There is a theme to all the discussions of the tenth anniversary of Lehman that are now beginning. It is that we have not really learned anything from the crisis.
What’s the evidence? I hope to reduce things to basics, but I would suggest just three issues make that clear.
The first is that there has been no real reform of banking and related financial services. The strongest evidence of that is the fact that the rating agencies, who played such a vital role in creating the crisis, continue as if unaffected by it, with the same models, and maybe the same people, doing the same job in the same way for the same people. Nothing has changed there.
The ratings agencies. How did they create this crisis?
Near all of the Triple A tranches of those loan pools have continued to pay out and are, well, they’re pretty much all Triple A in fact.
The equity tranches, which were marked as being horribly dodgy, turned out to be horribly dodgy.
This is a failure of the ratings agencies?
Then there’s that failure to understand the most basic bits of Keynesianism:
Which brings me to my second point. This is debt, and private debt in particular. There are places where public debt is an issue, particularly where it is not denominated in the currency in which the government raises its tax, but this is not the major concern in most of the markets at that had much to learn as a result of the crisis, which was not caused by public debt, but by private debt. And as is now widely reported, private debt is now back at 2008 levels. In the UK net saving actually disappeared in 2017. UK house prices may have stabilised, at present, but they are still at record levels. And car finances are heading to be the new sub-prime, both in the UK and the USA. Whilst household incomes have stagnated debt has accumulated as a result of the deliberate policy of the government, in the UK at least, which has been forecasting this trend ever since the financial crisis first eased. It is as if we have learnt nothing at all.
Er,, yes, that’s the point, It’s the solution to the paradox of thrift. They way out of a recession is to reduce the savings rate. Hey, sure, we might disagree, but the Spudtater does at least claim to agree with Keynes. If and when he understands him that is.
That point is at the core of my third point. In 2008 global capitalism nearly failed. It should have done.
No, it didn’t. The banking system looked like it might go bust. The correct answer to which is, as Bagehot pointed out a century and more before, is central bank support.
It was time expired: the model of Hayek and Friedman had ceased to be of value, as it still is.
The Pretence of Knowledge is no longer true? The AMA is not too powerful?
Only tax justice made a lot of progress, to be honest.
Snigger. Only my work has hanged the world!
I see Ritchie is back to writing for himself.
Curious as to your source for the AAAs all still paying out. If that’s the case, why did we have a crisis at all?
His claim that…
The same could be said of accountancy, of course. It’s taken ten years for there to now be a hint that they may pay some price for the massive role that they too played in creating the banking meltdown.
… is so stupidly false, it’s laughable. There have been massive changes to the accounting standards for financial instruments, revenue recognition, leases and insurance. And big changes to the auditing standards for estimates, with further changes on the way. As well as a complete overhaul of the European directives (/regulations) for accounting and auditing. The latter changes brought in mandatory rotation of audit firms, tighter limits on non-audit services and a much greater role for the audit committee in overseeing what auditors do. And in the UK the Financial Reporting Council is getting a lot more bolshy with firms, including levying much higher fines for misconduct.
Yet the tater twat says there’s no hint they’ve paid some price!
The crises was caused by tight money – specifically the Euro. The European banks sought to hold their reserves in any currency other than the Euro, thus creating runs on other currencies and endangering bank systems. Bernanke had to open swap lines to European banks.
Because of the design of the Euro, the ECB couldn’t act as a lender of last resort. Anyone remember the rise in the Euro? Scarcity means a higher price. So, yes, once again thank the Germans for bringing Europe to her knees. Three times in 100 years!
They dropped in value significantly. Banks which were holding them, leveraged up 30 odd times, were then in serious trouble.
The second best trade of recent decades – after shorting them in the first place – was to buy them as the banks dumped them. Near all of them ended up trading well above par – obviously enough, given the fall in interest rates.
“The ratings agencies. How did they create this crisis?”
But it’s true.
If one’s economics text is “The Big Short” I mean.
Don’t be obtuse. The ratings agencies gave far too high ratings to cdr’s
Well……AIG were writing vast “ contingency” Policies which were weird financial instruments to take risk from Banks . They were triple A Rated but they were minutes form disappearing if you recall
I don`t know if one can blame ratings agencies especially they just provided a convenient excuse but they certainly didn`t get that right . Rating security is actually a pretty simple business , you just have to work out what assets in various forms a Company has and that is set against risk judged ( in the case of Insurance ) by Premium income , class and various coarse measures like that.
Of course when you have an old complex company judging the extent of potential Liabilities is a fiendish business and making “global “judgments almost impossible.
In an advanced civilisation most people spend much of thei time doing things they don`t really understand , thats part of the problem.
Here’s an example of an investment trust that appears to be earning useful returns from CLOs
http://www.fairoaksincomefund.com
Newmania, I congratulate you. Your final paragraph is profound. Something of a first, and welcome for it.
Newmania: “In an advanced civilisation most people spend much of thei time doing things they don`t really understand , thats part of the problem.”
Your comments on this blog summarised in a sentence. I salute you Sir.
So Ritchie seems concerned that savings have “actually disappeared”. Which is odd, because when he’s calling for all pension savings to be expropriated by he State, he is scathing about private savings.
And anyway, if he wants to brown-nose hos way back in with the Corbynistas, he had better learn quick that they have “literally” and not “actually” disappeared.
Eoin Clarke hasn’t had a look-in on this blog lately, as Murphy seems to be taking up far more space.
If Corbyn had won the last election, Clarke would have gone to Number 10 as part of Corbyn’s press team. And Paul Mason would have had a top-table role (for economics, presumably, not for the media side).
Nothing for Richard “Founder of Corbynomics” Murphy though.
AIG was rated AAA, and bailed out for $180 billion. Made the UK bailout look minor.
I didn’t realise Eoin Clarke was still writing, after all the errors on his blog and embarrassing people who repeated them. Astonishing that he was down for a Press job under a Labour government.
It was AIG losing it AAA rating that meant it had to be bailed out. And it wasn’t holding bonds either, it was insuring them. Writing CDS, not CDO.
@Richard
Think Eoin is more into his “toryfibs” thing these days than his “Green Benches” blog.
“Astonishing that he was down for a Press job under a Labour government.”
I think I’m more astonished that Mason was down for a proper policy/politics job. Eoin was good for his viral infographics. They might have been daft, disingenuous or plain erroneous, but as a communicator he has a certain knack for getting his message across and getting it to go viral. It isn’t journalism, but No 10 doesn’t need journalists, it needs spinners. Mason also has an ability to communicate and can pass himself off more respectably in that respect than Eoin, what with having been a “proper journalist” for a previous career, but he seemed to be put pretty high up on the org chart for all that. If he had had a second career as a shadow ministerial bag carrier or think tank policy wonk then I’d have understood it more.