Wasn\’t this, well, a bit of a worry? I asked (in the Bank of England understatement is the modus operandi – or at least it was then). The faces that stared back looked drawn, fearful and rather weary. They pointed me towards another set of figures, even more worrying. They implied that if there was an unexpected shock that made it difficult to fill that gap by borrowing short term from other investors, home and abroad, the consequences would be disastrous: we were talking about a year\’s worth of profits – £40 billion – being wiped out; about house prices falling by a quarter and the economy shrinking by 1.5 per cent.
The boom went on for another year and a bit, and the eventual slump looks like being even worse, but the fact remains: there was a distinct bat-squeak of worry in the Bank of England in 2006 – and it was more or less ignored. Granted, the Bank had not identified all of the details, nor precisely how this crisis would become the worst since the Great Depression, but it did enough; it identified the root cause of the credit crunch.
So what went wrong?
One candidate for what went wrong. The Bank was no longer in charge. Supervision of the banking system lay with the FSA, not the Bank as had been the case before 1997.
In earlier days this sort of worry would have had the chief execs called into hte back room by the Governor, given a stern talking to and told to sort things out. Under the new, more legalistic and rule based system, no one actually had the power to do that.