Banking Why the collapse happened

Question; When is an apology not an apology? Answer; When it’s made by a banker. That’s Banker spelt with a W! This week in Britain we have seen the farce of the former heads of two of the failed banks appearing before a House of Commons Select committee. Where they did say sorry, but not for wrecking the economy through their actions, but they were sorry that the economy went bad and that wrecked their cash cows. The fact that the banks, all of them, were aggressively lending money to just about anyone, was the real reason why the economy went belly up. This was fuelled by the magic of house prices, seemingly defying the laws of gravity, and common sense.

Now I have said this before, and I was saying this long before this all happened, the banks were and have been manipulating the price of property. While there will be readers that will dismiss this, I keep on being told that it’s a free market and impossible for the banks to manipulate property values, the reality is that there was no free market. I was not a formal agreement but the banks and lenders all knew that as long as the value of property was forced up, it did not matter who they lent mortgage money to, as the rise in property values would secure the money. Therefore, the more they gave people for mortgages, the more they would pay for a property; therefore houses appeared to just keep rising in value. Even in January, one of the failed banks, continued to try to do this and released figures that said that there had been an increase in the price of houses. The rest of the financial industry dismissed it as an anomaly, but in reality as they knew what the Halifax had done, they knew this was untrue. By delaying the release of money to fund a previously agreed mortgage it is possible to make it appear that prices are rising. As you exclude the properties that have fallen most from the statistics while just including the properties that will make the figures look good.

Because the banks and the government know that this was what was happening, is why the banks stopped lending to each other. As simply they all knew that mist was clearing and that the mirrors were cracked and the public were no longer willing to be fooled by this alchemy of house prices. Therefore, the banks realised that with property over valued by sixty to seventy five percent, the security that they could sell the property vanished.

There has been a lot made of the securitisation of mortgages, I have posted on this myself, but that was not really the problem they were a symptom. As these bits of paper, now worthless, were all really just a means of the banks breaking the law and lending more than they were legally allowed to. This applies to the US as much as it does to Britain.

Going back to the House of Commons Select Committee, the evidence given by Paul Moore was not news, as it had been quietly reported previously. Paul Moore was sacked when he raised questions about the business model that HBOS (Halifax Bank of Scotland) was following. The person who sacked him was then appointed to be Vice Chair of the Financial Services Authority. To me it was like the police announcing that Mr J Ripper was heading a murder investigation. Had the regulator not been made up of banking insiders, perhaps questions would have been raised long before the house of cards collapsed.

I don’t believe that the government were aware of what was going on, either here or in America, nor that had we had another party in power, that this would have been stopped. As what the banks were doing was so complicated that no one really understood what was going on. It all appeared to be working and with everyone who owned property appearing to be making profits; it would have been a brave minister that said this was foolish. It should have happened but, it is hard to critic a something that so few understood.

Here we have the crux of the problem, if something is so complex that few can understand it, and then it has an unacceptable risk. As simply if the process is that complex that the bosses or managers do not understand how lead is being turned into gold, then mistakes can be made without anyone realising.

However the more serious question is the morality of much of what has gone on. While it is true that some people have made money from the property market, it is a scant few. As even if your house rises by ten times in value if you sell it for a great profit you still need to pay for another that is likely to have risen by a similar amount. Therefore, while people have assumed they were getting richer, in reality they were not. Also it only benefited people that already owned their own home. The people who did not were enslaved, paying inflated prices and forced to work harder to keep their homes and their families.

Add to this is the bonus culture of the banking sector. I am not the first to say that this created an atmosphere where greater risks were taken. While I have no problem with people being rewarded for success, it is when bonuses are paid for failure. In any other business, an opinion expressed by most people, failure would earn you the sack not rewards. That is why the majority of people think feel and know that bankers should not be paid a bonus when their business have made losses. In the cases of banks that have received state aid, it looks like the banks and bankers are snubbing the general public.

The banking system was and should be a boring and stayed system. That will return, it has to, but bankers need to think carefully about the morality of the business they do and the businesses they deal with. Making money at any cost is simply wrong. Helping the rich avoid paying taxes is wrong. Manipulating the property market has damaged people’s lives and injured society.