An Insider’s View

Until Sam Moore reminded me with this post, I had forgotten about my plans to write an article entitled “The Credit Crunch: Who is to Blame?”. I squashed those plans, I’m a little scared of the Man, because he pays my rent.

There has been a lot of discussion around the involvement of Ben Bernanke and the Fed in financial markets. When things are good, banks hate Fed intervention: “Free market economy”, they say. “Regulations? Have you read 1984?”. But now, after the years of excess had so far inflated the bubble, the results of the POP have been catastrophic, and the same voices are crying out for Bernanke to wield his power to save the skins of the financial institutions; it’s hypocritical at a level I’ve never encountered. Fed intervention is the order of the day, in times when short positions and fearmongering can sink a huge bank in one solitary week. A bank that survived the Great Depression, no less.

The blame lies with many.
The money-grabbing banks and institutions, lapping up the profits from “triple A” rated CDOs, instruments deliberately complex to disguise the rotting smell of looming failure; mortgage brokers, who lowered their standards of underwriting so that I could buy Beckingham Palace if I had a tenner in my pocket; the Central Banks (the Fed, the BoE and the ECB), whose high interest rates only drove brokers to drive their criteria lower, and when the turmoil came, made a series of errors, the severity of each depends on your economic views; the Rating Agencies, “yes men” all too happy to tag AAA ratings onto subprime debt bound to fail as soon as the property markets fell (it’s called a cycle for a reason); the Financial Guarantors, or Monolines, the AAA rated insurance companies who insured those bonds which would never have reached AAA status on their own (in effect, one insurance company guaranteed the entire state of California, the 6th largest economy in the world); greedy real estate speculators, who bought all they could to make a quick buck, forced first-time buyers into the rental markets, and abandoned their debts when residential property began to fall in value.

Now we are reaping what we have sown. The first victims were the homeowners, who suddenly couldn’t pay their mortgages. In some areas of California, 1 in 20 houses were being repossessed; entire streets were deserted. It was during this time that I felt sick reading newspaper articles and financial reports, crying for Fed intervention. Young couples, working class families and pensioners were being kicked from their homes, and all the CEOs could do was complain about their profits from the previous year being wiped out.

Now, the situation is beginning to show full effect. Northern Rock and Bear Stearns disappeared; most of the monolines defaulted on their debt and lost their AAA status; banks recorded huge writedowns; investment banks sank, unable to access the emergency funding provided for the commercial banks. The result? Culls in financial institutions, thousands of job losses; John McCain unveiling his incredible lack of understanding of the economy, for a presidential candidate (though I’d throw that in there – go Obama); the Fed practically establishing a fourth branch of American government; interest rate cuts guaranteeing inflation rises when food prices are already rising, thanks to the “solution” to fossil fuel burning.

This is not behind us. We can expect foreclosures on mortgages until mid 2009, as teaser rates end and homeowners cannot afford to refinance. LIBOR is at a record high above the base rate, counteracting the actions of the BoE, and banks are still hoarding money, refusing to lend to each other, causing further delays to any progress in the markets. In recent news, student loan lenders in the US are backing out, leaving the supply of funding short of demand – so some students could miss out on a college education because noone would lend them the entrance fee.

And who said banking is boring? Well maybe it is a little. But the Great Depression’s got nothing on us.