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Back to the nineteenth century?

Robert Peston | 21:24 UK time, Thursday, 19 March 2009

As a young, eager and arrogant banking correspondent in the mid 1980s, I was underwhelmed by the calibre of those running our biggest banks.

They seemed too easily seduced into lending to crooks such as Robert Maxwell, or to spivs running over-extended property companies, or to Latin American economies too dependent on overseas credit.

And their capacity to damage the wealth of their shareholders, by generating meagre returns on their invested capital punctuated by periodic losses, was wholly uninspiring.

As I chomped on their over-cooked beef, in their cavernous dining rooms, waited on by liveried servants, I was convinced they were responsible for much of what was stifling the economic potential of the UK.

If only our bankers had the flair and imagination to direct their depositors' money to genuine creators of wealth, I would muse.

I now, of course, recognise that I couldn't have been more wrong.

Bankers with imagination are what has brought this country - and the global economy - to its knees.

Oh for the days when the chairmen of what were then called the clearing banks would have vetoed any suggestion that their executives should invest in something whose very names - "collateralised debt obligations" or "credit default swaps" - are an offence against the English language.

The banks of the 1980s were bumbling and mediocre, with collusive tendencies.

However under the stern gaze of a Bank of England - which was a bit-player in steering the economy but was a feared supervisor of banks - they fiercely protected their depositors' precious cash.

So it's something of a treat to hear from them once more - in a collection of essays called "Grumpy Old Bankers", published by the Centre for the Study of Financial Innovation.

This is a compendium of the thoughts of the (mostly) better-than-average bankers of yore, not the nits.

And arguably the most arresting contribution is from Sir Jeremy Morse. He was the cerebral former chairman of Lloyds Bank, who - with Sir Brian Pitman - steered Lloyds from being a virtually bust creditor of what were called the less developed countries into a retail bank which had an unusual and healthy respect for the interests of shareholders.

Morse fears that our banks' and our economy's increasing dependence on wholesale funding - credit from unreliable institutional sources - has taken us to a cross-roads. And the choice is between two fairly treacherous roads.

One way would be to shrink our banks so that they could be funded wholly by domestic deposits and savings - but that would lead to such a severe contraction in the availability of credit as to impoverish us for some years.

But "if the system is reconstructed largely as it was (in the past few years) but with the worst excesses removed " - and that seems to be where we are heading - then Morse fears that "the subsequent cyclical pattern would be likely to resemble that of the nineteenth century".

He means that there would be harsher downturns and periodic financial crashes (but, curiously, less inflation than in the last century).

There is a logic to this analysis, especially since neither the UK or the US has yet come up with any remotely credible plan either to reduce the record indebtedness of our public and private sectors or to reduce the dependence of our economies on borrowing.

In fact, all current policy measures are pumping up our debts, on the theory - which many regard as dangerous - that although too much debt got us into this mess, we're simply too weak right now to cast off our addiction to credit.


  • Comment number 1.

    We had a debt problem so now for the past 6 months Governments are the world have started to ramp up more debt at a rate we have never seen before. Now even the Americans have turned to printing money to buy their own debt. Not to worry as The UK have beat them to it on that front. Gordon and Mervyn figure taking money out of the left hand pocket to put in the right will see us good in the end. Looks like massive inflation and depression is on the horizon!

    "The US is Already Bankrupt"

  • Comment number 2.

    Is this headline a reference to the speed of moderation on the previous blog?

  • Comment number 3.

    There is no political hunger for a return of the Glass Steagall act. Ultimately even with it's return the rapid increase in derivatives markets occurred because clearing banks were avoiding heavy regulation. Where are the next profitable markets? Heavy regualtion may mean big banks not profiting from them.

    If stability does occur, then appetite for emerging markets will return. Money will not be flowing to the Anglo Saxon economies from Asia. How can these global forces be contained? There's not a clear answer I'm aware of. One things for sure pressure on a return to profitability will see the major banks again failing to address risk with their investments in the emerging markets. It'll be a very dangerous place in the next few years if some old style capital protection is not forced on the major US & UK banks. Without this boom and bust is back on a much more rapid time-scale.

    Next year should see the return of heavy regulation on high street banks. But it won't so we'll be facing a much bigger crisis when China faces up to it's bad debt.

  • Comment number 4.

    Well, well, well. Weren't you just a genious back then.

    Such foresight.

    This must be the most pompous, self-oppinionated blog in the history of the BBC.

    Young and eager - maybe.

    Arrogant - without a shadow of doubt.

  • Comment number 5.

    Earlier in the week we had Lord Myners ringing his hands at the dastardly Fred Goodwin. Seeemingly all of the experts in the Government cannot find a legal way to attack this man who typifies the morality of our modern banker.

    I commented then that a way to tackle it would be to apply high rate of tax, maybe 90% to all PENSION INCOME over 100K per annum. This would still leave FG with a fat income each year but would also give the taxpayer 580,000 each year.

    Since then I've checked the theory out. It would work as very few people are in receipt of such high pension income, it's usually taken in a drawdown format for inheritance tax advantage.The problem is, I am reliably informed is that the imposition of such a tax would be "unpopular with the media and the electorate"!

    So, in the light of the US turnarouond in taxation policy, how about Robert Peston sounding out some of the genuine Labour MP,s who seem to be shellshocked at the turn of events.

    Oh... as I'm posting, Darling is stating that we will not be following the US plan for bonuses as we want to hold on to "our talent". He hasnt mentioned pension income..... Have a word.

  • Comment number 6.

    Obama looks to have done a Gordon Brown!

    "The White House has estimated that the Obama budget will produce deficits of about $6.9 trillion over 10 years. But a powerful congressional office that is due to file its budgetary estimate on Friday will report a uch larger deficit."

    I think we can expect a similar treatment here in the UK.

    "Obama Deficits To Be Much Higher Than Expected"

  • Comment number 7.

    "Bankers with imagination are what has brought this country - and the global economy - to its knees."

    Bankers with imagination ? I don't believe so.

    You are confusing the existence of an imagination with the non existence of a social conscience.

