It's two years since the credit crunch first entered our language and a year since the collapse of investment bank Lehman Brothers. The BBC's
is investigating the impact of the financial crisis and global recession that followed. This week our diarists reflect on the events of the last two years and ask what lessons have been learnt.
These diaries are written by people who work in finance and have had a front row seat as their industry goes through the biggest changes in decades.
They give us regular insiders' updates on the mood in the City of London and the dramatic changes in the world of finance.
Laura (not her real name) works for a commercial bank in London.
Has Lord Turner of the FSA been using diversionary tactics?
I am so very tired this week. We are currently going through initial strategy meetings for next year and the whole thing is so depressing it saps the life out of you. Whilst we are looking to increase our net lending, it will only be to those companies who have a better credit rating than we do - which means only the top businesses, posting good results and having recovered or stayed immune from the crunch, rather than small and medium sized businesses.
Although it has been two years since the financial world went into freefall, the impact on us and the majority of the population have been for less time than this. When newspapers start talking about the perfect storm unfolding with trillions of dollars of collateralised debt obligations or CDOs, the average person felt like a distant observer to a car spinning out of control. It was so far away, no one knew what it would hit or where it would end up, but you had sudden distinct terror that it would be bad.
What has proved to be bad is not the potential failure of a lender, but the hundreds of thousands of unemployed people, the stifling of innovation and investment, and the massive tax liability for generations to come.
A little reported item last week confirmed that the government's plan on debtor insurance has been an epic failure - the problems in this industry were billed as a catastrophe for business and needed a £5 billion government intervention to fix. So far a total of 52 companies have made use of this scheme since April and a frankly pathetic £7m has been utilised - I lend more than that in an average month.
Wealthy investment banks have become even wealthier with minimal incentive to reform
Lord Turner's efforts at a classic diversion trick last week with his Tobin tax mutterings are symptomatic of the institutional response to the crunch. We're told what we should worry about, we are told some grand plan to solve it and we are told that we're uniquely placed to deal with it. The reality is that we have had two years of predominantly useless noise and an impression that things are being done. We are still no further forward than what should have been blatantly obvious before we got into this mess.
With some notable exceptions, the herd mentality which causes asset bubbles and the corresponding crashes, is evident in our financial journalists given the lack of divergent commentary. Some June figures could be seen as positive or slightly less negative - hooray the recession is over! What a shock that July's figures completely disprove that tertiary analysis and suddenly the same people have reversed their position without a reference to their previous article.
I am a strong believer in the potential of creative destruction
A crash in an industry which was previously considered impervious and monolithic you would hope would result in profound change and enlightenment - core principles ripped up and rebuilt. I am a strong believer in the potential of creative destruction but there is a void-like gap in financial and regulatory innovation or debate. Wealthy investment banks have become even wealthier - with minimal incentive to reform as they now have even fewer competitors.
The government has jettisoned moral hazard by bailing out terrible lenders with universal quantitative easing. Business failure, the ultimate sanction of the free market, has been removed. Perhaps this is an inevitable conclusion of the rights-rich, responsibility-free society as collective blame avoidance makes the leap into the corporate world.
With weary resignation my colleagues and I look ahead to the coming year as anger has subsided into disappointment and ennui. We have learnt nothing but that which we should have already known - as yet I have not seen what will be done with this knowledge."
Stephen (not his real name) has worked in the City of London for over a decade.
Can the Chancellor regulate greed?
In the summer of 2007 as the first wave of the crisis hit, there was hope that it would be "over by Christmas". Two years on, it's time to take stock. The City is overflowing with bright young things: PhDs, MBAs and debt-laden graduates. However it's not intellect that ultimately drives these people. You get to the top by making more money than your peers. Competitive crafty, greedy people give their employers what they want and rise up the ranks. Greed is inevitable.
We're told by our chancellor that the solution to our crisis is more effective regulation of our banks, but regulation will never stop greed. Chancellor Darling also cites the notion that "spreading your risk is a good thing." This is a classic academic over-simplification and fails to account for human behaviour.
There is no box in which to put the adrenalin rush of being part of a winning crowd, bingeing on the greed that was measured as success. All that happens when risk is "spread" is that it ends up in the weakest hands and overall the system becomes saturated with the same risk. The mantra that diversifying risk is "good" ends up producing the opposite effect: we all fall down together.
It's why we must disentangle investment banking from more ordinary, commercial banking. It's the only way to stop another crunch in however many years' time.
Institutions that are "too big to fail" should be "too big to exist"
After the Great Crash of 1929, the Glass-Steagall Act in the USA forbade commercial banks from conducting investment banking business. Since then, financial crises came and went without the disaster we've just witnessed. Separation of the two forms of banking prevented contagion. The investment banks could be as greedy as they liked without recklessly endangering the rest of the population. Glass-Steagall was repealed after nearly seventy years in 1999 and it then took just eight years for the investment bankers to bring our entire global financial system to its knees, hold it to ransom and then get paid to fix it.
The politicians' solution? Merge more banks together and embed investment banking even more deeply into our financial blood system. Institutions that are "too big to fail" should, if we apply common sense, be "too big to exist". But instead they have become "too big to resist".
If I am right, the next financial crisis, when it comes, stands to make the last two years look like a "warm up". When these newly engrossed banks fail, what then? For the time being, more of the same is the only prescription the politicians can conceive of. The bailouts that were sold to the public on the grounds they would help the ordinary citizen have failed to do anything other than nationalise previously private debt, leaving the "little guy" to fend for himself and pay up to the hilt for the privilege. How many house repossessions have been halted, versus the number of banks that have been "saved"?
