The next economic crash

This is a summary of the main points raised by Will Hutton in his critique of the handling of the financial crisis by British authorities. The full article is available on the Guardian website.

After the crisis there were cries of 'never again'. But the glacial pace of reform leaves us all in imminent danger

It was the biggest bank bail out in British history, and it came with scarcely believable costs. A trillion pounds of tax-payer support; a trillion pounds of lost output. After a disaster of this magnitude you might have expected some collective soul-searching by both banks and government. There has been far too little. Instead we risk a repeat – our banking system is as disconnected from real wealth generation as ever.

The return to business as usual – bonuses, trading in derivatives, the organising of banking as an exercise in which money is made from money – is breathtaking and depressing. And so, given the recent buoyant profit figures reported by our banks, is the easy money.

Labour delivered the minimum reform it could get away with, subcontracting responsibility to the Financial Services Authority. As the crisis broke in May 2008 it commissioned an inquiry populated entirely by industry insiders, chaired by the now chair of Lloyds, Sir Win Bischoff, to examine how the City could become more internationally competitive. When it reported a year later, it recommended little or no change. The conclusions were tamely accepted by politicians.

The poverty of action is inexcusable. The value of outstanding lending by British banks in all currencies is five times our national output – proportionally greater than any comparable country – and is underpinned by a puny amount of pure equity capital; £1 for every £50 lent. As an internal Bank of England working paper hypothesises, this collective balance sheet structure is so precarious that without substantial and far-reaching reform a second crisis is almost inevitable within 10-25 years. And next time we would be overwhelmed as a country.

Most industries that had undergone such a near-death experience – along with such a high probability of a recurrence – would be taking precautions. Not banking. Instead of building up its reserves aggressively, it is carrying on paying salaries at pre-crash levels.  As it is, £6bn of bonuses were paid out last year. As Springer says, the status quo won. The regulators certainly want more prudence over pay, but the banks play cat and mouse with them, as they always have.

Barclays, RBS and HSBC each boasts more than 1,000 subsidiaries – most of which are secret vehicles created to warehouse lending or direct financial flows in artificial ways, whose purpose, as one official told me off the record, is  to avoid tax or regulation or whose complexity is designed so that in an emergency all a government can do is write a blank bail-out cheque.


The opacity is dramatised by the ongoing multitrillion dollar trading in derivatives – essentially bets on the future prices of financial assets. The justification is that derivatives help buyers and sellers – companies or banks – better to manage risk. Some do. But derivatives are an invitation to speculate. British banks have £1 trillion wrapped up in derivatives – a business that Nouriel Roubini, the economist who predicted the crash, thinks should be as closely regulated as guns because they are no less dangerous.


But progress on financial reform – nationally and internationally – is glacial. Part of the reason is the fiendish complexity that western governments allowed their banks to create, and part is the jealous defence of alleged national banking interests by governments.


The status quo is bad news not just because of the risk of another crash. British banks shamefully neglect enterprise, entrepreneurship, investment and innovation. Only 3% of cumulative net lending in the decade up to the crash went to manufacturing; three quarters went to commercial real estate and residential mortgages. The result – devastated industries and sky-high property prices.


Almost everybody accepts that banks need to carry more capital, except getting international agreement on how much is close to impossible. And banks should indicate how in a crisis they would wind themselves up without costing the taxpayer billions – so-called living wills. The question is how much more should be done.


There should be much more transparency; living wills, for example, should be public documents rather than secret arrangements. So should derivative trading. There should be a great deal more competition. The government, according to the new business secretary Vince Cable, needs to get tough and insist that banks lend to enterprise. Britain needs more banks, transparent banks and safer banks that really contribute to the British economy.