  • Comment number 8.

    Using global wholesale credit markets to smooth domestic fluctuations synchronises all economies. This brings us to the crisis of the present moment: all-encompassing, leaving no engine of recovery intact anywhere, because every country in the world is at the same stage of the economic cycle at the same time.

    The classic boom-bust cycle of 7-8 years is preferable, at least then the timing and character of recessions remain specific to nations and there is always wealth and demand elsewhere that can be tapped. There is a cost, regular recessions, but it is better than the alternative we are about to experience, which is global depression.

  • Comment number 9.

    The real issue is that until we stop looking backwards for the solutions and start thinking about what the future could and should look like the commercial,financial and social structures needed to get us there will be beyond the imaginations of our leadership - both at a national and global level.Now is the time to start thinking about those solutions and after a suitable period of reflection the implementation path should be entered into. This will take several years - perhaps ten to fifteen - to eradicate the problems we have created.The trick is not to keep digging the hole deeper in the interim.

  • Comment number 10.

    Hooray For Peston !! Bring Back Morse !! Bring Back Pitman !!

    Though interesting to see that Gordon Pell is still kicking around and defending 'Sir' Fred Goodwin with a Blairite 'history will judge him more kindly' spiel...

    p.s. anyone know what Maarten van den Bergh is doing these days ??

  • Comment number 11.


  • Comment number 12.

    From the Centre for Policy Studies' report this week, "What killed capitalism?"...

    What caused the credit crunch?

    - Genuinely valuable innovation.
    - Over-confidence in regulatory badging.
    - Use of novel products to bypass regulatory requirements.
    - Extreme moral hazard in respect of housing.
    - Over-dependence on annual inflation targets.

    What did not cause the credit crunch?

    - Greed.
    - Bonuses.

    In other words, all this froth we have been hearing about bonuses for the last few weeks is just the howls of the baying mob. It is base posturing to appeal to the masses and nothing more.

    It almost seems to me that, even if it could be proved unambiguously that restricting banks' freedom to pay staff what they like will, over time, make the economic crisis materially worse, some people would actually rather that than see some "greedy bankers" get their bonuses.

    If you want an economic system with maximum salaries, it's called socialism. Go out and vote for it. But if not, stop being so hypocritical and populist.

    Oh, and to those who say that because taxpayers bailed out the banks, it is only right that we should be able to dictate their compensation schemes for the next few years, bailing out the banks without actually absorbing them into the government only makes economic sense if you are going to continue to allow them to make independent decisions like any other private sector company.

    But then really the banks shouldn't have been bailed out at all - it is the biggest waste of money in the history of any western government. Banks that were unviable businesses (which, remember, was by no means all of them) should have been allowed to fail, and emergency legislation should have been passed to give retail depositors first dibs on their assets, above the rights of secured creditors.

  • Comment number 13.

    So where will what we used to call venture capital come from to rebalance the economy as Mandy wants?

  • Comment number 14.

    From everything they are now telling us how are the measures that have been put in place or are being talked about going to help out country.Surely these banks are just going to take the money thats been given and use it to increase there assets ???? they are not going to lend it on to stimulate the economy ???

  • Comment number 15.

    Is it time to look forwards and not back? Or is this the onset of Economic Mindset Syndrome? After all, 85% of global wealth is held by 33% of the worlds inhabitants and those amongst the remaining 67% can be very poor indeed. Time for a new way of doing business with a brighter outlook. [Unsuitable/Broken URL removed by Moderator]

  • Comment number 16.

    I understand that the International Banking System and domestic effects worldwide of it's failure had to be shored up in an emergency and yet, now, that emergency has passed.

    Last month I suggested National Banks to take over the supply of worldwide liquidity.

    What is now happening? Billions of 'insurance' and Quantitative Easing to provide liquidity to the world's real markets through the existing, saved Banking structure from National Governments.

    I call again for these Governments to set up their own lending institutions for the sake of international and domestic liquidity and the real global economy.

    If they continue to underwrite the multi-billion currency packages already provided to the Banks in the hope of increased lending and thence liquidity to provide life blood to real businesses and populaces, they're mistaken.

    The Banks will sit on the cash and not lend, either to each other or into the needy real economies.

    Direct Intergovernmental provision of these funds into real markets is called for. Further underwriting of funds for the Banks will just expand their balance sheets whilst living people, economies and future prosperity await the release of the easy cash that the Banks will sit on at their leisure.


  • Comment number 17.

    Those of us with personal debt all receive the same advice. Contact the people you owe money to - agree a repayment plan - DON'T BORROW ANY MORE MONEY !

    We will be paying for this madness for decades, starting with two generations of impoverished pensioners.

  • Comment number 18.

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

  • Comment number 19.

    The problem of the banks lies with its shareholders. Management are not blameless but the structure of the typical bank with its very high leverage creates a huge appetite for risk by the shareholder. Limited liability creates a payoff structure where the shareholder of the bank can walk away if the bank fails but gain if the risks it takes leads it deeper into the money. Unlike the conventional company with relatively low levels of debt, the effective call option on the underlying assets of the bank make risk taking highly attractive to the shareholder who, in their turn, agree to the incentive structures which bring this about. The shareholders in Rolls Royce or Glaxo for example have little to fear and need little protection from limited liability but I have no doubt that the shareholders of RBS or Lloyds would be very concerned if they did not have the protection, and the asymmetric claim on the assets of the bank, that limited liability offers. This leads to one radical solution: remove limited liability protection from bank shareholders - put them in the same legal position as LLoyds underwriters - and just watch how the attitudes of the banks and their management would change.

  • Comment number 20.

    So you too have run out of ideas Robert?

    What about your helpful friend?

  • Comment number 21.

    I am always wary when a complex situation is presented as a simple dilemma.....especially when the dilemma is presented by some retired bloke called Morse.

    There can be no comparison with 1970's banking or 1930's banking in my opinion because the situation here is different. Dusty old economics theories from the past are utterly useless when it comes to bottoming out this horrible mess.

