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Crunch and after, in three minutes

Robert Peston | 16:43 UK time, Thursday, 22 April 2010

Why are banks so vulnerable to going bust?

What does it mean when the Bank of England creates new money?

Why are some people paid so much more than others?

On The MoneyThese are some of the things we all need to know for a grasp of what caused the 2007-8 financial crisis that in turn precipitated the Great Recession - and also to assess the competing claims of the political parties that they have the remedies.

Can complete answers be given in three minutes?

Not on your nelly.

Can comprehension be aided by a a trio of pop-video-length films?

I hope so, because - for me - the most important work I've done this year has been to make three films which you can watch here.

They were commissioned by BBC3, and shortly after the election they will be the centrepiece of a televised discussion with young people about the Crunch and after.

In the meantime, please have a look at them and tell me what you think.

PS: If you think they're any good, please forward the link to anyone who might find them informative.

Comments

  • Comment number 1.

    I am Sorry Robert. Too many gimmicks.
    It doesn't work.

  • Comment number 2.

    Robert

    "Great Recession" - who called the little financial difficulty we have so far had this? (I assume we are talking about 2007..2010)

    I've heard of the 'Long Depression'(23 years after 1870 in the UK) incidentally also caused by over leveraged property (that is why it took so long - any why this one will too!)

    So why are we so scared of the 'D' word? This is in all probability the start of a depression, not a recession.

    Unless and until the private debt overhang is de-leveraged we will just bump along the bottom - no matter what the public sector deficit reduces to. By the way reducing the public deficit will cause us to re-enter recession this year or next. But will still will not have fixed the private debt problem - to do that we need either high inflation or to repay or default on the excess debt. There are no other options.

    Almost anyone who reads even a tiny amount of economic history sees that the probability is that no matter who wins the election the private debt overhang will cripple this country for a generation.

  • Comment number 3.

    Corruption in Government

    Corruption in Banking

    Corruption in Business

    less than three minutes....it really isn't that complicated.

  • Comment number 4.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 5.

    I thought the one on the banks was quite good, but really you discussed Building societies. The simple model of depositor financed lending. It was fine for children and mine liked it. However, many of us are struggling to understand HBOS etc

    What I would like you to have explained was for banks the relationships between
    (a) The shareholder capital
    (b) Fractional reserve
    (c) Bond holders
    (d) Money market (short term money)

    in a clear lucid way I can understand.

  • Comment number 6.

    The last line in "What is Money":

    "QE was to.. ..encourage people to buy goods and services"

    seems very simplistic and totally untrue. If that was the case the BoE would have sent us all some money to spend.

  • Comment number 7.

    light blue touch paper........

  • Comment number 8.

    Nice little film about banking but you didn't mention leverage. This is where the greed of Banker's cost us so much by not just lending the money in the bank but,I believe, up to 50 times that amount. That's what I didn't understand at the start of the Northern Rock debacle and why the Banker's really are the villains. They just pushed and pushed and pushed leverage until the collapse was inevitable.

  • Comment number 9.

    The point about money, surely, is that it promotes the "circulation of value". When there's a recession, we're all hoarding what little money we have, instead of using it to exchange goods and services. When there's a boom, we exchange more than we have because of lax credit. Getting the balance right is where the Bank of England comes in...but you were never going to make any of that clear from a Museum, never mind with a serving official of the BoE. Try somewhere like a street market, and talk to some traders.

  • Comment number 10.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 11.

    And the second film strikes a very important note.....the relative value of a skilled nurse against a banker.
    Many of us on here have been grinding on about this for years.
    This is still a very topical argument....

  • Comment number 12.

    I see Robert. So what you are saying is that banks only lend out what they have as deposits. So Fractional Reserve Banking doesn't exist.

    Glad that's sorted.

  • Comment number 13.

    #3 ghostofsichuan . Dealing with corruption takes courage.Some have it and some do not.
    http://news.bbc.co.uk/1/hi/world/asia-pacific/8636450.stm

  • Comment number 14.

