Morning:
8°c
In July, when the credit crunch was just beginning, I wrote in this column that the best parallel for how events were likely to unfold was to be found not in the Asian crisis of 1997, or indeed in the stock-market crash of 1987, but in the fringe-banks crisis of 1973-75. So indeed it is turning out.
The parallels between then and now are striking and well worth repeating. For a start, the seeds of the problem came from easy credit - in 1973 from a government decision to remove what until then had been strict controls on the permitted level of bank lending; this time from the savings glut brought about by the massive trading surpluses of the Asian nations.
Second, that easy credit brought huge, ill-deserved fortunes to those prepared to borrow absurd amounts and take gigantic punts. As they did so, they caused enormous distortions elsewhere in the economic system, in particular causing a massive inflationary boom in property and parallel booms in the stock market, art, fine wine, antiques classic cars and other collectibles.
Hedge funds then and hedge funds today cashed in on the fact that small gains in securities could be turned into big gains if they borrowed enough to gear up an investment tenfold and took enough risk. Then, as now, bright hedge-fund managers realised they could clean up if the bets paid off. And if they did not pay off? Well, hey, it's someone else's money!
But the most important parallel is that a range of shadowy intermediaries rose up largely unsupervised to take advantage of the new conditions, getting their money from the established, respectable banks and using it to make quite unrespectable bets on property.
They were the fringe banks, which eventually went bust so spectacularly they almost dragged down the big banks with them. This time, the fringe bank lookalike is called an SIV, a specialist investment vehicle, which is a grand-sounding name for something that is neither specialist nor investment. They too take punts in property - via subprime debt - and a whole load of other stuff, which is great for as long as the good times roll. After that, it quickly becomes horrific.
But the real parallel is that we are seeing the same lethal cocktail of opacity and denial. The fringe-banks crisis dragged on for two years because it was all hidden, and those who were in a position to find out how bad it was - the bankers - preferred to pretend nothing was wrong.
Only when everything began to crumble about their ears did they start to face up to the truth, but by then it was so bad it took another year to 18 months for the full litany of horrors to work through the system. By the time it had done so, there was barely an unscarred financial institution in the City. Sounds familiar? Believe me, it ought to.