    Of more value to us all right now would be a crack team of Scotland Yard and FBI detectives with a remit to bring the money forgers (CDS buyers)to book...all ten thousand of them (if that's how many there be). These counterfeiters continue by the day to con the authorities.

    All CDS contracts should be cancelled NOW. They are the currency of crooks. If a triple A bond goes pop then tough luck to the guy holding it.....but NO CDS UNDER ANY CIRCUMSTANCES SHOULD BE VALID IN THIS INSTANCE.

    There are banks and hedge funds out there getting fat on the CDS windfalls from broken bonds......KILL THEM OFF....BRING THEM TO BOOK......

  • Comment number 22.

    The people have become slaves because of this addiction to credit they have been brain washed into thinking that they must all be homeowners/buyers, most of them complain about how many hours they have to work.
    It's time for people to think outside the box's and realize the homes and must have cars, they are trying to buy, own them

  • Comment number 23.

    No, no, no. I'm not having this, Robert. We need imaginative bankers more than ever now. Fine men like Sir Victor Blank. What are you thinking of?

  • Comment number 24.

    It's spring time!...and about time for a spring clean at Westminster, the Treasury, the BoE and the FSA.

  • Comment number 25.

    2hrs and no moderation

  • Comment number 26.

    Simply building up banks' capital reserves and regulating them to behave like they did in the 70s will not help the economy grow. If anything it will put a lid on growth and still allow the type of financial busts that used to happen even more before the 1980s.

    A more sophisticated regulation is needed, which allows for and mitigates the psychology that creates bubbles:

    This will allow the economy to grow at fast, flexible rates but retain control over the irrationality that drives occasional overheating.

  • Comment number 27.

    I can't see any possible point to this cod nostalgia BANKERS review

    It appears that the moderators agree with me and have abandoned ship entirely.

    They may be in a completely different TIME ZONE but I would politely suggest that Mr Peston is in a TIME ZONE FAR FAR AWAY AND POSSIBLY ON ANOTHER PLANET

    The City remains in the GMT TIME ZONE however, which when one gets down to it, probably ensures their continued importance with or without stricter regulation and whether we like it or not!

    PS: Now that the US has a 90% super-tax where's ours?

    and a more serious question: does American public anger towards the banks mean that the administration will not be able to get any more bail-outs through Congress, whether they are needed or not?? so what happens when AIG comes back for their next $50bn instalment of taxpayers money in 3 month's time??

  • Comment number 28.

  • Comment number 29.

    Aghhhhh I've been reading your stuff for the past couple of months, and feel moved to make a few *ahem* observations:

    1) I imagine that you, just like practically all financial journalists, were constantly overawed by the "big swinging d***ks" of high finance. You also knew that by flattering them in print and on air you would gain more and better access to them, leading to more copy, and also perhaps with other fringe benefits...

    2) You, like virtually everyone else in journalism and government, had very little idea about what was actually happening inside the major banks, and the extraordinary risks to which they were subjecting their shareholders and - more significantly - their depositors. You didn't know this information because you (collectively) were unable and/or unwilling to find out, and were prepared to take bank CEOs and CFOs at their word. Plenty of middle-ranking mangers within all of these banks knew perfectly well how much danger was brewing - who knows, perhaps some of them contacted you in 2004-2007. But of course to sound a journalistic note of caution at that time (let alone to sound an loud alarm bell!) would have been terrifically bad form and could have cost a lot of invites and access.

    3) In that context, a PROPER scoop would have been to talk with disaffected or worried coal-face workers in these major financial institutions back in 2004-2007, and to have revealed the enormous debt and derivatives bubble that the banks were constructing for themselves. Incidentally, this was a bubble that was BOUND to burst once a) an inevitable house price stabilisation in the US occurred, and b) the stupidity of some other personal and business lending was finally understood. This is despite the received wisdom of 2009 saying things like "many prominent economists had never seen the bust coming" etc.

    4) This sort of bubble/bust in banking will inevitably occur again and again if we give bankers the tools to engineer it. The most powerful human motivators are fear and greed (and lust, but I don't think that's relevant here!). The point is, if we collectively feel that individuals and small businesses need protection when they deposit money with a bank (and I think we all agree that they do), then these sorts of banking operations MUST be subject to stringent regulation and very tough capital adequacy rules. It's the only way. A new Glass-Steagal-style act should force the re-separation of commercial banks and investment banks for this very reason - it's why the original Act was necessary in the 1930s. The problem is that successive governments here and in the US were *ahem* persuaded by powerful bankers (with lots of campaign funds to dole out) to loosen and finally repeal these rules. If the separation had still been in place, we'd be in a LOT better shape today.

    4) As most people inside the system really know and fear, there are potentially HUGE losses and writedowns sitting in virtually all the major banks, linked to the more exotic and difficult-to-price asset-backed derivatives. Everybody knows that this is an enormous timebomb, and since governments on both sides of the Atlantic have publicly pledged to bail out the major banks no matter what, this means that taxpayers could be set for further bail-outs in the order of multiple tens of billions.

    I've really had enough of what the Americans call "Monday morning quarterbacking" about all this. There WAS an opportunity for a journalist (admittedly a brave one) to have reported many years ago on how precarious a house of cards was being constructed. It's just a shame that everyone in the media was seemingly far too credulous or ill-informed to dig a bit deeper for the unpalatable truths...

  • Comment number 30.

    Hi Robert

    Your remarks are - as usual - sound; but I think you are over-generous to the banks of the 1980s. That was when this whole mess started. Back in 1985 I walked into a High Street branch of Curry's to buy a telescope. It cost about £150. I asked about the credit scheme advertised in the shop window. I was told I could have up to £2000 credit on their store card and I bought the telescope. Wandering up and down the High Street it became clear that I could easily rack up £6000 of debt (about my annual salary) easily - even though I owned nothing of any value (I was in rented accommodation at the time).

    The credit bubble did not begin with the banks. It began with credit companies and it was the way the the Thatcher government bought its way out of recession. Once that government gave the bubble its blessing the banks would inevitably be sucked in.

  • Comment number 31.

    Isn't the situation more dire than even your gloomy prognosis?

