The Financial Crisis – 10 Years On

Before starting it is important to make clear that I am not an economist nor am I a financial analyst.  However, I do hold some accounting qualifications and according to experts in the field I have more than a layman’s understanding of the subject.  Finally it is important to make absolutely clear that the opinions expressed within are my own and represent conclusions that I have drawn through observation and personal research.

Ten years on from the financial crisis of 2008, which almost led to a meltdown of the entire banking system it is worth re-assessing what went wrong and the lessons learnt with the benefit of hindsight.  I am convinced, ten years after the financial world crashed around us we had caused the problems ourselves.  This was compounded by the mismanagement and lack of regulatory control of the banks who lived by the motto ‘Greed is Good’.  This article will focus on two key elements that stalled the world economy and the resulting consequences that we are still living with today.

While less significant than the second factor I am going to start with the so called ‘Credit Crunch’.  In simple terms the Credit Crunch can be described as ‘maxing out’ our credit.  Credit had been cheap and readily available for such a long time and consumers had taken advantage .  This in turn had driven the economy and provided a lot of growth.  This sounds good until the inevitable happens,  As with domestic budgeting, if there is an overspend one month the belt must be tightened the following month.  In an economic cycle there comes a point when credit has to be paid back and more borrowing becomes unsustainable.  If enough people reach this point at a similar time demand for consumer products drops, growth is inhibited and the economy slows down.

Secondly and more significantly the domestic mortgage market ran aground, creating such deficits for the banks that losses became terminal.  This was particularly acute in the U.S. and a notable casualty was Lehman Brothers.  It is a well-known truism that when America sneezes the rest of the world catches a cold.

So how did this situation evolve?  In simple terms two things happened that cumulatively compounded the same outcome.  As often happens in economic good times a property bubble was formed creating a substantial overvaluing of properties.  This was further exacerbated by irresponsible lending when mortgages were been granted at more than the (already over-inflated) value of the property.  120% mortgages were not unheard of – the justification often being to cover renovations or refurbishing of the home by the new home owner.

Then the bubble burst.  The market went through a period of readjustment and house prices depreciated.  This created a situation of negative equity for home owners.  While not ideal this is not hugely consequential if only a few hundred or even a few thousand home owners subsequently default on their mortgages, but it becomes untenable for the financial sector when a million do so.  Historically, banks would have repossessed (or foreclosed) such properties to cover any potential losses.  What made 2008 so devastating was the perfect storm of overlending in a depreciating market that meant repossessed properties all too frequently did not cover the value of their associated debts.  The banks could only offload such properties cheaply and the resulting losses took the banking sector to the brink of collapse.

How was such a situation allowed to develop?

The simple answer is greed and irresponsibility on the part of the banks.  While some have suggested that the borrower is also responsible for borrowing beyond their means ultimately it comes down to the banks’ short-sightedness, focus on shareholder dividends, profits and greed.

To use an extreme example to make my point if I lend £100,000 to somebody who is unemployed is it really their fault when they default?  Yes of course it is and to suggest otherwise would be to avoid them taking responsibility.  However, if this is true it is even more my fault for not checking on their ability to keep up with the repayments.

Again –as above – let’s deal with the simpler issue first.  I would go as far as to say that the credit crunch was self-inflicted and tantamount to self-harming.

I first came across the term, Credit Crunch as early as 2002.  From time to time the media would run a story with dire warnings that catastrophe was impending, that it would come upon us a crunch and that we needed to get ready.

Forewarned should be forearmed!  Yet nothing was done to avoid or at least alleviate the crunch when it arrived.  In principle this is the same as getting a bomb warning and then ignoring it until it blows up in our faces!

This begs the question of whether anything could have been done.  The author’s view is a resounding yes, and what is more it may have reduced the devastating impact of the collapsing property market.

While tied to the base interest rate of a country, banks are free to set their own interest rates, but are restrained by the influence of the competitive market.  I would argue that an upward massaging of the interest rates would have had three positive long term effects for the banking sector.

  • Lending would have slowed down and greater control of borrowing would have been established, lessening the impact of the credit crunch.
  • Loans would have become more profitable and the banks would have earned more for doing less.
  • Customers would have been encouraged to save more rather than spend (see also my article on retail banking), which would have given bankers greater reserves when the bottom fell out of the property market.

So if a potential solution – or at least partial solution – would have been so easy to implement why wasn’t it?  The answer is stark in its simplicity.  Nobody did anything because everybody did nothing!

If a bank had unilaterally raised its interest rates it would have become less competitive and lost out as a result.  This would have impacted not only the profitability, but the share price, shareholder dividends and confidence in the senior management of the bank.  The responsible CEO may have realised it was the right thing to do, but the cost would have been their job and reputation.