    How are the banks "vulnerable to going bust" when they know that the taxpayers, the same taxpayers they rip-off with sky high interest charges, overdraft charges and arrangement fees, will be forced to bail them out by craven politicians every time ? Caledonian Comment

  • Comment number 15.

    Dear Robert

    I'd like to offer you two more sources of info so that you can give yet more succinct explanations:

    1. the MSNBC video on the Fed as the godfather of the greatest con and cover-up: see http://bit.ly/9pAMSe

    2. my comments as a mathematician and system analyst to the 16 explanations of quantitative easing by the Bank of England: see http://bit.ly/cVPxOJ

    With best wishes for more and more power to your multi-media elbows,

    Sabine
    http://PublicDebts.org.uk

  • Comment number 16.

    Well I’ve watched your videos and note that there is no mention of fractional reserve banking.

    If anyone out there wants a more informative view, watch Paul Grignon’s ‘Money as Debt’. Just put it into you search engine and watch it. Then if your really keen read Murray Rathbard’s the ‘Mystery of Banking’.

  • Comment number 17.

    Wish I could see it, Not available in my area!!!!

  • Comment number 18.

    3. At 5:27pm on 22 Apr 2010, ghostofsichuan wrote:
    Corruption in Government

    Corruption in Banking

    Corruption in Business


    ========
    Spot on, it strikes me that one of the biggest areas for reform is in the Pension funds, here, Fund Manager's take all our money and use it as though it was theirs’, they effectively overpower small investors in business, how many small investors vote for the ridiculous bank CEO remunerations, or for any of the ridiculous remunerations for that matter? But it isn't only business that exploits our Pensions, Brown helped himself to our future and for at least 5 years, if not more, was able to rob our Pensions Piggy Bank without anyone really understanding what it all meant, and the damage being done, arguably he was more of a Pensions Robber than Maxwell. I bet a lot of people know now mind you.

  • Comment number 19.

    Re blocked comment 10....
    Sorry beeb, it didn't sink in that these films were actually made for young people....apologies for that.
    In my opinion film one should have mentioned mortgages, and film 3 should have mentioned that "quantative easing" can have the effect of slightly reducing the value of each note, particularily overseas.

  • Comment number 20.

    Nice video Robert - but don't give up the day job!

    I believe the answer to your question about 'Why are some people paid so much more than others?' is simple.

    It's the industry you work in.

    IT infastructure guy and gals earn more in finance than in other industries - there is no difference in what they do.

    This is because finance is an inductry built on extracted surplus value which is further enhanced with their vast accumulated capital.

    Banks, through lending, are able to 'tax' every piece of production in the country. This is because collectivey they have all the resources (represented by money) under their control.

    It's no different to when the fuedal lord lent out his land and helped himself to a piece of the future production. They have replaced the role of the lord and instead of a aremd force to ensure payment - they have a collusion with Government to provide laws and the auhoratitive measures.

    The more they lend, the more they accumulate and therefore have to lend. Unfortunately - as Marx explained - the customer becomes some impoverished they can no longer afford to borrow and continue the cycle - and we get collapse.

    In the meantime - anyone who works for these companies gets showered with all the excess extracted wealth - even the tea lady gets paid more in finance!
    Although to be fair - finance isn't the only 'bubble' industry - but it's certainly the biggest and most visible.

    Unfortunately people believe in the false impression of a meritocracy - which it clearly isn't. I know you know this, but you, like me and many others are struggling with our sense of arrogance (as we believe we're just special and get paid loads) and our self-conciousness(which tells us this is not true)

    Some are able to repress their self-conciousness very well (bankers) - which is why they tend to only employ people who think similarly i.e. old boys network.

    ...but it's for the people to change this - not me, or you, but all of us.

  • Comment number 21.

    Money is the root of all evil in society as corruption is embeded in it. Talking about movies, Zeitgeist Addendum is the one to watch!
    http://video.google.com/videoplay?docid=7065205277695921912

    Sorry Robert but you need to shake the ground more than that!