    We will need cash to restructure our economy as we cannot rely so heavily on finance and a hell of a lot of cash to restructure for climate change (infrastructure improvements for climate extremes like storms; the flight from carbon etc etc).

    I am no economist so can't argue but surely if we don't prevent the next crash (and it doesn't have to be another neat seventy years later it could be ten) then we are totally done for so far as I can see as we will still be paying off this one.

    Therefore we can't go back to what we had before and the C19 won't do.

    I assume that its not written in stone that we will actually pull through this one?

    Are there no nasty derivative issues sting in the tails like CDS to pull us back into the mire?

  • Comment number 32.

    WHY WHY WHY does no-one talk about investing in CREATING new wealth, i.e. the stuff we can export?
    How will we pay off our debt when we have no money coming in? I despair.
    Please, please please let's have an election..........

  • Comment number 33.

    You are right Robert when you say you were wrong in your youthful assessments of bankers T he banking business grew rich when it backed others risks and ventures speculating on everyone from Raleigh through cobalt and Cook to Maxwell was great for Banks they went wrong hen the tried to cut out the middle man and become the Raleigh’s Cooks and Maxwell’s them selves

    Your proposition of back to the 19th century is equally wrong when you are right we are back to the 16th century when the smith is king local expertise skill and knowledge is as I wrote in the 20th century the by product of the internets globalisation not the banks incompetence big units are only viable when you can not communicate when you have global communication small is beautiful. Nay essential

    The bankers tried to buck these truths.

  • Comment number 34.

    I'm not sure it was banker's imagination that did it. Most of 'em just follow the herd.
    True, in the '80s they didn't do it on such an industrial scale, but most of them were pretty dim - Maxwell, South America and so on as you say. The current lot aren't much different, judging by my gig on the exotic option floor of one of the Canary Wharf firms. As an ex-physicist, I knew what a partial differential equation was, which was why I was there. I also knew that if you put rubbish into it, it didn't matter how good you were at math, you got rubbish out.
    It was certainly the case that the trader boys had no idea what they were doing; they were just watching spurious numbers on expensive computer screens.
    I think they had - probably still have - a exaggerated idea of their own cleverness and importance. Getting stressed about their pensions and bonuses is probably useless, but encouraging them to teach our kids is not a good idea. If one goes near my daughter, I'll sue the sod.

  • Comment number 35.

    "If only our bankers had the flair and imagination to direct their depositors' money to genuine creators of wealth, I would muse.

    I now, of course, recognise that I couldn't have been more wrong."

    I don't think you were wrong. The trouble was that they came to believe that THEY were genuine creator of wealth (which was probably right at an individual level). The sad fact is that people who piggy-back those who do the hard work usually end up richer; but without gold-diggers, whom would you sell picks to? Consider the number of websites, during the great dot-com hours, the business model of which was simply based on getting traffic and making money on advertising. Is it sound? I think not. We end up mistaking the accessory for the essential. That's called fetishism.

  • Comment number 36.

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

  • Comment number 37.

    "However under the stern gaze of a Bank of England - which was a bit-player in steering the economy but was a feared supervisor of banks - they fiercely protected their depositors' precious cash.

    So it's something of a treat to hear from them once more - in a collection of essays called "Grumpy Old Bankers", published by the Centre for the Study of Financial Innovation.

    This is a compendium of the thoughts of the (mostly) better-than-average bankers of yore, not the nits."

    So now it's Forward into the Past, is it ( with due apologies to those teen flicks)?? So those "old farts" with their "My-word-is-my-bond" are not such idiots after all !! My !! My !!

    As one of the "old farts", I'm desperately resisting any gloating !! Sputter, sputter !!

  • Comment number 38.

    #16 "What is now happening? Billions of 'insurance' and Quantitative Easing to provide liquidity to the world's real markets through the existing, saved Banking structure from National Governments."

    The 'billions" that Crash Gordon poured out will not have any effect on the worldwide supply of liquidity, especially when compared to America's debts of trillions (close to 7 trillions and counting) !!

    Crash Gordon cannot even save Britain with his quantitative easing let alone the world !! In the greater scheme of things, the British economy is no longer that significant and Brown's posturing will not impress the world !! Obama's 1.2 trillion quantitative easing *did* have some effect, mainly negetive !!

    Crash Gordon's 75 billion barely registered on the global radar !!

  • Comment number 39.

    "Populist Peston, going on and on about Credit Default Swaps.

    Only one of the most important tools in a bank's risk management armoury."

    A CDS is a risk transfer tool it does not manage the actual risk or fundamentally alter the risk associated with the underlying loan or investment. All it does is shift it to someone else who was too trusting or stupid to try to understand the risks for themselves before underwriting it.

    The original lender/deal maker is the one who manages risk by making an assessment of the risk that the counterparty will actually be able to repay the debt or what deault level there will be in a package of debt as they are the only ones with all the information required (ratings/financials etc.).

    CDS and the like have permitted banks to discount the risk by making it appear that they have managed it - they haven't, they have actively engaged in high risk lending and assumed it was low risk because they had layed it off on someone else because they never understood the risk properly in the first place.

    That banks devised CDS and the like to fool themselves that they had removed the risk of making risky loans is precisely why the whole pack of cards has come crashing down.

    The Proles as you put it understand this very well, it's why we are a bit miffed at the bailouts which the proles are expected to pay for - it was the investment bankers who failed to understand it and opened the financial system up to systemic failure as a result.

  • Comment number 40.

    "Under-whelmed" by the calibre of those running our biggest banks. Spot on RP.
    The British banking industry 2000 to 2008....
    The biggest "trough" for pigs in history.
    Institutionalised thieving.
    State-sponsored robbery.
    Robbery on an industrial scale.
    The Americans have got the right idea... 90% tax on all bonuses in the bailed-out banks.
    We need to do the same.
    And stop giving bonuses to people who arrange mortgages...or we're asking for more trouble. Just give them a salary.

  • Comment number 41.

    Mr Peston used one of my favourite words MYOPIC , but I'll add to it.

