Who To Blame - 3rd February 2012

The shredding of Fred Goodwin was demanded by many of my email correspondents for months. Indeed they go much further in their desire that wicked bankers be brought to book, blaming them for all our present economic misery. Not all, but only some, is my reply.

It is important to correctly apportion blame if you are going to properly identify the mistakes made, in order to avoid repeating them in the future. As a partisan politician, and formerly a wicked banker myself, I am not the most objective of observers, but I did teach economic theory for a number of years, so here is my shot at the blame game: First, the recession would have happened in any event. In Joseph’s interpretation of Pharaoh’s dream, which predicted 7 years of plenty followed by 7 years of dearth (with clear policy implications for a prudent ruler), we see the universal truth that human economic activity moves in economic cycles between booms and recessions. Economists still argue about why this is the case, but it just is. Governments have tried and smooth the peaks and troughs of the cycles by various means with limited success. Inevitably however, recessions are a regular fact of economic life.

Second, the Banks have made this current recession much worse and much longer than most. They are suffering a hangover from their reckless binge in the last few years. No matter how it is dressed up in fancy jargon, the simple fact is that they lent far too much to people in no position to repay, and whose collateral turned out to be worth much less than was anticipated. This mistake was primarily in aggressively extending mortgages to ‘sub-prime’ customers. The contagion spread because these dodgy loans were then parcelled up and sold on to other banks to share the risks, but which ensured that nobody really knew exactly what their exposure was. When the market turned sour, Banks wouldn’t lend even to each other because none of them could be sure how creditworthy any of them remained. The unwillingness and inability of the banks to extend credit made the recession so much worse and it will take quite a time for them to rebuild their balance sheets. Fred Goodwin’s particular contribution to this mess was persuading RBS to buy ABN Amro without checking up on the dreadful state that its loan book was in.

Third, the government also made the recession much worse in two distinct ways. For a start, it failed to get a grip of what the banks were up to. When I was a banker the disaster wouldn’t have happened because the Bank of England would have used its powers to prevent it. It was the decision of the last government to destroy that regulatory regime, and replace it with one that manifestly failed. The next thing that government did to make matters so much worse was to borrow as if there was no tomorrow. Unlike Pharaoh and Joseph they did not use the years of plenty to prepare for the years of famine. Even when the economy was booming Gordon Brown was piling on the government debt, instead of building up a surplus. Now, just when we could use a little slack, the cupboard is bare and we are burdened with paying back the debts.

Fourth, the Euro has also made the recession so much worse. They fudged the rules to let in countries which wouldn't have qualified because of their too large debts, then they fudged them again to let the member states borrow even more. The weaker southern economies found that their membership of a respectable German club entitled them to credit on such easy terms that they overdosed. Now, economic reality has dawned and Germany demands austerity to clear up the mess. This destabilising muddle in one of our principal export markets is chilling our own economy and that of the whole world, just when we needed warmth.

So, there it is, we have no shortage of people to blame. We may have got even with Mr Goodwin, but there are so many other culprits still at large, and only a very few of them are bankers.