Worse it turned out there were few other institutions that had not acquired this gambling madness depositing public monies in Icelandic Banks despite it being a very risky investment.
Such speculative bubbles have been seen in the history of the capitalist economy since the invention of the company by the Dutch. All speculative bubbles will eventually burst. The Dutch speculated on Tulip bulbs, the English on the South Sea Bubble whilst modern speculative bubbles have been seen investing in China and the pacific Rim or in Land and Housing. But in the global downturn of trade arising out of the liquidity problems that stemmed from the collapse of the housing market in the US and the UK that caused many banks to go bust having to be rescued by massive government intervention, it was unusual to see some really Conservative icons taken down by investment madness.
Once upon a time in the late 60,s were you to be reading text books on "Banking" you would be immediately reassured by the chapters describing how both the Government and the Bank of England, regulated bank lending rates and the ratios of deposits to bank lending, to ensure that the integrity of the Banking System was maintained. This was a tried an trusted system that had seen the UK through past traumatic contractions in world trade and made the British banking system allegedly the envy of the world
Back in those days, events like a "bank run", which we saw with both Northern Rock or Bradford and Bingley, had been unknown for over a 100 years. We never ever believed that our savings could be at risk from anything other than inflation.
In the 30,s US banks had collapsed . But British Banks with their cautious approach to lending had not.!!!
Young sixth form economists in the 60,s were probably bored absolutely witless by the complex bureacracy of banking that seemed wholly unintresting to teenagers.
But in the US a major economic revolution was under way. In the West the Left argued for increasing government intervention and banking was seen as a commanding height of the economy that should be taken into public ownership. Whilst accepting the need for a mixed market economy..the Left argued for high levels of government control and regulation to plan economic growth that served all of us. Nationalisation was the cure all for public ill,s and we wrote essays juxtaposing free entrprise and public ownership.
In the background however big US conglomerates and multi nationals were manovering, whilst many traditional British industries were ailing have seen little investment since world war 2. The UK economy was in poor shape. A large public enterprise economy was seen as the s train that would lead the nation to what Wilson once described as the "White Hot Technological Revolution".
But the Chicago School was in the process of formulating the principles of monetarism in which government would be criticised and chasticed for regulating money supply poorly. The problems the Uk were sufferring were entirely due to government intervention and over regulation of the economy.
Young Revolutionaries like Milton Friedman was mounting a classical revival and taking on the left and questioning their principles of government intervention in the economy. Keynes was under seriously heavy fire.
The US even sent the CIA to destabilise most South American economies and imposed under dodgy right wing governments, that privatised and deregulated public services. Death squads and terrorists over ran the continent whilst US multinational and global corporations, under the cloak of the munro doctrine, siezed all business they could get their hands on. Whether bannaas, oil, water, minerals all were fair game to be expropriated. Why? A patterm emerged. Any Governments that promised workers or farmers reforms or responded to organised trade unions were overturned by US financed freedom fighters and then farms, factories and processing plants were taken over by US companies. The first thing these companies did was externalise costs. Poverty, pollution, social injustice and waste of natural resources were ways that profitr margins were massaged. It was the model for globalisation and the global sourcing of profits.
In the UK banks had upsized through amalgamations and mergers to produce a small group of high street brands. In the US there were literally hundreds of suppliers. In the UK there were other lenders known as mutualised building societies. Mutualised companies were accountable totally to their depositers.
Despite mounting evidence that monetarism was a complete disaster in South America politically, economically and socially paving the ways for the complete utter economic colonialisation of the continent by the US...two political icons for the free market were about to enter the stage. Monetarism and Friedman were the prophets of this new age.
Thatcher and Reagan both committed themselves to small government and privatising public services. Monetarism was the new religion although Thatcher and the Tories never really understood the more radical policies of negative income tax in the place of welfare benefits.
In the US and UK by the late 70,s the rise of an "underclass" was blamed as being a sheet anchor on the economy, welfarism bred dependance on the state loossened fanmily bonds, breeding one parent families and producing sink estates full on non working white trash totally dependent on the state.
A decade earlier most economic projections predicted that declining traditional industries, mechanisation and computerisation would mean that there would be too few jobs to meet the needs of the population. Welfarism just abandoned folk, some work was better than none and negative income tax should bring wages from any work up to a better level than welfare benefits. 2 decades later new labour used this economic principle to drive economic growth!!!
Thatcher attacked nationalised services and industries privatising them, stimulated owner occupation by selling council houses, attacked and diminished the power of trades unions. One of her targets was banking. A banking cartel on the high street, Tories argued, did not match the diversity of providers in the US. Deregulation was the name of the day, the emergance of wholesale money supplies and the arrival of credit in banking were things she wished to encourage. She opened the doors for banks to speculate and for mutualised lenders to convert to PLC banks!!!! A long spending boom that seduced Britons to turn from saving to borrowing and spending money had begun. To paraphrase Trevor Storeys book a "Live now pay later" culture had emerged. In the 60,s hire purchase had exploded in the UK but it was the late 70,s and early eighties with the assault of bank loans and credit cards that was creating a debt ridden culture.
Post Thatcher the launching of these new banks, Halifax, Northern Rock or Bradford and Bingley was accompanied by High Street banks closing high street sites and relying on telephones as a customer interface!! Significantly a time bomb was ticking even as speculative investments were collapsing in the pacific rim. Lending had been decoupled from savings and investments. Worse lending began to seem to only be loosely linked to collateral.
Casino banking was born. Both in the US and UK banking was greedily investing in the seemingly never ending housing equity boom. Sub prime lending in the US, mainly to poor black marginal borrowers, was seen as being safe because it was anchored in property even if estimates of the borrowers abilities to pay and the value of the assets did not match the worth of the loan.
Everything that goes up will.................will also come down. In the UK lending was increasing families debts were escalating and the economic mantra of the day was if you want borrow more money to satisfy the want.
When the collapse began in the US it became immediately apparant that no economy in the western world did not have these worthless "toxic assets". Billions were wiped off balance sheets by worthless assets.
In the 1929 crash did Bankers warn the public? No they removed their own investments but continued to take the publics money. In the UK and US bankers continued to lend on bad equity to people who were bad investments...even after government had begun to launch lifeboats.
Faced with a political situation within which an angry labour government, forced to make massive investment into banking, and left with little to give back to the public at a general election, it was unsurprising that bankers would flock to the Tories in search of better terms.The Tories of course were sympathetic and warned that nationalisation and too harder deal for the banks would export business out of london!!!
Yes Cameron did a deal for which we will all pay the bill. They will also seek to divest the government investment asap and have advisewrs from Merril Lynch to help.
In this shambolic mess that we all are paying for there are major worries
- If the world trade crises was caused by banks when will we see the tighter regulation that needs to happen to protect the public from further over exuberance in investment?
- Where will divested investment go to reduce VAT? and other government cuts?
- Why are those who were accountable for the disaster never brought to account in the courts?
- How come the banks are still awarding bonuses to bankers?
- The heaviest banking failures had occurred in demutualised building societies over dependent on wholesale borrowing instead of savings deposits.
Before he died last year Milton Friedman who had framed the economic principles that the Tories had used to deregulate banking argued there was a strong case for, transport, utilities such as electric, gas and water and banking to be in the public sector!!!! The Tories and Liberals for all their promise to bring reforming zeal do not seem to be up to date with such debates.. Of course the free market system endures but even Adam Smith argues the "invisble hand" of the market needed help. Regulating and controlling greedy bankers would top my "wish list"
