The London Paper – 7 April 2008
And so it begins. Never in the field of human capitalism will so many suffer so much due to the actions of so few. Over the last few weeks banks and building societies have been withdrawing offers faster than the girls at last night’s party after my drunken striptease; there are now only around a quarter of the mortgage offers that were available last July.
Mortgages are becoming less available and more expensive. This means the five month old decline in house prices probably ain’t close to ending and I wouldn’t be gob-smacked if we return to the bad old days of negative equity and home repossessions. The ensuing decline in consumer confidence will mean businesses fail and jobs are lost. Since inflation is currently well above the targeted 2% we may even face the dreaded prospect of ‘stagflation’ which is when the economy stagnates but inflation remains high – limiting the Bank of England’s ability to cut rates further. Even if the base rate drops to 5% on Thursday it ain’t necessarily going to help mortgage rates much because LIBOR (the rate at which banks lend to each other) remains resolutely high since the sub-prime losses mean there’s less cash swilling around the financial system and banks are wary about lending to each other such is the fear of another bank collapsing.
Of course, most of the comedians who got us into this sorry mess are sitting on their fat arses laughing all the way to the bank. Admittedly, some have lost their jobs but not before inflating their already bloated wallets with massive bonuses over the last few years as a result of their radical self-serving plan to sell mortgages to poor yanks who couldn’t afford them. Once defaults became common-place and the banks’ huge exposures were revealed the chickens came home to roost and we will now all suffer in the ensuing credit crunch.
What is even more galling is that banks are considered such a vital part of the economy that governments seem very happy to use taxpayers’ money to bail them out whenever their short-term greed gets them into trouble – as seen with Bear Sterns and Northern Rock. This reduction in any potential downside encourages short-term risk-taking by bank CEOs just like the annual bonus system does for investment bankers. ‘Boom and bust’ will always be the order of the day provided this so-called ‘moral hazard’ persists … especially since bankers will inevitably use their firms’ current share price weakness to price stock options so any future recovery will pay massive dividends.
History is merely the story of the ruthless exploiting the defenceless. Nothing that I have witnessed over my 12 year City career suggests modern banking is any different.