I've long argued that the Great Banking Crash of 2007 was and is simple to explain: bad loans were made to people unable to repay the loans. In the United States, pressure from the federal government to create a "homeownership culture" backfired. Nonsense like the "Community Reinvestment Act" and other pressure to make questionable loans… resulted in defaults. Shocking, right?
Well, the same problem struck in the United Kingdom. Bad loans were made. The crises was not about all the fancy financial instruments the U.S. Congress and the U.K. Parliament hope to regulate.
The full report is only for masochists and journalists - to the extent that those are different groups, anyway. Below is, in full, what you really need to know about what happened:A bank that wasn't involved in fancy derivatives or swaps, or high-fequency trading, failed because people borrowed money and didn't pay back the loans. Wow, that's soooo complex! We'd better ban that entire loan thing… because banking was the problem.
This was a traditional bank failure pure and simple. It was a case of a bank pursuing traditional banking activities and pursuing them badly.
We all know what the political narrative about the banking failures - the Great Crash of 2007 - is. Excessive speculation, trading in swaps and options and futures using high speed trading algorithms. Greed and financial capitalism run mad in free markets led to the collapse of the economy and we've got to do something about it.
So, the narrative runs, what we're going to do is tax the transactions with the Robin Hood Tax. We're going to separate casino banking from real banking, slice the investment banks off the commercial banks. Cut The City down to size and force them to invest in the real economy rather than gamble everything away in frenzied trading.
There are only two problems with this analysis, and thus, the plan of action.
The first is that it comes from those who would enforce such a plan anyway, whether the system had collapsed or not. The second is that it gets who collapsed, and why they collapsed, entirely wrong.
As Parliament's report has found, HBOS [Halifax Bank of Scotland] fell over simply because it lent too much money to too many people who couldn't pay it back. Banks have been going bankrupt in this manner ever since the very concept of a bank was invented (13th century Italy to some, about 30 seconds after the building of Ur to others).
HBOS didn't have an investment bank of any size, and the losses it did make didn't come from the tiny one that it did have. Losses were also nothing at all to do with futures, options, swaps, CDS, CDOs or any of the plethora of acronyms that infest investment banking. There was no high speed algorithmic trading unit of any size. They weren't short selling, naked or not; they weren't even trading stuff very much.
Quite simply, they made loans to people who said they had a great plan. And fewer of those plans turned out to be great than was necessary to keep the bank afloat. One revealing number in the report is that in 2008-2010 they wrote off 10.5 per cent of their total 2008 loan book.
Given that banking regulation, even after being tightened up, insists only that a bank has 9 per cent of capital behind its loans, this would have busted the bank anyway. Well, maybe HBOS would have survived if it had more capital, but it would still be a close-run thing.I actually like the idea of banning high-frequency trading (HFT), but I dislike most other ideas put forth to "prevent the next crisis." The crises was caused because American, Britons, and too many other people seem to love living on credit.