Unhappy Anniversary
A year ago this week, the credit crunch struck. With no end to it yet in sight, have any lessons been learned?
As far as the financial markets are concerned, 9 August 2007 has all the resonance of 4 August 1914. It marks the cut-off point between an Edwardian summer of prosperity and tranquillity and the trench warfare of the credit crunch – failed banks, petrified markets, property markets blown to pieces by a shortage of credit.
On that day, the European Central Bank and the US Fed injected $90bn into financial markets, which had abruptly frozen as banks took fright about the US sub prime mortgage market. There had been previous jolts, but this was a big one. As Northern Rock chief Adam Applegarth remarked soon after, it was the day the world changed.
The idea of a crunch sounds reassuringly swift. On short, sharp bite and it's done. Yet we are still in the teeth of this crisis, which risks aggravating an already acute danger of recession. There's the threat of a vicious downward spiral taking hold, in which new bank losses lead to still tighter lending conditions, further sapping economic growth and plunging more companies and households into financial distress.
Banks are struggling to rebuild their strength. The fresh capital they have raised – involving a painful series of rights issues and capitulations to the cash-rich sovereign funds of the East – remains lower than the huge $400bn in losses sustained. And successive hopes of catharsis following the run on Northern Rock, the collapse of Bear Stearns, and the rescue of US mortgage giants Fannie Mae and Freddie Mac, have proved false.
There may yet be more financial institutions to be bailed out by governments before this crisis is over – and that stands no chance of happening until US house prices stabilise.
A year on, it's clear where the blame lies: with the bankers who convinced regulators that by re-parcelling risk and selling it on they were actually making the global financial system safer; and with the ratings agencies and regulators who forgot the cardinal rule that, like teenage boys, bankers are not to be believed when they swear: "Don't worry... I'll be careful."
Regulation has a bad name, but at the very least, banks should be forced to set aside more capital and allow their financing plans to be scrutinised. It's unlikely that any remedy will prevent another crisis: variations of old mistakes are bound to be repeated and innovative ways of taking excessive risk found.
All we can do is watch, with a sceptical eye, and make sure that we don't buy into the next lot of hype.
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