It was the end of February when the first tremor was felt; the Shanghai Composite Index fell a massive 8.84%. In spite of this warning it would be months before the nascent economic crisis came to the attention of the world’s political leaders. As winter passed markets recovered their brash self-assurance. Life continued with the same unabashed optimism people had become accustomed to in the glow of George Bush’s New World Order and Tony Blair’s Cool Britannia.
At a grass roots level prospective home owners continued their scramble to sign-up for mortgages, lured by the mouth watering terms offered from lenders across the USA and the UK. In their rush to get onto the property ladder, to upsize, or to drawdown on their accumulated property equity, normally sensible, and not so sensible citizens were stampeded into debt. They were engulfed by a psychos; the fear missing out on what seemed like a once in a lifetime opportunity of realizing their dreams.
Tom Barton, from his office in the City, sensed the coming crash. It loomed as large as a runaway double-decker bus hurtling down Leadenhall Street. His brokerage firm was inundated with a daily flood of mortgage demands — many of them with patently fraudulent declarations — from every kind of hopeful punter imaginable in their frenetic rush to jump onto the bandwagon before the music ground to a halt.
The warning lights flashed crimson when a taxi driver boasted about the profits he had made on his terraced house, ‘Look mate,’ Barton remembered the driver telling him, ‘if some bloke at the bank tells yer the place you’d bought a couple of years back was now worth a couple of hundred grand, you’d feel a bit mean if you only borrowed thirty, I mean with that kinda money you could pay for a new car and take your missus and the family on holiday to somewhere like the Coster Bravo, couldn’t yer?’
Young and old, rich and poor, able-bodied and infirm, were getting into the stampede, overextending their fragile finances, many in the hope of an easy profit, buying rundown homes then after a quick renovation job flipping them to anxious first time buyers desperate to get their foot on the first rung of the property ladder.
Objectively, there were two distinctly different origins to the financial crisis that pushed the global economy towards an unparalleled slump. In the US the cause could be traced to sub-prime mortgage lending, and in the UK the demutualization of British building societies.
In the nineties British building societies demutualized and were transformed into banks, under the provisions of the Building Societies Act of 1986, which allowed them to become joint stock banking companies listed on the stock exchange as public limited companies. After 2000, these new banks through a policy of aggressive expansion built their business around home loans and company lending, both in the UK and abroad. One of the most important of these was the Halifax Building Society, the UK’s largest mortgage lender, which merged in 2001 with the three century old Bank of Scotland — a commercial bank, to form HBOS.
During the same period, in the US, the sub-prime mortgage business rapidly expanded driven by investment banks and the securitization of mortgages at a time when interest rates were low following the dotcom crash and September 11. House prices continued to rise, peaking in 2006, though vast numbers of buyers would continue to pile into the market afraid of missing out on the bonanza.
The Federal Reserve Chairman, Alan Greenspan, although not alone, would be seen by many as being responsible for the sub-prime crisis. His monumental mistake had been to open the monetary floodgates following the dotcom debacle in 2000. In doing so he allowed the housing bubble to develop, pumped-up by his policy of low interest rates and his encouragement of sub-prime lending. Equally important was Greenspan’s backing for the growth of derivatives, including the securitization of sub-prime mortgages.
In the UK, as Tony Blair waltzed across the world stage in the footsteps of George Bush, creating his version of Cool Britannia built on war, credit and ruinous short term economics, a smug Bank of England governor, Mervin King, reported growth at 3% and inflation at 1.3%, without the least explanation as to the whys and wherefores of those serendipitous figures.
By encouraging such disastrous policies Britain’s leaders ran the risk of transforming the City of London’s financial services sector into an urban version of country’s industrial rust belt. During the sixties and seventies successive governments had looked on indifferently as the country’s iron and steel industries collapsed, coal mines were shut down and the automobile industry’s slid into its long and painful decline.
The rust belt was formed by the crumbling remains of Britain’s once glorious manufacturing industries — the heart of a now forgotten empire, running from Birmingham to Liverpool, Liverpool to Newcastle, and Newcastle to Derby. Bad business decisions and political mis-management had condemned large swaths of British industry to oblivion whilst in Japan and Germany the same industries were reinforced to form a solid base for the future.
Tom Barton remembered his father’s Wolseley and Humber cars, built in the sixties by once famous automobile manufacturers, companies now forgotten, swallowed-up by the failed British Motor Corporation and its defunct successor: British Leyland. Britain had even abandoned control of its luxury car sector, now in the hands of Germany and more incredibly India’s Tata Motors. Incredible it was if one looked back to the UK of the sixties and compared it with the then struggling and impoverished newly independent state of India.
Airbus had succeeded after once illustrious British companies, including De Havilland, Hawker Siddeley and Vickers, became forgotten names. Ariane thrived after a whole series of able British rocket builders were condemned to fail; the end result of political squabbling and indecision. The Nuclear industry was left to the French. The computer industry to the Americans and Japanese. Hanging on to the coat tails of the US, Britain had abandoned more than a century of industrial tradition.
Britons were lulled into complacency by the glitz and glamour of celebrities, thrust upon them, as models, by trash media. The term ‘celebrity’ once referred to cinema idols, up and coming starlet’s, football and cricket players. All that changed when high definition colour television thrust life-like images of the country’s leaders, tutored by public relations specialists and revamped by my makeup artists, into the intimacy of Britons’ living rooms, carrying their persuasive messages of spend and prosper, as if tomorrow did not matter. The same television encouraged viewers to emulate the life styles of the so called celebrities; aping their supposed elegant living: flashy homes, trendy shopping, loud entertainment, showy fashions, sporting styles, clubbing and pubbing, living on credit and paying scant attention to the consequences of frivolous living.
In that well Hackneyed comparison, Britons were not unlike the Titanic’s passengers on the night of 15 April 1912, oblivious to impending disaster; the rich wined, dined and danced, the poor huddled in their cramped quarters below decks, as the nation sailed towards doom captained by a helmsman who had not understood the dangers of the perilous course he had chosen.
The creation of Britain’s modern financial sector could be traced back to Margaret Thatcher; architect of the legislation that transformed British economy. The Iron Lady lived up to her name, instead of seeking a cure for the chronically sick coal, steel and automobiles industries, she simply killed them off. It was Thatcher who initiated the deregulation of the country’s financial services industry, opening the City of London to American investment banking methods.
The Iron Lady’s changes transformed the City of London into the financial capital of the world, where vast riches were created, riches that in the long run were to prove ephemeral. Wealthy foreigners poured in encouraged by laws that exempted them from British taxes on their non UK income: Americans, Europeans, Russians, Indians and Middle Easterners. Twenty years after the Iron Lady’s Financial Services Act, London had become an international financial Mecca where bankers, traders, hedge fund managers and financial adventurers of every ilk rubbed shoulders and became rich.
When the party came to an end, as it inevitably did, t
he British taxpayer was presented with a horrendous bill with the country’s hobbled financial sector forced to live on handouts from public funds. Policy makers who had imposed the financial sector as Britain’s economic locomotive would wake-up to find themselves in charge of a hugely indebted nation, a crisis stricken banking sector and a greatly diminished manufacturing industry.
Successive governments, driven by powerful financial interests seeking short-term gains, had wittingly or unwittingly presided over the massive deindustrialization of the nation, exporting jobs and industries to China or India, with little or no thought for the future consequences of their acts.
Summer
The City of London