    All the Captains Of Industry / Politics are very much the brand of MYOPIC / HYPOCRITICAL / SYCOPHANTS we have come to expect!

  • Comment number 42.

    Actually you couldn't have been more right.

    It's just that the financial services industry wasn't the genuine creator of wealth that you or a lot of other people thought it was.

    Of course, financial services have their place in a modern balanced economy.

    With "balanced" being the operative word.

    Just think where we might be now if we'd used some of that money to finance capital investment in high tech manufacturing and R&D...

  • Comment number 43.

    Oh and another thing, I'm pretty sure as far as good ole' USA is concerned that there's allegedly a lot of rich white money thinking if things get any worse we'll just blame it on the new guy! Here's one from the left field so to speak, what if all the money behind the new guy was indeed largely from these rich white guys cos they seen this disaster coming and they needed a patsy! what better way of setting back this new found progresive equal society.....or is this too lateral for you to understand what I'm meaning? I'm trying not to be moderated here!

  • Comment number 44.


    Yeah Invest in the manufacturing of food and energy first off!

  • Comment number 45.


    Surely the only way the UK can stop being a deficit country is for the amount of borrowing in the UK to equal the savings of people in the UK. This will probably lead to a heavy and painful constriction of credit in future but what is the alternative - an unsustainable deficit that never unwinds - is that possible let alone desirable?

  • Comment number 46.

    No problem going back to 19th century. That was BEFORE Fractional Reserve Banking which has been disasterous and is just fraud under any other name. Why is this NEVER discussed?

  • Comment number 47.

    Your last paragraph says it all, they are afraid to go cold turkey. This is not just about the banks, governments have surounded themselves with these people and believed it all without processing any of it through their own brain. There were jouralists and bankers out there who were not in agreement that all was well, but for the same reason were ignored, no one wanted the party to end. The media were also happy to give them all an easy time so they are to blame. There has been very little robust questioning of governments throughout the past 10 years. We have a compliant press and media who have helped this government to ride roughshod over any one who disagrees with them.

  • Comment number 48.


    "A CDS is a risk transfer tool it does not manage the actual risk or fundamentally alter the risk associated with the underlying loan or investment. All it does is shift it to someone else who was too trusting or stupid to try to understand the risks for themselves before underwriting it."

    Risk transfer = risk management. You are transferring the risk to someone who values the risk/reward ratio differently to yourself. This is how all markets work, including the stock market.

    "CDS and the like have permitted banks to discount the risk by making it appear that they have managed it - they haven't, they have actively engaged in high risk lending and assumed it was low risk because they had layed it off on someone else because they never understood the risk properly in the first place."

    This doesn't make any sense. If you make a loan and hedge by buying CDS then you *have* reduced your risk. Not eliminated it of course (counterparty risk), but it has been lessened.

    "That banks devised CDS and the like to fool themselves that they had removed the risk of making risky loans is precisely why the whole pack of cards has come crashing down."

    Non sequitur and you don't provide any evidence to back this up. People have been going on and on about how CDS helped cause the crisis but noone has actually presented any credible evidence for how this happened!

  • Comment number 49.

    I won't quote individuals, but I really can't see the logic of a certain argument that is going on here.

    It goes something along the lines of - "doing XYZ economic/financial mechanism will get the economy growing again (reasonably) quickly and safely".

    I cannot see how the economy can significantly get growing again unless financial industries (the banks, stock markets, pension funds, insurance investments, etc.) achieve regaining the trust of potential customers or investors. That is, the banks need to evidence to the public that they are competent, reliable and trustworthy and that these mechanisms are safe and will actually profit the customer/investor.

    No-one seems to factor into their mathematical models that a lot of people (not just in the UK):-

    a) are a lot poorer than they were, say, 2 years ago and
    b) got varying degrees of fingers badly burnt recently and
    c) regard the "experts" (bankers, financial advisors, insurers, etc.) with distrust, if not loathing.
    d) are slipping into seige mentality about the future.
    e) are expecting to be in worse positions in terms of wealth, income and social security than they are currently.

    Furthermore, the vast amount of dosh HMG has put into the pot does not seem to have made a huge difference to things.

    In reality, we'll probably see once more the days, as said on here before, when banks (and others) only lend to people who don't actually need the loans. Which will leave a lot of other people in a lot of problems.

    Oh, it leaves the financial industry in quite a bad way too, because a lot of people who don't actually need the loans aren't going to actually bother to get them. The notion of "living on credit" has become significantly discredited of late.

    So, really, just how are these mechanisms going to rescue us?

  • Comment number 50.

    Oops, I do apologize BBC for that third party quote in #36 which may have caused moderation to consider it offensive. I have removed it and thus submit it as something novel and newsworthy again .... It is certainly a constructively different approach and makes a pleasant change from all the impotent moaning that is being done about a dire situation which will only get much much worse if nothing novel and different is tried in an Alternate Model.

    amfM HyperRadioProActivity ...... Running on an always Full Tank of Tiger Gas

    "So you too have run out of ideas Robert?

    What about your helpful friend?" ..... #20.

    Do not dismiss Imagination as an AIdDriver/Universal Virtual Force/Immaculately Resourceful Asset just because it fails to be Viably Conceived and Transparently Selflessly Shared into Competent Skilled and Creative Hands/Mindsets, by the Naked Short Selling Tool/Fool on the Hill and in Ivory Towers with No Practical Virtual Concept nor Perceived Experience of the Long Evolutionary Game that Life Itself Plays out in Nature, and which Our Thoughts about such Plays in so many Different Tangent Parallels would Seek to Mimic for the Unifying Singularity of ITs Great Purpose.

