Why are the markets in a such a mess? (2)
At the end of the most tumultuous week on capital markets since the Wall Street Crash of 1929, there is a sense of utter bewilderment – and powerless – from ordinary citizens. Is it possible to give a short and layperson’s explanation of why all this has happened?
It all started about a decade ago with the development of many of the credit derivatives that were intended to remove risk from the balance sheets of banks and mortgage companies making loans to those least likely to be able to pay them (the so-called sub-prime market). The idea was to separate the default risk on loans from the loans themselves. The risk would be moved into an off-balance sheet device.
The banks argued that, by trading such credit derivatives, they had spread their risk elsewhere and therefore needed lower reserves to protect against loan defaults. Regulators in the US and the UK allowed this and the banks loaned ever more. It was a huge success and the market for credit derivatives grew rapidly. However, one of the fall-outs from the current crisis is the call that banks should carry their own risk.
It’s like I wrote in my earlier posting: it’s all down to derivatives and deregulation.
So, who’s to blame? At the end of this feature in today’s “Guardian”, no less than 14 villains are named. They include the Bush administration and the Brown government who may have steadied the markets by this weekend but who got us into this mess in the first place.
Both the sense that a financial crisis is not the time to change leader and some uncharacteristic decisiveness by Brown this week suggest that he’ll get through the Labour Party Conference without serious challenge – but I still feel that his resignation is simply a matter of time.
September 21st, 2008 at 6:25 pm
I wonder, Roger, if you would add two others:
1. Media programmes like ‘A Place in the Sun’ or ‘Homes Under the Hammer’ or ‘Property Ladder’ that encouraged rampant investment in property (often overseas) for its own sake and seemed to promise viewers that every year prices would only go higher. The presenters would often breathlessly repeat the year-on-year increase for certain areas or countries and basically imply people were fools for not participating in the buy-to-let market.
2. Ordinary people who overspent and probably did not listen to their parents or grandparents who had survived tough times and knew the value of saving.
Anyway, I suppose the blame list is long and it can always get longer…