Storm, The by Vincent Cable Read Free Book Online

storm in 1999 centred on the collapse of the hedge fund Long Term Capital Management. Then there were,
     aroundthe millennium, a bursting bubble in ‘dot.com’ shares in the USA and Europe, and financial crises in Asia – Thailand, South
     Korea, Malaysia and Taiwan – followed by a default on Russian debt. While these individual crises inflicted considerable damage
     on the countries concerned – a loss of over 30 per cent of GDP in Thailand, for example – there was no significant impact
     on the USA or the rest of the world economy.
    It has become increasingly clear that the storm is not one of those lesser events, but one of the most destructive ever known:
     the equivalent of a Force 12 hurricane. The earlier storms blew over. The attitude of the US authorities, however, in each
     case, was that a major potential disaster could only be averted by applying the central lesson of the 1929–32 crash, which
     was the need to counter the deflationary effect of a financial crash by pursuing expansionary monetary policies. Faced, for
     example, with a potential systemic crash at the turn of the century, the authorities cut interest rates dramatically, from
     6.5 per cent in 2000 to 1 per cent in 2003. It is a matter for conjecture whether dramatic intervention was necessary or desirable
     and whether it contributed to later, damaging, inflation in markets. But the apparent success of that strategy – albeit with
     three quarters of recession over the years 2000–1 – helped to elevate the then Chairman of the Federal Reserve, Alan Greenspan,
     to a status akin to beatification. It is just as well that beatification did not proceed to sainthood, since his freewheeling
     approach to financial regulation is now seen as a major cause of the more complex and deeper financial crisis that we are
     facing – perhaps a bigger crisis in scale and scope than has ever been seen before.

    The immediate source of turbulence, and the trigger for the current global financial crisis, was the US mortgage market. As
     the economy recovered from the downturn of 2000–1 on the back of low interest rates, a veritable army of American Adam Applegarths
     pumped out enormous numbers of mortgages, oftenaimed at poorer families or those with a poor credit history. So-called ‘ninja’ loans – to people with no incomes, no job
     and no assets – look in retrospect to have been criminally irresponsible. But at the time it seemed a worthy idea, as in the
     UK, to spread the fruits of home ownership from the middle class to poor Americans, often recent immigrants or poor black
     people, as part of a process of empowerment and liberation from the ghetto or from poor-quality public housing. And, as in
     Britain, property seemed self-evidently a good investment, as house prices doubled in value from the late 1990s to the peak
     in 2006, outperforming the stock exchange by a considerable distance over that period.
    More-cynical observers might ask why bankers suddenly became so enthusiastic about poor people whom they otherwise wouldn’t
     have touched with a financial bargepole, and certainly wouldn’t want in their golf clubs. Philanthropy can be discounted.
     Poor people have one great attraction. Because they are poor, and have a poor credit history, they can be charged relatively
     high interest rates. Of course, this was not obvious to the borrowers, who were offered low-interest ‘teaser rates’, which
     would then be refinanced later at a higher rate. For banks looking for new business with a high yield the attractions were
     obvious, especially if they could find a way of spreading the (higher) risk. An instrument to achieve just that was at hand
     in the form of collateralized debt obligations (CDOs), or packages of debt paying interest rates that varied according to
     the risk. These could be sold as bonds in international markets. Soon, mortgage-backed securities accounted for a third of
     the whole US $27 trillion bond market –