. Even the accountants who audited the books of the ‘dodgy’ lenders are in the frame.
But auditors aren’t regulators. They work in a competitive market – they’re after business, so it’s not actually in their interest to paint a bad picture of their clients’ affairs. Remember, they only sign off accounts prepared by the company’s own internal book-keepers.
The £50 billion bail-out by the ‘mother hen’ Bank of England to its own brood of errant chickens was the more unacceptable because effectively it signalled that when banks make gains that’s their profit, but when they get into difficulty, that’s our loss. The problem is, once the policy of rescue-at-all-costs has been established, everyone is locked in. No surprise, then, that the ‘rescued’ Northern Rock gobbled up a further £400 million while still in hock to the taxpayers and sliding ever further down the bad-risk slope.
Now because the financial crisis struck just as the world was buffeted by the hike in oil, food and commodity prices, we’re naturally feeling all-over defensive, hence the protective ring thrown round the banking institutions. But unlike the droughts and simmering political instability affecting food-producing countries, and over-demand for hydrocarbons, plus, let’s face it, a generous amount of speculation on the futures market, it’s only fair to point out that this was a crisis of their own making. Where were the banks’ own much-vaunted checks and balances, and why didn’t their own highly paid geniuses spot the problems? Could it be that prudence and principle were conveniently subsumed to profit taking? Surely not!
Satisfying though it may be to pour righteous indignation into their vaults, there’s a serious point to the criticism. A league of canny individuals did indeed see it all coming and have converted their hedge trimmings into personal fortunes out of the banks’ three-monkey-ism. Though that serves only to point out the menace of the unregulated sector cashing in on corporate and private misery.
It certainly is time for a severe review of attitudes and practices. No less an interested party than Mervyn King has openly attacked the risk-taking culture and the pay structures in the City. We are paying the price for compensation packages which reward greed and testosterone on both sides of the Atlantic. With uncharacteristic sagacity, George W Bush is reported to have quipped: ‘Wall Street got drunk – now it’s got a hangover!’
Well sadly, as we know to our cost, it’s more than the binge-lenders who are nursing headaches. We’ve been living on credit for so long that we’ve drifted into a mindset that wealth creation is an effortless, painless process. Investors, whether in stock or housing markets, just planted their money-seeds and watched the banks and market-traders grow it all for them. No pain, much gain.  Now, suddenly, there is pain – from first-time house buyers to mortgage-payers through to each and everyone affected by a stuttering economy. So there is an inevitable back-lash against those whose poor dealings have contributed to the general downturn.
Clearly, a correction is definitely in order, particularly in the never-never land of savings and loans. And, we’re told, it will take time to deliver. But we shouldn’t expect to read many reports of today’s City bankers falling on swords. After all, they’re the ones who’ll be wanting to take the credit for putting Humpty together again – won’t they?