Moving on to the collapse of property prices and the sheer number of defaulting homeowners the issue on one hand is more complex, but the solution is easier.  Banks need to lend responsibly and, as in the past bear in mind, two vital factors; the value of the property and the credit score of the borrower.  After these two factors are considered the bank should never lend 100% to give some contingency in the case of a collapse in property values.  The author suggests maybe 80%.  This will protect the bank in the case of a depreciating market while building a sustainable lending model.  However greed and the lack of effective regulation took over.  The more money lent the greater the profitability for the bank – or so the theory went.

Not directly related to this issue, but the media ran stories in the years following the crisis of banks deliberately creating a situation where small businesses wouldn’t be able to keep up with any loan repayments so the banks could then after  a number of defaults move in, acquire the properties and add them or revenues from their sales to their asset registers.  They were as trustworthy a den of thieves.

The whole banking system was sick!

What makes this worse was that the banking system had a warning shot of what was coming.  Not long before the whole system collapsed Northern Rock a small British bank went under for exactly the same reasons that brought about the financial crisis.  The message was clear from Northern Rock – adapt or die!

Particularly in the UK some banks were defined as being too big to fail and the government pumped huge amounts of finance in to stop the whole system from collapsing.  According to a TV interview with Alistair Darling (then the British Chancellor), Fred Goodwin (CEO of the Royal Bank of Scotland, the largest bank in Britain and one of the largest in the world) had warned that RBS was literally hours from running out of money*.  The British government agreed a bailout plan that ensured the survival of such entities.  In a similar way American tax-payer dollars were used to prop up the system.

The emphasis of governmental intervention was for the banks to continue to function, to lend and keep the economy ticking over.  Remember the now almost ubiquitous phrase ‘Keep Calm and Carry on’?  A little known and relatively obscure British propaganda poster from World War II had a new lease of life.

What did the banks do?  They virtually shut down the system.  They used the funds to consolidate and restructure (yes this was necessary), but they didn’t use the funds to keep the system going.  This issue is also discussed in my article on Retail Banking.  The world economy juddered and stalled while the banks licked their wounds, thinking only of themselves – this had not been the purpose of the bailouts.

Although impracticable to implement it seems to the author that the children should have their toys taken away from them for being very naughty.  Maybe the National Banks shouldn’t only set the base rate, but also set interest rates for the banks that are fair for all and take greater regulatory control of the whole system.

The cost would be the removal of competition from the market as the whole system is nationalised.  This opens a door that few would dare to pass through as it would increase state control of personal finances

A cynic could say, ‘The banks are rotten to the core anyway, so what does it matter?’

© Richard Horton, Omega Support Services 2018

* As seen on BBC documentary The Bank that Almost Broke Britian

Story Telling

Storytelling has been around since the dawn of mankind and was a great way of memorising traditions and history .  Oral tradition was the only means of keeping records before the invention of writing.  Writing which was developed in the Middle East (probably by the Sumerians in modern day Iran or Iraq) provided an alternative way to record the histories of people and it was a natural process for histories to become simply stories.  The Epic of Gilgamesh that dates from earlier than 1000 BC is widely considered to be the first written story and prior to being recorded it had been kept alive by oral tradition.  Later what we recognise now as the Old Testament was recorded that traced the formation and travails of Israel before moving into the New Testament.

Pilgrim’s Progress written in 1678

Stories don’t only entertain, but can be used to inform and educate.

While not unique among the ancients, for story telling, Jesus is widely recognised as an outstanding example through his use of parable and allegory.  John Bunyan used The Pilgrim’s Progress to convey the Christian journey and a similar trend has continued into modernity.  In the 20th century the Christian apologist C S Lewis picked up this theme again with the Narnia books and in particular The Lion, The Witch and the Wardrobe which is a transparent allegory of the Christian message and even references Old Testament principles in the light of New Testament interpretations.  Some elements were obvious like the sacrifice and resurrection of Aslan; while others were less so – such as the deep magic which represented the law that condemned and the deeper magic which stood for the grace of God

Away from Christianity a personal favourite, that I was introduced to as a teenager, was Pawn of Prophecy (Part 1 of the Belgariad series) by David Eddings, a  coming of age novel set in a fantasy world.  A key character is Belgarath the Sorcerer who is initially introduced as the Storyteller who provides the back story for the boy Garion as he starts his epic quest..  Eddings drew on real world oral traditions as his methodology for bringing the world to life with its vibrant history of the Wars of Gods and Men in their fight for supremacy as good sought to overcome evil.

