Commentary: Bankers forgot mistakes of the Seventies

Dozens of other banks needed his urgent attention. The Governor had called on strong men to crew a lifeboat and salvage the shipwrecked. "Gentlemen," he said, "I am not appealing to altruism."

That was the crisis of the mid-Seventies, and until now it could be said to have dwarfed all that have followed. It came with inflation at 24 per cent and a stock market down by two-thirds from its peak. Sterling collapsed, and the International Monetary Fund had to be called to the bedside, prescribing cold turkey.

The prescription worked, our luck turned, North Sea oil came on stream, and the bankers lived to fight another day and to make new mistakes. Some of them found that they had made the same old mistakes in a different wrapping, for theirs is a cyclical business. My Law Of Banking tells us that disasters happen when the final man who can remember what happened the last time has retired. Then their clever successors think that they have abolished the cycle and can go on coining money. There could be no more dangerous illusion, as we can now see.

With the Seventies behind them, the banks took to lending money to countries. "Governments," said Walter Wriston of Citicorp, "don't go bust." They never needed to. Some of them couldn't pay, some of them wouldn't. It took much of the decade for their creditors to write their loans down and rebuild their balance-sheets.

Banking by now was an international business, tapping the pools of money that flowed across frontiers. The City of London established itself as the new markets' home, and banks from all over the world set up shop here. Financial services became Britain's fastestgrowing industry and its best earner of foreign currency. The catch was, of course, that if money could flow freely round the world, then so could risk.

By the Nineties, the share price of Citicorp was down to single figures and Japan's banks, once deemed the world's richest, had retired to lick their wounds at home. We had our own credit crunch, with its own casualties - Barings, London's oldest merchant bank, the most spectacular - but this was a crisis that hurt the borrowers more than the lenders. Millions of home-owners were under water. Surely, from this, they would learn that house prices could go down as well as up? They did not take long to forget it.

In markets, too, the idea got about that prices would not be permitted to go down and stay down. At the US Federal Reserve, Alan Greenspan warned against irrational exuberance, but whenever they got too exuberant and boiled right over - a hedge fund in New York, wounded tigers in Asia, the dotcom wizards everywhere - SuperAlan would fly to the rescue.

Sycophants told him that he had saved the world, and the markets let their guard down.

His cheap and easy money blew house prices up into a gleaming bubble. Happy lenders found bad borrowers and winked at fraud, believing they could always sell their loans on to one another as job lots.

A huge market formed, and was fuelled by more borrowed money and more ingenuity. Short-lived fortunes were made. When the bubble burst, the job lots lost their value and the smile came off the lenders' faces.

In its scale and in its scope, this new crunch is a Force 12 financial hurricane. How grave the damage will be, we shall not know until it blows over. A new generation of bankers must learn that their business is to manage risk and that credit is a matter of belief. One of these days their successors will forget it. May that day be distant.