The history of the credit crunch continues to be rewritten

by Shaun Richards

Today is a day for central bankers as both the Bank of England and European Central Bank declare the results of their latest policy decisions. However it will be a Super Thursday only in name as  the main news concerning the Bank of England this week has been the extension of Governor Carney;s term by seven months to January 2020. A really rather extraordinary move on both sides, as we mull not only the possibility of future monthly or even weekly future extensions,, and on the other side what happened to the personal circumstances that supposedly stopped him staying for longer in the first place?

Moving to the ECB the rumour yesterday was that its economic forecasts will be revised down slightly which is likely to reduce the rhetoric about the Euro area economy being resilient. But apart from that there is little for it to do apart from play down the recent news about money laundering via banks being rife in some of the smaller ( Malta and Estonia) Euro area countries. President Draghi may also repeat the hints he keeps providing that he has no intention of raising interest-rates n his term of office. This may have a market impact as more than a few have convinced themselves that a 0.2% rise is due this time next year. Apart from the fact that the ECB changes interest-rates by 0.25% and not 0.2% the apparent slowing of the Euro area economy makes that increasingly unlikely.

Rewriting History

This week has seen a lot of reviews of the crash of a decade ago but the most significant comes from the man at the centre of the response which was Ben Bernanke of the US Federal Reserve. He has written a paper for Brookings which to my mind illustrates why central banks have put so much effort into raising asset and in particular house prices.

Recent work, including by Atif Mian and Amir Sufi, proposes that the accumulation of debt during the housing boom of the early 2000s made households particularly vulnerable to changes in their net worth. When house prices began to decline, homeowners’ main source of collateral (home equity) contracted, reducing their access to new credit even as their wealth and incomes declined.  These credit constraints exacerbated the declines in consumer spending.

Or if you want the point really rammed home here it is.

Mian and Sufi and others attribute the economic downturn in 2008 and 2009 primarily to the boom and subsequent bust in housing wealth,

Thus central bankers including Ben decided that the response to the bust in housing wealth was to create another boom. Many of them including Ben himself did so well before the paper he quotes was written. For example the US Federal Reserve bought mortgage-backed securities as follows.

From early 2009 through October 2014, the Federal Reserve added on net approximately $1.8 trillion of longer-term agency MBS and agency debt securities to the SOMA portfolio through its large-scale asset purchase programs. ( New York Fed).

Thus we see than Ben Bernanke is being somewhat disingenuous in pointing us to a paper written in 2014 when he made his response in 2009! Anyway there is a statistic you may like in the paper.

that the total amount of debt for American households doubled between 2000 and 2007 to $14 trillion?

The banks

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They would have been helped in a variety of ways by the response to the credit crunch. Firstly by the large interest-rate cuts and next by the advent of QE ( Quantitative Easing) which helped them both implicitly by raising the value of their bond holdings and explicitly via the purchase of mortgage debt. Some were also bailed out and that mentality seems to be ongoing.

 We need to make sure that future generations of financial firefighters have the emergency powers they need to prevent the next fire from becoming a conflagration. We must also resist calls to eliminate safeguards as the memory of the crisis fades. For those working to keep our financial system resilient, the enemy is forgetting.

That is from an opinion piece in the New York Times from not only Ben Bernanke but the two US Treasury Secretaries which were Hank Paulson and Timothy Geithner. What powers do they want?

Among these changes, the FDIC can no longer issue blanket guarantees of bank debt as it did in the crisis, the Fed’s emergency lending powers have been constrained, and the Treasury would not be able to repeat its guarantee of the money market funds. These powers were critical in stopping the 2008 panic.

In other words they want to be able to bailout and back stop the banks again. Or if you prefer take us back to the world of privatising profits and socialising losses. For the establishment in the US that worked well as the government made a profit and the banks were eventually able to carry on regardless. Indeed the next stage of fining banks also was something of an establishment merry go round as you can argue that it was just another way of the banks repaying the establishment for the bailouts.

On the other side of the coin ordinary people did lose money. Some had their homes foreclosed on them and others lost their savings. The unfairness of this arrives when we look at bank shareholders who had losses. In itself that is not a crime as by being shareholders they take a clear risk. But the rub is that the losses were driven by a combination of fraud and malpractice for which so few have been punished. If we move onto the bank fines we see that yet again punishment hit bank shareholders whereas bank executives might see a lower bonus but otherwise remained extremely well rewarded. We are back to the theme of the 0.01% being protected whilst the 99.99% bear any pain.

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Putting it another way here is former Barclays boss Bob Diamond from the BBC website earlier.

Former Barclays boss Bob Diamond has said he fears banks have become too cautious about taking risks.

Mr Diamond told me the risk-averse culture means they can’t support the economy and generate jobs and growth.

Support the economy or bankers pay?


Here is perhaps the biggest rewriting of history as we return to the thoughts of Ben Bernanke at Brookings.

“There’s some folks who don’t like QE, and as each argument fails, they move down the ladder. And so now you have hedge fund managers writing in the Wall Street Journal how QE is creating inequality as if they cared.”

You may note that there is no actual denial that QE creates inequality. Frankly if you boost asset prices which is its main effect you have to benefit the asset rich relative to the poor. However back in March the Bank of England assured us this.

Monetary policy had very little effect on overall inequality

How? Well let me show you their example of inequality being unaffected.

 But it is worth noting that existing differences in net wealth mean that a 10% increase for all would equate to £200 for the bottom decile and £195,000 for the richest.

Apart from anything else this was awkward for the previous research from the Bank of England which assured us QE had boosted wealth for those with pensions and shareholders. I guess they were hoping we had forgotten that.


The last few days have seen quite a bit of rewriting history about the credit crunch as the establishment wants us to forget three things.

  1. It was asleep at the wheel
  2. Those who caused it got off scot free in the main and were sometimes handsomely rewarded whereas many relative innocents suffered financial hardship.
  3. The response not only boosted the already wealthy but contributed to an economic world of struggling real wage growth

The first problem will recur we know that in spite of all of the official claims to the contrary. As to the response one issue is that those in charge are invariably unsuited to the role. They are picked out of academia and/or the establishment and suddenly find that they go from a cosy slow-moving world to one that is exactly the reverse, so we should not be surprised if they act like rabbits caught in a car’s headlights. So on that score I think we should cut Ben Bernanke some slack but that does not eliminate points two and three which are critiques of the economic regime he implemented.

Also if we stay with central banks it could all have been worse as imagine you are at Turkeys central bank the CBRT deciding how much to raise interest-rates and you read this!

Erdogan says must lower interest rates ( @ForexLive )