  • Comment number 22.

    Robert, I'm afraid you're not the next Alfred Hitchcock, you haven't made your films gripping enough, or blood-curdling enough.

    I suggest you set the first film, "How Do Banks Work", in a casino or at the races. You need lots of shots of the chips being down against the poor banker, but then he smiles and walks away knowing it wasn't his money to lose in the first place. Suitable music would be some gangsta rap songs.

    Your second little movie, "Why Am I Paid What I'm Paid", needs to have at least one emperor with no clothes on. Kids have probably read the story and will be familiar with this.

    Your third film, "What Is Money?" would just be all smoke and mirrors and some creepy music.



  • Comment number 23.

    #20 WOTW Blogging after 8, answers " I may be blogging in my spare time."

  • Comment number 24.

    On your first film - there seems to be a little bit of revisionism. The credit crunch was not 'caused' by runs on banks - it was caused by the toxic CDO's which were repackaged and spread around so the banks didn't really know who was liable so they stopped lending as readily and the price of money went up - hence the problems at NR. There was a run on that bank but only because of their difficulty in securing finance at rates that actually worked (and there was a journalist who broke the story - a Robert Peston). The reatil bank sector is actually quite safe when regulated properly - it was all the shenanigans going on at the investment banks that was the problem.

    On your second film - time for bash the bankers is it? Why not question the ridiculous amounts the footballers are paid rather than smugly justify it- slightly different tone for the two professions wasn't there?

    On your third film - I though QE was really more about making it easier for the government to borrow money through the gilts market although the banks did have the additional bonus of generating money from their investment banking operations, helped by QE no doubt.

    Why not do a fourth film - why did the government deregulate therby allowing the banks to become too big to fail? Hmmmm - can't see that one being made.

  • Comment number 25.

    #17 - Chris Campbell

    Ah - Auntie is up to her 'not available in your area' trick again is she?

    Presumably she a party to the conspiracy that the million or so of us who are entitled to vote should be denied access to the media because we are overseas. Telling you how to overcome this would doubtless incur the moderator's wrath so try Googling 'IP masking' then fill your boots.

  • Comment number 26.

    Why are banks so vulnerable to going bust?

    Review : No mention of full versus fractional reserve banking?

    What does it mean when the Bank of England creates new money?

    Review: QE does not automatically mean inflation? (to be fair, that was realy a Kaletsky comment in the Times but it seems a bit puzzling to this economics novice).

    Why are some people paid so much more than others?

    Review: Agreed - perceptions of earnings capablities are sometimes very distorted. Could also explore how senior public sector salaries have become so inflated, especially if pensions are factored in, which in theory is unsustainable.

  • Comment number 27.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 28.

    OK so what will Q1 growth be like and what about 2010 overall?

    Q1 growth will reflect VAT hike, ,loss of stamp duty, rotten weather, and the effect of the downturn in Europe, so not brilliant you might think.
    Mind you, the sales were busy before the bad weather, Valentine's Day , Mother's Day and Easter were busy, and the iPhone became more widely available and the car scrappage neared its end so was busy,houses on the market for ages got sold and new ones were snapped up, the low pound brought in high spending tourists on Oxford St, shares have boomed, mortgages have been low,good for people on fixes going over to decently low variables, Mrs Ho has been shopping like a lunatic for discount skiwear,ipods,docking stations and made me buy my first pair of shoes in 5 years,we have been out and about eating and going to the cinema and others have too.Our construction project has started and we visited friends who have finished doing up their house.People have been spending redundancy cash and setting up on their own.BT have a 3 month wait.And flats are renting like hotcakes.
    And the Poles are back in town having hibernaated over Xmas.
    The Government's borrowing coming in at £15 bln under Nov 2009's projection means that serious dosh is starting to get paid into the coffers.March's big govt spend was a last ditch to do so because that money is a goner if they do not spend it.
    So you know what?........I think headline rate for Q1 is going to surprise everyone at 0.5% and still think 2010 will reach 3%.
    And I was just about the only person on the blogs to predict the problem of the Euro, that UK public finances would improve, and that growth was higher and earlier, and the housing market would recover in 2009 and 2010.
    And big tax amnesties come to an end in June and the banker bonus taxes will have to be paid too, so expect a bumper pay-in.
    GORDON HAS ACTUALLY SAVED THE DAY , EVEN IF EVERYONE HATES HIM FOR BEING HIMSELF.