    The following short extract from a slighter longer post entitled "A New Class of Business Professional in the Virtually Perfect Amateur" ..Posted Friday 20th March 2009 07:32 GMT and which may or may not appear, in reply and response to a Sky Virgin IT conversation here, .... ... is as relevant here as it is there, for a Version of it has tasked RBS/the Government/Banking Lead Management to Provide a Very Particular and Peculiar Positive Constructive Enabling Credit Facility/Perceived and Practical Wealth Distribution Portal/Quantitatively Eased Working Capital for Immediate Rapid Injection into Markets and also Banking Systems, thus ensuring that the Banks Credit Transfer System into a Joint Venturing Individual Customer/Major Business Client Bank Account and subsequent Interbank Credit Transfers or Currency Conversion and Exchange Transactions for Retailed Goods and Services, with the Exchanged Currency Conversion or Interbank Credit Transfer Feeding the Transferred Credit Immediately back into the Major Host System, will Feed/Provide the Initial Credit Transfer Sum as Again Available for further Liquidity Release for Free Flow Spending, which Energises and Oils all the Myriad Feeder Markets, which are Cointerdependently Linked to a Subjective Purchase of Principal Spend. A double Whammy of Outrageous Good Fortune and All for the Cost of Nothing but the Better Beta Management of Perception with Credit Transfers being Disbursed and Working their Currency and Industry Flow Magic rather than being Pimped as Debt Obligations Incurred and Economies Stagnating and Dying.

    As you may Freely Imagine, the Novel Pilot Proposal has resulted in a Period of ..... well, whatever you would call it whenever there is a Lack of Immediate Official Feedback Response and no obvious Third Party Figurehead Provided and Identified as being Responsible and Accountable, Personally Able to take/make the Simple Yes or No Decision, with the Yes being so Mutually Constructive and Inclusively Vibrant and the No being so Self Destructive and Exclusively Divisive. However maybe I just expect things to move at too quick a pace for an old establishment workhorse and thus I will content myself to bide their time, although its amazing how much further on and how much further they will have to travel to remain even where they are today, whenever so much more is being done in the Field even without their Engagement, which would have one wondering on the Necessity of their Being in the First Place, in their Present Form.


    An easier solution would be for the Introduction/Hiring of a new head to provide Virtual Leadership and that may even be as simple as Sir Richard launching another MasterPiloted Craft/CyberSpace Vehicle for the Hire to feed Intellectual Property/Creative Ideas into Existing Infrastructure, thus making Beta Use of "that bunch of useless (idiots)". All it takes nowadays, to Run, and to Run with such Organisations, are Beings who can Fly High in ITs Rarefied Atmospheres by simply Providing a Bigger Picture View of what can be done in and with the Virtual Environment/Binary Code/Digital Signature/ElectroMagnetic Pulsating Spectrum/call IT what you will."

  • Comment number 51.

    Credit is a means of transferring spending power from those who have a surplus and are not inclined to use it or invest it, but simply want to save it safely, to those who do want to spend it, but do not have enough. Morse is probably right that if this mechanism were restricted we would return to 19th century economics.

    The present unsatisfactory situation, in which on the one hand there are unemployed workers who would love to have a job and be producing goods and services, and on the other hand there are people, some of whom are the very same workers, who would love to consume those products but do not have the money to buy them, would become endemic.

    The obvious solution is simply to put money into the hands of poor, freshly printed if necessary, and have the state act as the major source of funds for investment. Unfortunately, and not surprisingly, the wealthy elite, who have almost all the power, and for whom life is quite congenial during a recession because their purchasing power is enhanced, do not like this idea.

  • Comment number 52.

    12. At 10:51pm on 19 Mar 2009, kennethmac2000 wrote:
    From the Centre for Policy Studies' report this week, "What killed capitalism?"...

    What caused the credit crunch?

    - Genuinely valuable innovation.
    - Over-confidence in regulatory badging.
    - Use of novel products to bypass regulatory requirements.
    - Extreme moral hazard in respect of housing.
    - Over-dependence on annual inflation targets.

    Fine but this is where I think your point went wrong and should read:-

    what inspired people to do this?
    The bankers tried to buck these truths.

    you are right here is great deal of froth and smoke covering the real issues for instance we have as a society become insular driving 4 x 4 urban tractors from behind locked electronic gates to secure underground car parks and back again we have no feel breath or ear for social being and that leaves us with little moral virtues and even less in ethical principals and above all we fail to grasp a philanthropic approach to our late 20th century capitalism.

    Capitalism is the only way forward and it is a shame when communism and many other extreme doctrines have failed, that a greedy bunch of devil may cares have taken down the very modal that should have flourished like every thing in life anything will only work for the minority if it serves the majority and has a mind for the needs of the entire community.

    It must be morally interrogate-able and used with ethical principals but you don’t need me to tell you we’ve ruined a good chance because the model of historic success always points to a philanthropic and benevolent approach carrying the most successful long term ventures and I dare say always will.

    Ask the Greeks, the Romans the Normans, the Tudors and even Victorian philanthropists, what made money work best and why most or their successors failed because they all think it is take and in actual fact it is giving that makes you rich long term.

    So we have blown the true communist model and the true capitalist model all in the same generation not bad going in afewshort years what next me thinks because we sure have not learned the lessons we need to put it right that is perfectly clear from the vast amount of journalism and even more from the response in these and other blogs. Our wayward politicians and our hapless thinkers all seem stuck for an answer.

    The fact is the only thing any one can think of is lets repair the model and do the same thing all over again. Yes I have nothing against the idea of falling off and getting up and back on but to do it in the same way with the same model and the same people without researching the alternatives beggar’s belief.

    The suggestion that weshould do it is also very dangerous its ass innocent and as threatening as a phrase like - let them eat cake

    So all I can say to our venerable leaders is be very very careful where you try to take your people next too much has been done already without thought.

  • Comment number 53.

    Your points are taken on an individual company basis which I guess is the point you are making - where the risk within one company is transferred to an unrelated company, the individual company views it as mitigated.

    My points were the basic principle of CDS and effect on the system - CDS and the other derivatives are the financial industry insuring itself, they are not managing it systemically they are just transferring it.
    A insures B insures C insures D insures A. Provided there are no major corrections the system survives, subprime and the lending bubbles were major accidents waiting to happen and when they did - the system ground to a halt since A,B,C and D all got worried that they may have to pay out since none was sure if any of the others might be exposed to this chain or other chains.
    Because they are all linked means all the risk is still in the system - it cannot be managed by the system since the system can only transfer it back and forth between itself. Therefore individually the risk may appear to be managed but it is still entirely carried by the same system.

