Sunday, 9 March 2008

UK Government confirms 'Greed & Fear' as causes of credit crunch:

Writing in 1998, Professor Susan Strange wrote that:

"“Greed and fear are the two human emotions most evident in the day-to-day behaviour of the international financial system today….Either dealers are drawn by greed to take too big risks with their own or, more often, with other peoples’ money; or they are overcome by fear that the risks they have taken will catch them out. In their rush to escape the consequences of greed, they may start…an avalanche of panic that carries away the innocent along with the guilty.” (Mad Money, pg. 139)

10 years later, the Treasury have confirmed this assessment - although they use less obvious language. Their current consultation on proposals to increase stability in the world of banking highlights the two causal factors of greed and fear in the language of the marketplace: with 'search for yield' as greed, and 'uncertainty' as fear.

The Treasury's current consultation on proposed measures to stabilise the financial services sector notes that:

"...the disruption in global financial markets in the second half of 2007 followed a prolonged period of macroeconomic and financial stability and low interest rates in the UK and globally. Historically low interest rates encouraged investors to ‘search for yield’ by investing in increasingly risky financial products without being fully compensated for the additional risks, leading to a general under-pricing of risk. Benign macroeconomic conditions and the search for yield also encouraged an erosion of credit risk assessment standards in some markets, most notably US sub-prime mortgages." (para 2.2)

and then at para 2.4:

"Although the US sub-prime mortgage market is small in relation to the global financial system, difficulties in valuing many of the residential mortgage-backed securities (RMBS) and uncertainty about where the risks associated with sub-prime mortgages had been distributed led to significant uncertainties about the losses and their impact on banks’ balance sheets."

However, rather than focusing on ensuring that lenders act responsibily in the first place, the proposals concentrate on allowing the Government, Bank of England and FSA to prop up banks that get into difficulty. Banks, it would appear, are now too big to fail - with the consequent moral hazard that means they will invariably take greater risks with other peoples' money in the future.

This is the wrong approach - act now to tighten the rules on responsibility in lending, and link the huge level of assistance currently being given to banks with additional requirements that they meet the needs of all communities in the U.K for affordable credit.

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