  • Comment number 29.

    RBS at 53.85p , even getting to near 56p on Thursday, reflecting a fivefold plus return on their trough last year.
    And at a near 8% return on Govt cash not such a disater either!

  • Comment number 30.

    Hi Robert

    The films are simple and appear gimmicky but they get the essential points over to an audience wider than this column I think so they do the job. I was left wondering a couple of things after the closing line on the "Money" film.
    - So who gets the extra money the BofE generates through QE?
    - Do they pay for it or do they get it for free?
    - Are we giving free money to banks here at everyone elses expense.

    Maybe you and Stephanie could do a 4th short film explaining QE again :-).

  • Comment number 31.

    robert,

    i know this is may for the layperson, but there are a lot of basic issues you still need to explain if people are going to undestand the roots of the crisis. in particular:

    - too much debt. if there is too much debt in the economy, it means economic problems snowball much more quickly. e.g. i take out a 95% mortgage on my house, house prices only need to fall 5% and i am in negative equity. that makes me spend less, which puts more downward pressure on the economy. banks were also way overleveraged (too much lending compared with the capital they had to cover losses), which meant it only took a small downturn to make them insolvent and cause them to suddenly stop lending altogether. and a lot of debt creation came about because of "shadow banks" - i.e. companies like special purpose vehicles, insurers (aig) and the us investment banks (lehman) - which performed the same function as banks (borrow short term, lend long term), but didn't have to meet the same capital requirement rules as banks. solution: we need tighter and cruder limits on all forms of leverage (minimum deposits on house purchases, much bigger minimum capital requirements for banks, and also for all other financial institutions).

    - uninsured cash. although you explain the bank run phenomenon, you don't explain how this was allowed to happen in the first place, even though the problem was supposedly fixed by government guarantees on deposits, after the bank runs of the 30s. the problem was that banks borrowed cash massively from each other and from big investors, which don't benefit from these government guarantees. and the "shadow banks" also borrowed cash without these guarantees. so we recreated in the financial system exactly the same conditions that led to the retail depositor bank runs of the 1930s. solution: we need a deposit insurance arrangement for all short-term debts in the financial system, paid for by the banks and other financial institutions that benefit from it.

    - too big to fail. or too complex or too interconnected. whatever. the point is that when banks get too big and complicated, it makes an orderly winding up of the bank impossible. everyone's business with the bank gets frozen while the bankruptcy administrators try to work where all the money is and who owes what. that sudden freezing of business is massively disruptive to the financial system. that was the lesson from lehman. solution: legislate a resolution arrangement to let the government immediately separate the important functions of the bank and keep them going, while the bad loans of the bank, and the people who invested in the bank's debts and shares, work out how much they've lost. and require all "systemic" financial institutions to draw up a "living will" - a detailed plan of how it should be quickly resolved in a bankruptcy.

    - "disintermediation" - this is finance jargon for cdos and other fancy financial structures used to help investors take risks they didn't understand. the basic problem was that people who bought these cdos were effectively lending their money to people they didn't know. when you take the relationship out of the lending process, it allows fraudsters and sharks to exploit the naivety of supposedly sophisticated investors. the buyers cdos had no clue who they were lending to and whether they could really repay their debts. now could they sit down with their borrowers and renegotiate these debts when everything went wrong. solution: ban banks that create these loans in the first place from selling more than 50% of any loan to cdos or other "disintermediated" lenders, so they will always be there to take care of the relationship. and investment banks need to be given a "fiduciary" obligation to act in the best interests of all their clients, including supposedly "sophisticated" ones. that way an investment bank has to tell its client if it thinks the client is doing something stupid.

