We are all to blame for the financial crisis

Have you ever wondered whether Groundhog Day is more than just a fiction? The 1993 film features Bill Murray as a selfish weatherman forced to relive the same day over and over again until he learns the error of his ways. In the meantime he engages in mindless hedonism and ends up driving himself off a cliff in an attempt to get it all to end. Time loops may sound like the stuff of nightmares, found only in the arts. And yet, Groundhog Day seems to be the perfect analogy for the way in which financial markets have functioned during the last 30 years. At a time where there is much speculation around Britain’s financial future, it is alarming that very few lessons have been taken from the past.

In many respects, banks get a worse press than they deserve. People often focus on the scandals and the bonuses instead of the ability for financial services to allow for the expansions of corporations which provide the goods and services that allow for the world to have a better quality of life. Financial markets, when operating well, serve as a catalyst from which we can all benefit. The problem arises when trying to strike a balance between financial market freedom to reallocate money and that of financial stability. Bankers (it may surprise you) are not the cruel and depraved beings that they are often portrayed to be. What they are is human. This means that they get caught on tides of ill-placed optimism which can lead to mistakes. However, these mistakes can collectively derail national (or even multinational) economies.

It is, in fact, two of the sacred cows of the right that are responsible for increased market instability in the UK. These are globalisation, and the financial market liberalisation of Margaret Thatcher. Both served the purpose of ensuring that there was far greater scope for speculation both nationally and internationally. Make no mistake, speculation in financial markets is merely glorified gambling on the future of the economy. Hyman Minsky noted that the cause for concern arises when financial markets move from hedging against risk taken to speculation. A great failing of the human race is that we have a tendency to be unnecessarily greedy in chasing things we see as desirable. If there was any pursuit where this was the case, that of profit surely takes the proverbial biscuit. In the far more financially stable (if not economically prosperous) period of the 1960’s, it was the role of government not interested in the profit incentive to rein in financial market activity. Thanks to the banking reforms of the 1980’s those days are gone. Much conversation has been had about the role of the government post Global Financial Crisis. But, bar the rebranding of the regulator and the imposition of a higher leverage ratio (the ratio of owned assets to total assets), little has been done to affect the fundamental nature of the FTSE 100.

As city economist Richard Spencer points out, international cooperation is a vital part of ensuring we can harness the potential of financial markets whilst ensuring that we minimise the risk of sharp and damaging downturns that negatively impact the real economy. This has become exponentially more important as economies have further embraced market globalisation and there is a far greater risk of downturn in one country turning into contagion. Unfortunately, as with politics, cooperation in economics does not seem like the order of the day. You only need to take a cursory glance at attitudes towards NAFTA and TTIP (and possibly the EU more widely) to understand that the global powers do not look like they are going to come together to get a substantive deal on financial markets. This unwillingness to cooperate may be something the international community could pay dearly for in the future.

 

But the reality is that we are all to blame for financial instability. Every single one of us. The banks may have been used as a scapegoat during the last crisis, but deep down we all know the truth. Politicians who were inefficient in demanding money from financiers were to blame. But more than that, individuals and enterprises are to blame. Supply of financial products are (apart from the rare cases when they are coerced onto people) a function of their demand. People wanted to take out unsuitable loans in order to satisfy the very British fetish of owning your own home. Small and medium size enterprises often had credit arrangements which were far beyond the appropriate level. Banks (and they are responsible for this) indulged the developed world in the retrospectively farcical belief in perpetual prosperity. Whilst the global financial system remains what it is, Britain shall have no such thing as long term economic stability. The Bank of England and the government have acted nobly to attempt to bestow some credibility to the financial state of the United Kingdom. But whilst we are so unwilling to implement substantive regulation which is enforced, we shall very much find ourselves standing on a most precarious knife-edge.