Before I get too distracted I want to underline the point that story telling is an essential communicative tool and it has a role in the workplace too.

The best and most effective communicators have always used stories to help make their point.

So what do good story tellers do?

  1. Real life stories make the speaker more real and can help hold the interest of the listener when well delivered.
  2. Stories illustrate better than abstract principles and ideas.  A good story can be used as an anchor to make a salient point or simplify an idea.
  3. Stories can entertain and amuse and enable greater rapport with the audience.
  4. A good story should engage the emotions, build anticipation and stimulate the imagination.

Some Does and Don’ts for Story Tellers.

  1.  If you decide to tell a story or anecdote it must be short and make a point or illustrate something
  2. Don’t make the story too long because the story then becomes the dominant element rather than the point that is being made.
  3. Don’t allow the story to sidetrack you into a memory trawl.  Stay on point.
  4. Use stories sparingly as there needs to be real content behind the message
  5. Employ your full soft skills tool set to communicate and engage the audience as much as possible.  Do so as naturally as you can while avoiding repeated fillers and unnecessary sounds like ‘erh’ and ‘erm’.

Can you think of any more?  Please use the form below to let us know about any ideas you have.

Omega will soon be launching some training on how to develop and use Story Telling as a communicative tool in a business environment, so keep in touch.

In Search of Meritocracy

I am going to start this article as unpolitically-correctly as possible, but I challenge you to read it to the end and see if you still disagree with me.

When it comes to work I don’t believe in minority rights, nor do I believe in feminist agendas or staff quotas.  I do not see race, religion or disability nor do I see sexual orientation.

I see people.

The fact is that when we compartmentalise people we end up creating an us and them agenda, however noble our motivations may be.  What really matters is the person’s ability to do the job, nothing more and nothing less.  This is the bottom line.

In other words what I am searching for is that ever so elusive thing known as meritocracy; or put simply people get on (or don’t) at work because of their qualifications, knowledge and experience.  When recruiting or promoting it is for the good of a company to have the best person in that position they are hiring for and everything else is irrelevant.  The best person for the job can be defined as a correct blend of competence, experience, soft skills and ambition.

It is patronising to – let’s go with stereotype here – give a woman a job to make up a quota or to make the boardroom seem more balanced.  They know she is there to make up the numbers and she knows that it is highly unlikely that she is there because she deserves it on an equal footing.  She may be the best woman for the job, but if being a woman was the key qualifying criteria, this shows nothing more than blatant disrespect that in my view is counterproductive.

Furthermore if an organisation is that skewed towards male hegemony, offering a woman a token position to fulfil their need to appear as an equal opportunities employer is not going to make any difference.

I can make similar arguments about any other marginalised or minority group and while I accede to the points many of these people raise, quotas and pushing a minority agenda is not the solution.  I will also further agree that there is a need for greater tolerance and understanding in society as a whole and not just in the workplace, but forming (often militantly minded) groups has the habit of provoking even greater hostility from the intolerant and hateful.

This is consistent with meritocracy because if a gay employee is experiencing any kind of discrimination it is wrong.  However, meritocracy argues that sexuality is irrelevant in the workplace and assuming ‘ze’ [1] is a competent employee it is the intolerant who should be reprimanded or even sacked.

‘Mobbing’ – I hate that word – just call it bullying – has many similar characteristics and in each case the hostile party should be shown the door.   There is no difference.

The solution is somehow elusive.  We must ensure recruitment practices focus only on merit, and not the agenda of recruiting individuals with all of their pre-formed opinions and expectations.  One way of doing this is to widen the decision making body who initially shortlists and then interviews the candidate.  This same body can also make a shortlist based on a limited CV that has had all of its personal biographical data removed; name (some names can be indicative of age too). DOB, gender etc.  This limited CV then presents competences, knowledge and experience as their primary indicators.  Finally if employers (and many do) can create some kind of empirical scoring system then a successful job interview will come down to a points total.

That is meritocracy in action.

Ultimately employers will recruit who they want and this is even more so in smaller companies that have less resources.  If they want a pretty girl they will take her on irrelevant of her competences or if they want a young male manager that is what they will take even if a better qualified woman applies for the same job.  Sadly there is very little anyone can do about this other than appeal to the employer’s integrity.

Decency and humanity demand that merit and merit alone is how we get on in the workplace.

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Notes

[1] In recent years the definition of gender has moved beyond tradition male, female and neuter classifications and pronouns such as he/she/it are no longer sufficient and an attempt to resolve this has come with the introduction of the word ‘ze’ (which rhymes with he and she) has been suggested as a cover all for gender pronouns.