How we ignored warnings and raced after US into cash crisis
Published 07/10/2008 | 09:00
My eight-year-old grandson, who is being brought up in a fast-moving and expensive suburb of south London (is there any other sort?), asked his parents at the table the other day: "How long is this credit crunch going to last?"
The impact of the crunch on the purchasing power of pocket money is still unknown, so it was a good question.
Finding the answer requires an honest look at the origins of the trouble. But few of the main players are willing to take it. The guilty ones, governments and bankers, prefer to blind us with pseudo-complex economics, the misdeeds of hedge funds and the improvidence of bank customers. Significantly, it is the economists who, mostly, have been honesty itself.
But it is an uncomfortable time for politicians, particularly those in office: for they have been rumbled. Shaun Woodward, our ex-Tory Secretary of State, pronounced on Sunday that the financial crisis was not made in the UK — it was a world problem. (Translation: “Please, it wasn't me.")
Leaving the degree of Mr Woodward's personal responsibility, if any, out of it for the moment, he should know better. The UK problem is very home-grown and it has happened upon his chosen Government's watch. The Americans may have waded into the mire first, but we followed fast: same bad habits, same devil-take-the-hindmost philosophy. Along with both, marched the Republic.
Three years ago, in 2005, when the property boom was at its height, a very large proportion of the foreign cash pouring into the UK commercial property market was Arab money. Fed by the surge in oil prices, it doubled in the short space of 12 months, amounting to a cool £1.4bn. But the largest investors in the UK that year were not Arab, but southern Irish. The Irish spent £2.75bn!
Ah, those heady days! The Irish commercial property market was commonly described as gravity-defying. In the early summer of 2006, just two and a half years ago, a five-acre site at Sandyford, on the south-west fringe of Dublin, was on the market at more than £56m. In fact, £35m had just been paid for a mere 2.8 acres across the road. But, wait for it: the site carried planning permission for no fewer than 430 apartments. Prices were booming. Many of the flats were already sold, though no sod had been turned! Another world entirely, is it not?
Behind the developers splurging this kind of money, of course, were the banks. For it was not the developers' money. But the trouble was that it was not the banks' either: at least not the Irish banks'. They had borrowed a large part of it from foreign banks.
When the foreign gnomes in Zurich and Frankfurt and New York grew nervous about the manner in which the Irish banks were flashing their wads before the property tycoons, actual and would-be, they began to grow cagey, draw in their horns and decline to accept Dublin calls. Which, roughly speaking, is where we are this week. Many of the newly-completed apartments lie empty, so the developers are finding it tricky to keep up their payments on their vast loans. It is at this stage that we meet the other players in this madcap, but in many ways tragic, pantomime; the building societies — or the ex-societies, those who, in their greed to cash in, turned themselves into banks. In the competitive scramble, mortgages took off. In many cases you only had to say your credit was good to get the money. They called it ‘self-certified’. It was designed, whether intentionally or not, as a dreamer's or even a wide-boy's charter; and so it has proved. There were 125% advances. One hopeful London woman bought 70 properties to let!
This week's motto, I regret to say, is that life is not fair. Anyone who, before the crunch, did not know that should not be allowed out without a nanny. The crime of governments has been to profess to uphold fairness as the guideline of policy while failing to move to curb the excesses of greedy entrepreneurs until it was too late. Goodness, everyone knew what was going on. Wise voices warned it could not last. Meantime, every taxpayer will pay the price of the attempted rescue of the crumbling world system. The 12 million who have sunk their savings in shares throughout the UK — little mentioned in the crunch — are paying an additional price of the bust the Prime Minister claimed — absurdly — to have seen off for good. Those paying into pension schemes will also suffer twice, as the schemes' share portfolios plummet in value. Meanwhile, the new word, from the Greek, is toxic. It takes its honoured place alongside those other over-worked resorts of the slightly literate. Remember ‘scenario'? And ‘famously'? Toxic is right on the bullseye of this story. Poison it is.