The firms that survived the bust have never known it so good
Closer to the ground, it's common to believe that these are uniformly hard times for everyone in the City. Not necessarily so. The firms that survived the bust have never known it so good - less competition, fees have gone up, margins have got larger - all courtesy of the reduced competition created by our politicians waving-through mergers as a solution to the crisis.
But none of what I see makes me any more hopeful for a better, leaner City. I want a City that properly serves the economy and acts as the lubricant, rather than the engine, of growth. I want commercial banks to make boring, safe loans. I want investment banks to be able to blow up without taking the country down. I want the ordinary citizen to be insulated from financial excess, not left out in the good times and then billed for the bad times. Yet none of this is on the way. Leaving me to simply ask: Why?
Will the green shoots of recovery soon bloom?
Those green shoots of recovery seem to be growing nicely and before you know it, will be blooming into a fantastic flower that we can all enjoy. Put correctly, the economy is now back on track. Although, it is probably a little early for this, I get a sense of "Oh no it isn't", "Oh, yes it is". Pantomime season may well have started early!
The media have a fantastic influence over our lives in this digital age we live in and contradicting stories or new stories based on new facts are consistently coming to air. I have read the crisis is over, the crisis continues and the worst is yet to come. "Airline losses hit '$1bn a month'" reads one BBC Business headline, sitting nicely next to "Bristol broker battles downturn", a story on Bristol-based broker Hargreaves Lansdown 20% profit increase, a fantastic result in the current climate.
"Is the worst over?" is the question I am consistently asked by family and friends
"Is the worst over?" is the question I am consistently asked by family and friends. I really have no idea is the only thing I can say. Does it look and feel better? Well, yes, actually it does feel better. For one, I am calling business contacts and actually getting them, rather than "Sorry, Joe Bloggs has left the firm". However, it really depends on what you read. I could fill the rest of my diary with quotes from prominent economists across the world and give you a number of contrasting views but I think the bigger question is not where we are but what we have learnt?
A former mentor of mine use to always say "You learn more from what you do wrong than what you do right". I am sure he was not the only one and I am sure you have heard this type of thing before, but it also, probably rings true with us all. I read with interest the
Personal debt dips for first time
article published Tuesday. We (and I use the royal "we" to encompass the world) got into the crisis because of our willingness to spend and the banks' willingness to lend, sometimes without due regard to circumstances. I was therefore, slightly encouraged that about £600m had fell off the personal borrowing of £1,457,000,000,000 (I add the 0s for emphasis), or £1.457trillion.
You can read the excellent
on the BBC Business site to understand why a fall in personal debt can be bad but forgetting all of the economics information, I think it shows a trend towards living more within our means. Credit is an important and vital part of the economy and it does not need to be reduced to nothing but it is important that is it managed. Personally, in the last year, I have paid off all debts except my house and car, I aim to pay off both early. I did not have huge debts, a buy now pay later deal for a TV and a bit on a credit card, but when the threat of redundancy was looming large, these worried me. Businesses have to change to cope with the way credit is now being made available and the consumer has to as well. This should help us recover and stabilise for the future.
The collapse of Lehman's plunged the banking system into freefall
The credit crunch may have started two years ago but it was the collapse of Lehman's just one year later on September 15th 2008 that plunged the banking system into freefall. Two years ago we had a crisis but one year ago we had a catastrophe the like of which no one had seen before.
Before September 15th, the demise of Northern Rock was a disaster for the general public but not for the City. Financial institutions had failed before such as Barings in 1995 and the hedge fund Long Term Capital Management in 1998. We had had financial crises before in Asia in 1997 and Russia in 1998 and survived.
It is true that markets were worried as banks reported huge write downs but action was taken. CEO's were replaced and banks were able to raise more capital to bolster their balance sheets. The failure of Bear Stearns raised the collective blood pressure but this was quickly dealt with as J P Morgan stepped in to buy the bank.
But nobody expected Lehman's to go. The US Government made a catastrophic error allowing it to fail and in this respect the UK government deserve praise for the way they rescued RBS. They may even make a profit for the taxpayer. In the US, nationalising a bank was something that politically they could not handle but this was no time for politics.
Lehman's had $639 billion of assets to unwind, but not all were bad. There was real value in the business Why else would Barclays and Nomura step in quickly to buy the juicy bits of the failed bank?
And yet Lord Turner of the FSA recently decided that certain aspects of banking are "socially useless" and that some banks have grown beyond what is "socially acceptable". Was he thinking of Lehman when he made that call?
The UK government deserves praise for the way it rescued RBS
Just because products lost the banks billions does not make them "socially useless". The mistake was in the way these products were risk managed and that is what the regulator needs to address. There was nothing fundamentally wrong with the product. Securitisations, where loans are packaged and sold on as asset backed securities are a major source of finance. The collapse of the system that provided this second line of funding is one of the reasons why credit is so hard to find.
The remarks of Lord Turner are reflected throughout the FSA. What we are seeing in the new world is an uncompromising regulator which no longer sees its role as a defender of the City and its vital role in the success of the British economy. The FSA have lost sight of the big picture and now their actions are affecting both small business lending and mortgages to first time buyers.
They demand the banks keep more capital to support a further collapse which is like shutting the door after the horse has bolted. If the FSA relaxed the capital rules for lending to first time buyers and small business then the lending would start flowing again.
So where are we now? Risk management is being reformed. The regulators have become more confrontational. Markets have corrected but volumes are low so, the problem is not completely resolved. A downward correction is imminent.
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