    There are good reasons companies pension funds are prevented in investing solely in their own shares (Enron being a case why this is dumb). There is also a good reason I can't just insure my car by having a note from my wife saying she'll pay if I crash it.
    CDS are just the financial system insuring itself, ok for the fender bender but when the cars a write off and takes 2 or 3 others with it, it really is a problem. This is the risk of CDS and other similar derivatives pose to the financial system when there is systemic failure, it threatens to take the whole system with it.

    This should be regulators role to ensure that systemic risks are mitigated by independent means - this does not means the proles becoming the default insurer. That all regulators removed the safeguards or decided to go on an extended holiday created the conditions.

    Without the ability to lay off the risk with a CDSetc I contend that loans and deals would have to have been more carefully assessed for the risk. CDS may not be the root cause of the specific issues behind the current debacle but they represent a very large risk. After all, had the default market mechanism of bankruptcy been allowed to befall all the banks deserving of it then all the CDSs related to their loans would have been activated - are you suggesting that the remaining banks could possibly have soaked up all the related CDS obligations without going bust themselves. All commentators seem agreed that allowing Lehmans to go was a bad idea after the fact for this very reason.

  • Comment number 54.

    I agree with Mr_CasaLingua @29 that we should look to those who predicted the present collapse from 2004 onwards for ideas on how to proceed from here.

    The point raised by hack_round @33 about globalisation and communication by internet, SMS text, TV and radio is also well made and marks a clear difference with the old style bankers.

    At a personal level, individuals are voting with their feet and not taking out new loans to buy houses, cars or other big ticket items (Sutara @49).

    The problem seems to be one of valuation and the making of a market where there are insufficient buyers to form an orderly market.

    Anyone who has bought a house in last 2-3 years in the UK is looking at an investment that has cost them quite a lot in interest payments and has not increased in capital value as they hoped or expected.

    The banks were happy to lend on high income multiples safe in the knowledge their charge against the property would protect them if the mortgage payer defaulted.

    This model only works if price of houses only moves upwards.

    What we need to do is re-value house prices for both the bank and the mortgage holder. The value of the loan to bank is reduced and the cost to the customer is reduced.

  • Comment number 55.

    So James, still trying to spam this blog then? This time without success I note.

  • Comment number 56.

    Time for a change.

    Lets start with a new Business Editor at the BBC who doesn't believe that banking is the only game in the park.

  • Comment number 57.

    Of for god’s sake - so much religious faith!!!, the hominid has assimilated memes from the previous generation and does not question them!!!. What is money - the means of exchange. Kill fractional reserve banking, private companies should not have the power to issue money even in the form of credit. Debt free money can be created and issued by government or by persons in this technological age and the problem disappears forever.

  • Comment number 58.

    Non sequitur and you don't provide any evidence to back this up. People have been going on and on about how CDS helped cause the crisis but noone has actually presented any credible evidence for how this happened!

    Shadows of the CDS Market

    It didn't help that the ratings agencies assume just like you horreur that it was managed. So I am bank A and my buddy is bank B. We pass these managed risk between us making bets on the outcome. We traded risk, the ratings agencies say we managed it and give us their highest rating and we never looked in the box because it doesn't really matter if you think about it from a greed standpoint. It does what it is intended to do and allows me and my buddies to rake in massive bonuses and profits from excessive leverage. In short a ponzi scheme.
    It is like setting up domino's for the most part except you are not sure where they are located and who they will hit next.
    This has yet to really blow up. It is related to all the frustration surrounding AIG though. AIG is a symbol of this system which was basically fraud and is being handed off to working class tax payers who don't have the luxury of tax evasion and offshore accounts.
    Either way the risk didn't disappear from the system. Now no one knows who to trust and the government is helping keep everything secret. If you want things to finally pan out then we must reveal what is hidden. No one knows who is safe and who isn't, thanks to all these creative risk managements schemes.
    The CDS is basically an attempt to insure speculation. We cannot allow insurance for speculation. Or we have to have a true free market and let all the gamblers fail as they deserve, including the central banks if they are unfit as they appear to be.
    The CDS tools are basically a means for the bankers to play musical chairs. And they want to dump this fiscal responsiblity on the average tax payer since they have zero control of playing the musical chairs game with them. We are the unwilling dupes who know we are being lied to and looted.

  • Comment number 59.

    This is the 21st century not the 19th century.

    We face new challenges - global challenges.

    Learn from the past - yes.

    But we need forward thinkers with fresh ideas.

    Your halo is slipping Mr Peston.

  • Comment number 60.

    We keep blaming the credit culture for the crash. The credit given has allowed the west to live like this for at least 10 years. I am not saying this is a good or bad thing. What I am saying is that without people spending their credit in Woolworth's for the last 10 years Woolworth's would have closed years ago. Without our recent cred culture I suggest we would have had a slower slide into this poverty.
    Admittedly, if we had had this slide we may have been able to see its signs and do something about it. But then there were many voices predicting it anyway and nothing was done.
    Borrowing money is not always bad. It is good if we use the money to better our position in such a way as we can pay it back. However we have been using our money to buy cheap, short lived, disposables from China. The borrowed money that was previously in circulation was sent to China. The decrease in money in circulation now means there is not enough to spend in our shops to keep them open. Shopkeepers are reducing prices to try to stay open but this does not pay their bills. Deflation has the consequence of even more shops. So introducing money into the economy to redress the imbalance of lack of circulation is a way forward.If we can indeed push prices up.
    Inflation is not always bad. It is bad in that it will hurt many of us. It will force us to spend more suitably. It will, in real terms push, wages and property rental prices down. This will help businesses stay open and new businesses be productive.Inflation will also obviously devalue the pound - so long as we print quicker than other countries. This will allow us to export and bring more money into the economy.
    So printing money is not just a patch. It does make us worse off as individuals but helps dig us out of this.

  • Comment number 61.

    Best articles about the black hole and the fraud which created it :

    [Unsuitable/Broken URL removed by Moderator]

  • Comment number 62.

