“We need to keep offering these wages to keep the best people.”
So we are repeatedly told by the banks, including those which we, as tax payers, own to some extent. We’ll come back to this.
In the early days of the financial crisis, way back in the summer of 2007 when the first tremors were starting to be felt, we were confidently told by many bankers and economists that we were hitting a blip, a bump in the road which clearly stretched indefinitely on into the sunshine. Including many bankers at the world’s “safest” banks.
Meanwhile, for the previous four or five years, from around 2003, banks had been becoming more and more gung-ho about lending to all and sundry, somehow blind to the fact that economics tends to work in cycles. The value of things goes up until the market decides they are too high, and then they go down. Of course, to keep them going up, the banks can lend more and more money to people in order to keep the system going. Only at some point, the roundabout will run out of steam.
Instead, as conditions worsened and it became obvious this was more than a glitch in the system, bankers were still confidently telling us all was well until spring 2008 when, in the wake of the collapse of Northern Rock in late 2007 and the lack of evidence we were bouncing back, the slow withdrawal of lending began with the death of the 100% mortgage in April 2008. At that point, interest rates were still coasting along at 5%, though the Bank of England was starting to lower them.
Arguably the 100% mortgage was built on unsteady foundations—quite how an inability to save up even 10% of your house’s worth was supposed to make you a safe bet for a thirty year loan has never been clear to me.
With the sudden withdrawal of these wacky mortgages, by the early summer of 2008 house builders were starting to feel the crunch. People began to realise that buying a house was not an ever increasing in value “investment vehicle”, as touted by innumerable daytime television shows. Many of the new housing developments were aimed squarely at first-time buyers, many of whom ended up unwittingly buying into an unwarranted dream by a 100% mortgage. It appears the ones who arrived too late for this apparent gravy train in fact did well to miss out. The drop off in these buyers caused the collapse of a building trade previously sustained on the glut of swashbuckling loans.
During this period of exuberance, the banks both here and abroad—but especially in the US—had been chopping and changing these remarkably questionable mortgages with a few safer ones and merrily passing them off to each other—with the help of the remarkably pliant ratings agencies—as, well, “safe as houses”. Apt, really, that when the improbable dream ended and a vicious circle of repossession started to happen that these dud packages really did end up as safe as the houses they represented.
As a glut of houses appeared on the market, their value fell as there were far fewer people available to buy them. This of course meant it was rather hard for the banks to get back their money, secured as it was on the houses which they themselves had caused to lose so much value by their reckless lending habits. And so gradually, the made up money in the system—which is what giving such reckless loans effectively produced in the economy—started to disappear, taking the balance sheets of the mortgage lenders with it.
In any other walk of life one would think that a collapse caused by ones own short-sighted stupidity would be rewarded by allowing the affected parties to crash and burn. But the banks and lenders had one further trick up their sleeves: they convinced us we couldn’t allow them to fail.
By September of 2008, the two curiously named owners of around half of all US mortgages, Fannie Mae and Freddie Mac, were on the verge of collapse and were rescued by the US government, foreshadowing the bailouts to come. Throughout the year, the giants of US car manufacturing all had major difficulties and were provided government aid, and during 2009 declared bankruptcy even after severe government help. Worries about protectionism began to surface, but were mercifully unfulfilled.
In February 2009, the UK entered recession and the Bank of England’s base rate had decreased to 1%. By this point, Bradford and Bingley had followed Northern Rock in becoming fully nationalised. The UK taxpayer also had a significant stake in Royal Bank of Scotland, Lloyds TSB and HBOS by this juncture, which we still maintain.
At this point it really seemed like people might up and take notice that the banks really seemed to have very little idea what they were doing, and very little control over their employees, and especially didn’t care so much for the economies which sustained them. But the banks, of course, were “too big to fail” and so we pretended they knew what they were doing: giving them all that money would have been awfully reckless if they didn’t, wouldn’t it?
So we head further through 2009, when the Labour government announced a huge spending package in order to stimulate the economy, only to have second thoughts in 2010 and to find that what was apparently really needed was the opposite—and this being taken enthusiastically further by the Conservative/LibDem coalition.
And the natural thing to ask now is why do we need these “years of austerity”? Why, because the very ratings agencies who did so well during the years of the credit boom in triple-A rating those dodgy chopped-up mortgages are threatening to downgrade the ratings on our government’s bonds and the sound of the very bankers who caused this screw up tut-tutting over their martinis and champagne in their exclusive London clubs is causing parliaments the world over butterflies in their stomachs.
Looking further at these bankers—albeit most of which have had a few very austere years where they’ve barely made a single million each, poor souls—it seems like the gravy train has recently started to run again. One wonders if these very same bankers, the “very best” which we apparently need to keep, were the same ones blind to their impending destructive streak; arcing across the economies of the world as their reckless financial instruments lost touch with reality, inflated an unsustainable housing bubble, and finally brought the world to the ground with an almighty bump as their hubris draws in governments, making them believe the banks are too big to fail, apparently meaning that we need to push all our spare cash into propping up the banks—supporting inventors of unreliable capital rather than the more honest, traditional trades which create real value to which money is a proxy rather than an end in itself.
Speaking of “too big to fail”, we’ve taken a set of reckless, extravagant, short-sighted gamblers with a proven failure record and what do we do but give them a get out of jail free card and a trust fund. Do we really expect them to behave better next time? It seems governments are as short-sighted as the bankers, but that’s probably because they went to Eton together and once you’ve spooned each other trifle over candle-lit tables, well, you can’t let an old chap go under now, can you?
Now we’re back to our original question. Big bonuses are, apparently, needed to keep the best people. But it appears the best people are the same as those who screwed up so royally in the past. So why do we care about keeping hold of them? Let them go and instead get some cheaper people in, what’s the worst they can do? Sink the world’s largest economies or something?
I’m beginning to find the whole thing rather sickening. At first, years ago, I put banker’s large salaries down to their doing something far more useful to the economy than people paid far less, but the more evidence is presented, the more it seems like they are instead merely proficient stewards of money from other people’s pockets into their own, abusing in the process their position at the crossroads of global monetary pathways. If these people are “the best”, then things don’t stand to get much better any time soon.
I would love for someone to correct me on this perception, as I don’t like to be so pessimistic.