Belfast Telegraph

A decade after the start of the worldwide banking crisis, what lessons if any have we learned?

ECONOMY WATCH by Dr Esmond Birnie of the Ulster University Economic Policy Centre

In the middle of the summer season you may have missed the 10th anniversary of the start of what would become the banking crisis. August 2007 is identified as the point when it became clear that something was fundamentally wrong in the Western banking system.

In September 2007 we had the collapse in confidence in Northern Rock — the first British bank run since the nineteenth century. A decade on from the crisis, what have we learned?

What or who caused the crisis?

For several centuries there has been a regular pattern of booms and slumps in national economies. What was unusual in between 2007 and 2009 was the way in which a crisis in finance also began to effect the so-called ‘real’ economy as well. Difficulties in one country spread rapidly to others, in a process called contagion.

At the time, Vince Cable MP, who was then the Minister for Business, said some bankers had acted like, “spivs and gamblers”. This was, and probably still would be, a popular view.

However, other groups bear some responsibility.

• Accountants: should certain accounts have been so readily signed off?

• Regulators: were they asleep at the wheel? Was there massive complacency about how risks were building up across the entire banking system? Governments added to the false optimism by claiming that the business cycle had been abolished.

• And, yes, I admit, economists too. Why did the profession fail to anticipate how bad things would become? Questionable assumptions were made about continuous market efficiency and ever-rising house prices.

Fundamentally, there was too much lending in too short a time. Banks and their senior management surely bear considerable responsibility for the recklessness. After Northern Rock, for example, introduced a 125% mortgage, some criticism can be attached to those who took such loans, but surely more blame lies with the senior bankers who created such dangerous products?

Marxists might argue that a capitalist economy inevitably produces excessive and self-destructive profit seeking. And there is some merit in the argument that the massive glut in world savings produced by China was bound to cause problems.

Nevertheless, I prefer to rely on older explanations; human greed and stupidity.

What happened?

UK GDP declined by about 5%, which was not dissimilar to the hit taken during the Great Depression of the 1930s. In the Republic of Ireland, meanwhile, the decline was about 15%. Here in Northern Ireland, output fell by about 9%.

What did not happen is just as significant

The expected big rise in unemployment was avoided. A collapse in international trade and widespread bank collapses in the manner of the 1930s were also avoided.

To give credit where credit is due, policy makers like former Prime Minister Gordon Brown and Ben Bernanke at the US Federal Reserve did learn something from history.

They were determined that we would not repeat the mistakes of the 1930s and so they engaged in monetary expansion on a huge scale.

What about Northern Ireland?

We clearly suffered a bigger slump than the UK average. Since then, economic growth has been slow. Today we still have an incomplete recovery. Household income and wages remain below their 2008 levels in real terms.

The importance of levels of consumer debt

Here, alas, is one lesson which seems not to have been learnt. As a percentage of disposable income, UK household debt peaked at 160% in 2008, having been about 95% in the 1990s. That rate of debt is now above 140% and rising rapidly. This is suggestive of a fragile economy.

What should we do now?

Given the extent of unusually loose monetary policy and with interest rates close to zero, alongside quantitative easing, backing out is going to be extremely difficult. The toothpaste cannot be put back into the tube. All this is especially troublesome, given that in terms of traditional trade cycle timescales we are probably due another recession.

  • Next week’s Economy Watch features Ulster Bank’s Richard Ramsey

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