    - perverse incentives. a lot of these problems were actually well known to people who worked in finance long before they blew up. but when someone can convince their management they made a "profit" on a toxic loan, and get paid an enormous cash bonus for it, they no longer care if the loan blows up later on and destroys their employer or their clients. they already made their bonus. solution: defer all bonuses 5 years, and allow them to be "clawed back" to cover any losses that the individual may turn out to be responsible for.

    - political influence. ever since the 1980s, banks have succeeded in eroding the financial regulation that previously prevented a lot of the problems listed above, and made the financial crisis possible. solution: break up the big banks so that none of them is big enough to corrupt the political process.

  • Comment number 32.

    I guess I'll get round to these films, when I have some slack time. In the meantime, keep bashing the banks. All of these profits come from real workers/voters/taxpayers/wealth-creators etc. Bankers can't "create wealth" just by shuffling money around...


  • Comment number 33.

    Your videos were good, first ones style did not appeal to me but reflecting on it I think your target audience is probably teenagers. The Bank of England one was my favourite.

    Whilst its not a complete lesson on economics its a great introduction into how the economy works and probably presented in a way teenagers would watch.

    I would imagine the target audience of the video and this blog are wildly different so you will not get much positive feedback, try asking some typical BBC3 viewer or posting onto YouTube.

  • Comment number 34.

    #28 - We all know where your coming from by now, but things must be getting desperate in the Zanu-Labour bunker with Goondog Trillionaire Brown's poll ratings collapsing so soon after his TV appearances. DREAM ON.

  • Comment number 35.

    Soory, Robert - you've still not added sub-titles ....

  • Comment number 36.

    for EUROMILLIONS - try this film for some answers to your queries.

    http://www.youtube.com/watch?v=UHiuaGJ46zo

  • Comment number 37.

    28
    OK, so growth is coming in at 0.2%, not my 0.5% ....but I think this 0.2% will be adjusted upwards, remember the previous quarter estimate was 0.1% and is now 0.4% and rising, so let's wait and see.
    And remember the Jonahs were predicting a double dip.
    But , really, in January there was no building work going on and people were too cold to go out and buy sofas and springwear..
    Anyway it is definiteky not the time for Tory hatchets and interest rate hikes.
    Q2 looks interesting, as the planes down must have some impact, but real estate is hot in my city .....friends report 4 houses in their street have sold in the past month, some in under a week ,at prices nearing old peaks.Other friends are in a competitive blind-bidding for a house with four people and a valuation 10% over asking price and a likely sale @ 20% over asking.
    Looks like the tipping point has been reached where the holders off are changing into panickers now they realise they had better get in quick as prices are going up again.

    ...........

    Gordy was the only witty one on the box last night ......
    and aren't Clegg and Cameron not looking a bit Jedward-like.
    At the end of the day, the intensity of youth gets a bit tedious and repetitive does it not,even a bit embarassing .....I used to be a Liberal in a previous life and remember that behind all that twee reasonableness there lurks a bunch of raving nutters with views more divergent than the Anglican church.
    LURCHING FROM UBERSENSIBLE TO DEBONAIR BUT DODGY ....
    Jo Grimmond,Jeremy Thorpe,David Steele, Paddy Ashdown and Charles Kennedy ,Ming Cambell....looks like it is time for someone risky!
    What is going to knacker Nick?
    Are the LibDems THENEWPONZI?
    Why does cash go straight into a private bank account?

  • Comment number 38.

    Robert ; useful for schools and,at its most simplistic level, a good general guide for the rest of us.

    jamie11 - we live in a free country.You are therefore entitled to express your views but it doesn't follow that the video represents a balanced view. In my opinion,this video is for another forum.

  • Comment number 39.

