If you, like me, are struggling to understand what this United States sub-prime housing loan crisis is all about may I suggest you spend 10 minutes listening to John Bird and John Fortune on a British ITV television program? The pair seems to make sense of the incredible story of just how it happened that those highly paid world bankers and fund managers found themselves losing billions on mortgage loans to the likes of “an unemployed black man sitting on a crumbling porch somewhere in Alabama in his string vest.”
The satirists relate how the funds that specialise in this area all have very good names and give the example of the Wall Street firm Bear Stearns with its High Grade Structured Credit Strategies Fund and the High Grade Structured Credit Enhanced Leverage Fund. This was the magic of the market — how the loan of a few thousand to an unemployed black man in a string vest became a very impressive sounding high grade structured credit enhanced leverage fund.
The depressing ring of truth to it all will be reinforced if you first read the article by Martin Wolf published in the Financial Times of London back on 19 November 2007 headed “Why banking is an accident waiting to happen“. Martin Wolf is no anti-capitalist comic after a quick laugh but the conclusion of this earnest commentator on financial affairs is little different to that of Messrs Bird and Fortune.
Compare the introduction to Mr Wolf’s article:
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Why does banking generate such turmoil, with the crisis over securitised lending the latest example? Why is the industry so profitable? Why are the people it employs so well paid? The answer to these three questions is the same: banking takes high risks. But the public sector subsidises this risk-taking. It does so because banks provide a utility. What the banks give in return, however, is gung-ho speculation.
…with this closing exchange from the ITV program:
Interviewer: But now, you see, people are saying that the crisis is likely to turn into a financial melt down, I mean can that be avoided?
Banker: It can be avoided provided that governments and central banks give us, the financial speculators, back the money that we have lost.
Interviewer: But is not that rewarding greed and stupidity?
Banker: No No. it is rewarding what the Prime Minister Gordon Brown called the ingenuity of the markets.
Interviewer: But you see …
Banker: We don’t want this money to spend on ourselves. We want this money just to go into the market so that we can go carry on borrowing and lending money as if nothing had happened, without thinking too much about it
Interviewer: But if the worst came to the worst and you did not get this money, what then?
Banker: Well, then there would be another market crash and then I would say what people like me always say, that it is not us who would suffer – it is your pension fund.
Since the sub-prime crisis surfaced, the politicians of the western democracies have largely been silent on the questions raised so seriously by Wolf and humorously by Bird and Fortune. There is clearly a fear of not wanting to be a party to undermining public confidence in the whole banking system.
In the US even the most populist of the candidates to succeed George W Bush have held back from what would be quite justified bank bashing. There has been no debate about the long term consequences for the country of having large shareholdings of its major financial institutions held in the Middle East as banks seek extra capital to bail themselves out of their liquidity crisis. The same politicians who are preaching the need for the US to quickly become less dependent on foreign oil apparently dare not draw the attention of their constituents to the price that may eventually be demanded by those foreigners when they not only provide much of the money lent by American banks but own the largest chunks of them as well.
If I was an Israeli I would indeed be getting worried about the consequences of the growing Middle Eastern influence on the American financial system.