One of our colleagues attended an interesting talk given by Robert Peston at the London School of Economics on the financial crisis. Robert was also promoting his latest book 'How do we fix this mess?'
Initially Robert looked at the UK economy pre-2008 and how easy access to credit had allowed us to spend way above what we could afford. An alarming statistic is that borrowing is still more than 500% of our national output! He feels that our economy has become too reliant on the financial services sector and that we need to get back to a more balanced economy with longer term investment in education and research.
He then went on to look at the global macroeconomic imbalances and roughly split the world into two categories: Producers (i.e. China, Germany and Japan) and Consumers (i.e. the UK, US and Europe). An interesting point he noted is that the producers were usually also lending money to the consumers so they could buy their products.
Robert also considered the eurozone crisis with the debt-driven construction booms in Ireland and Spain etc. having been driven by investors believing that all debts of the eurozone countries were of equal value (which they weren't!). His understanding is that a possibility of a break-up of the Euro is causing massive instability in the bond markets as a break-up would lead to devaluations of the weaker currencies. At the other end of the scale, discussions have stalled on a full monetary union because countries are unwilling to give up autonomy in tax, spending and borrowing.
In the final section Robert reflected on the banks' weak regulation and irresponsible lending e.g. Northern Rock’s leverage ratio was 100 times it’s capital value so just a 1% fall in the underlying asset values would have caused the bank to go bust! One of the main problems was that banks were allowed to increase their leverage (i.e. ratio of borrowing/lending to capital) by trading in complicated debt packages. His conclusion was that banks should be shrunk down, simplified and strengthened including a requirement to hold more capital.
It was a fascinating talk but unfortunately there is no simple solution, instead it will take a number of measures from different parts of the economic system in order to, in the words of Robert Peston, "fix this mess"!
by Amy Rogers, Associate