    I've never seen BBC 3. I guess it's aimed at a younger audience with a low attention span? Silly faces popping on the screen and making noises detracts from the information. Also, there was little need to walk and talk. It got better when you both sat in front of those statues for a while. Why not ask why gold stopped being available 80 years ago, and would it not be better if cash was backed by a limited resource instead of being fiat?

  • Comment number 40.

    Is that your Jackie annual on the shelf behind you, Robert?

  • Comment number 41.

    I can't access the clips and am getting an error message "not available in your area." Sort it out, Robert.

  • Comment number 42.

    Hello Robert

    I am sorry to say that the films are very simplistic and I'm not sure what they are trying to achieve?

    You're not giving us much credit(excuse the pun) and the films are not likely to provoke much in the way of thought or worthwhile discussion.

    Are they meant to stimulate political debate or are you just suggesting Capitalism has failed and we should now adopt Marxism?

    takethenationspulse.co.uk

  • Comment number 43.

    Did Gold stop being used after Brown sold it all by the way?

    takethenationspuls.co.uk

  • Comment number 44.

    # 37 - up to your usual tricks trying to ramp the property market again, you must be a buy-to-let 'genius'. We had one living down the road, but he vanished last year and hasn't been seen since. Getting as much as possible out of property is OK while QE is inflating the market, but I'd be cautious about hanging-on for too long when it stops - a bubble is a bubble is a bubble.

    I'm not a wishy-washy Liberal, but any party that would have Harridan Harman as deputy leader (she could even take over by default if Labour win and Brown goes!), deserves a thoro' kicking from the electorate.

  • Comment number 45.

    I would love to watch your films but as I'm in Italy I face, yet again, the message that they are "not available in your territory."

    We're in a globalised world, the recession, the banks, money supply and wages levels are relevant around the world but if your outside the UK you're blocked out. The BBC offers many global services but every now and again it becomes very parochial. Please find some way of letting people at least subscribe to the BBC's full range of services and let us have access to iplayer.

  • Comment number 46.

    3 minutes is not long, so I thought less imagery and more brutal facts would have been better.

    1. Could have mentioned maturities: not all deposits are payable on demand, similarly not all loand have same terms. Needed some mention of matching maturities and fractional reserves plus Bank Of England under-pinning.

    2. I didnt watch this video

    3. Would edit out BOE man's incorrect definition of inflation and replace with description of credit-induced inflation of money supply inevitably leading to higher prices.

  • Comment number 47.

    I'm outside UK so I couldn't watch those pieces of journalistic art, that's a shame. But I'd like to comment a bit on money, how it is produced, and on a confusing in which way it is done. I can easily understand the real money produced from goods, properties, services (real and delivered ones), but what I can't understand is money made from another money, which is made from yet another money in a fuzzy, mind-boggling way whose the only value is a worthless financial bubble after several strange operations of bundling, packaging, re-packaging shares, mortgages, equities, investments and so on. And what is funny and somehow sad at the same time it is the very fact that those operations are bombastically called 'sophisticated algorithms'.

  • Comment number 48.

    Not available in my area. Why not? Looks like the UK could do with a few good ideas from outside at the moment

  • Comment number 49.

    The clip on money said that QE was done because there was less demand for goods and services but that is hogwash, Just look at how retail sales have fared during this recession.

  • Comment number 50.

    Am i the only one to listen in amazement to the TV last evening to hear that the Euro Zone may request Greece to LEAVE the zone. Was it long ago that I heard Politicians say that once we were in we COULD NOT get out! And does this not mean then that the same applies to EU membership ?

    Separate subject - when i looked on the web to find out where this £trillion had gone, i found a site that broke it down with a substantial element being what we paid to banks and for which we took share ownership, some a substantial amount was in Guarantees, which may never be called upon, some were "potential" bad mortgage debt but were still being paid. Some clearly will have been "lost".

    Robert you must have access to these figures by category. i would like to see the Treasury perhaps put a dash board on the web defining the figures and putting a risk % against each, followed with an action plan to recoup or cover? would that not help all of us to understand the mess we are in and possibly the mess we are not in?

 

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