    "fears that our banks' and our economy's increasing dependence on wholesale funding - credit from unreliable institutional sources"

    How about the billions or even trillions accumulated over the years by fraudsters, drug lords, despots, tycoons, dynasties, secretive organisations, collectively pays little, if any, taxes. Money probably laundered and washed through tax havens and ended up lending it back to us, earning interests which will not be taxed ... again.

  • Comment number 63.

    Not sure why my previous comment has been moderated. It could be because I linked to an article, which contained "bad language", although it was more apposite than usage in many BBC programmes. Or, perhaps because my characterisation of the underlying cause of the crisis isn't yet considered acceptable, although it's screamingly obvious.

    Any way, I think we have to turn to the US for journalism, which doesn't pussyfoot around the real reasons for our current situation. Strike 1 :

  • Comment number 64.

    [Unsuitable/Broken URL removed by Moderator]Strike 2 :

  • Comment number 65.

    If honest politician is the most glaring oxymoron possible, then unbiased journalist probably ranks alongside altruistic derivatives trader. Matt Taibbi is always worth reading, although I don't always agree with his point of view and his use of expletives can be seen as gratuitous.

  • Comment number 66.

    We are now in the famous catch 22 situation.

    As a country we all know that if we are to get better, economically speaking, then what the Leaders and citizens of the UK need to take is a good long dose of nasty medicine. And and that involves dramatically reducing our appitite for borrowing in order to satisfy our desire to consume ever more of the things we don't really need.

    Unfortunately we, the leaders and citizens of the UK, are now so addicted to borrowing that this has left us and the country so weak (economically speaking) that the nasty medicine we need to take will in all probability kill most of us off.

    Even the strongest of us are going to be in re-hab for a long time to come.

  • Comment number 67.

    It's not just in banking either. All industries need gray haired people who have experience (and memories) of how the world works when things turn sour.

    We needed people who hope for the best, and prepare for the worst.

  • Comment number 68.

    What is an Anglo-Saxon economy?

    Is that one in which the main participants come from another country and henceforth start calling themselves British to the exclusion of the original Pretani peoples?

    After all, the British economy is a Celto-Germanic mix, not solely Anglo-Saxon, nevermind those other people's living here.

    I'm just puzzled, you see, because I don't understand how ethnicity informs the nature of national economies.

  • Comment number 69.

    I do not believe in the credit crunch nor that it just dropped on us from the sky or that people overspend just like that. The banks had over ten years to fill their coffers and they did and then they decided that people would now be controlled by the fact that they would have no money, job , or home and it could all be blamed on the Muslims or what ever. This started before the money was hidden away, the setting up of New World Order were the state controls its people first by fear then by stealing from them which is fear on the next level. Were is all the money who owe and I mean real owns the banks of world I can not possible say because I get kicked of your blogg. Has Coutts lost money has the Royals, and the Govenment many of the MPs are still fleecing us so were is the money when they suffer then I will believe it history repeats its self because the human race does not learn. WWW3 on its way.

  • Comment number 70.

    The Domino Game now falling in ever expanding circles round the World does not seem to have any possible end game until we have reached the plateau of the Great Leveller. Once there, we can all walk or crawl to the Tower of Existence passing on the way the Monuments of Greed and Inhumanity, where we can enter into discussion with the Muslim, the Christian, the Jew and the Unnamed about our Identity while the Blind and the Blinded serve fried fillets of fresh air with a bottle of sunlight filled with tears.

    All the cards on the table, all the stones flat on the floor, the gathering of the Race will join at the Core.What is at issue, what is it worth, human frail tissue, human at birth. Place your bets Ladies and Gentlemen, place your bets. Look in, eyes down, for a full house. The Wheel is turning, see how it goes, where it stops, nobody knows. Mesdames et Messieurs, faites voux jeux, s'il vous plait.

    Junk derivatives, fine print split infinitives, capital crumble, investment jungle. Set the Joker in, give Thatcher another spin: a Lincolnshire fix, and Order a Garter with University Challenge as an establishment starter. Screw the Dartboard to the Wall, screw the tender Liberals inside some Hallowed Hall, go and wake the Spider, open up its hole, its all fall down when we've got them on the dole. This rounds on me, said Monty Monstrous to smiling malignant Malign Majesty.

    Bottle time. The genie is out of the bottle. The bottle is afloat, let's call it the Obama Boat. Can we climb aboard and seal our fate, seize our state, by ending inhuman hate? Can we create order, with humanity at the border, can we humanise, throw off all disguise, come to realise, we are brother and sister size? Can we? Create a human centre, join at the human core, while human achievement pushes the door? Can we?

    Ten green bottles hanging on the wall, ten green bottles hanging on the wall, and if one green bottle should accidentally fall, there'll be nine green bottles hanging on the wall. Common sense, a shared sense, a Human Scale, inside and outside the Pale. End the torture, expose the greed, plug the hole, Human Atom at the pole.

    Spin the bottle, see it spin free. Place your Round Robin, chance your hand and see. Milli Pyango me, gamble and scramble me, take me to the Lottery before you come to bottle me.

    Sunshine corner, all is very fine,
    It's for children under ninety nine,
    All are welcome,
    Seats are given free,
    Redcar Sunshine Corner is the place for me.

    Tax haven,
    Murderous, craven,
    Palm tree delight,
    My arse in the sun,
    Your nose in the shite.

    I need a bonus, I need that fix,
    and have it countersigned,
    by that Lawyer and that sweet young thing,
    who does the accounting tricks.
    My just reward, all spiced and steaming,
    A pile of real shit ready for creaming.
    I have earned it,
    My Banker confirms it,
    My credit is good,
    Sign on the bottom line,
    In your own childrens blood.

    Bird brained Moloch,
    Teetering on amok,
    Whiskey slated face,
    Throttling within,
    Its own human grace.
    Mottled and flecked,
    On the bottle,
    Impotent and boring greed,
    Did deceiving Mammon once conceive.
    Fools gold all,
    Fool all fall.
    A horse! A horse!
    My kingdom for a horse!



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