Wednesday, January 09, 2013

The King's New Clothes


Housing & Residents Team at Westgate
I’m out on the annual estate inspection in my ward this morning with Cllr King, now once again the leader of the TOM party in Thanet. What was TIG has now been unofficially renamed the ‘WC’  party, to reflect the initials of its two remaining members.

It's also rumoured we have another councillor in Westgate but until such a time as anyone can prove her existence, I’ll keep an open mind.

At the next meeting of the Council, I’m sure we will hear Labour’s cabinet member, Michelle Fenner, once again speak colourfully and indignantly against the ‘greedy bankers’, she holds personally responsible for the recession. This without any demonstrable grasp of the facts, outside of the political rhetoric, of how we arrived at the biggest financial collapse since the ‘South Sea Bubble’ burst in the 18th century in similar circumstances. In fact, I recommend you listen to the podcast of Melvyn Bragg’s ‘In Our Time’ on BBC Radio 4, as an example of how those who don’t learn from history, are doomed to repeat it.

So for the benefit of readers who would prefer a short encounter with the facts, rather than the political fiction, here's the pocket-sized story of why the financial markets collapsed and governments and banks were equally complicit in the failure.

I think we would all agree that in areas of high home ownership, crime is lower and so, in relative terms, are unemployment and bad health. In fact pretty much every statistic that measures deprivation.

You may vaguely recollect that Fannie Mae survived the sinking of the Titanic but not the collapse of the United States economy in 2008. Of course, Fannie Mae was actually shorthand for the 'Federal National Mortgage Association', directed by the policies of the US Department of Housing and Urban Development, (HUD).

In the late 90’s the United States Government, much like our own, was determined to increase home ownership among the poor and attempted to use the force of law to influence mortgage lenders to lend more readily to ‘disadvantaged’ groups. By 1996, 42% of  mortgage lending had to be to borrowers with incomes below the median and in 2005, this rose to an astonishing 52%.

I think readers may be ahead of me by now in seeing the catastrophe unfold. In fact, in the States, a manual was even published for banks, advising them that a mortgage applicant’s credit history should not be seen as a negative factor in assessing a home loan and that living on unemployment benefits should be no barrier to a lending decision.

On this side of the pond too, while less extreme than the States, Government, under the direction of Gordon Brown, also chose to favour a path of very loose touch regulation of banks like HBOS and RBS, through the FSA and Bank of England, when it came to home loans; following much the same path as the Americans toward the goal of increasing home ownership and greater prosperity built on property.

But then, as we know, it all went horribly wrong because house prices on both sides of the Atlantic stopped rising, promptly reversed and the cost of mortgages started to rise as the US economy stalled. At which point, mortgage debt ceased to pay for itself and the home-owners started missing their monthly payments to the banks.

What had happened is that international banks in a global financial village, had underwritten the mortgages held on the books of Fannie Mae and Freddie Mac , the two largest financial institutions on the planet as packaged debt instruments, expecting someone else to be servicing them. When these debts started to default in huge numbers in the United States, the lenders, like Bank of America who had bought the debts and many in our own financial centres, started showing large gaps in the their balance sheets. This revealed that they had recklessly joined in this 21st century equivalent of the Pacific Bubble by lending way beyond their assets on loans that they thought were underwritten by government policy.

Of course, it’s a little more complex than this but my story represents the wider picture reasonably clearly. Government, both here and abroad, wanted people to buy homes so they could become happier, healthier and wealthier citizens through the responsibilities they perceived went hand in hand with home ownership.

Governments placed pressure on the banks to lend money at low interest to people who lacked any real ability to sustain a mortgage over time and looked the other way when banks started to lend more than they had in assets. When the bubble burst in the United States, the financial contagion spread to London and centres like Frankfurt and Madrid, with predictable catastrophic consequences.

So ‘Yes.’ bankers have been recklessly greedy encouraged by a culture of eye watering bonuses but since the crash, 20,000 have lost their jobs in the UK’s own financial services industry. However, this particular financial crisis happened principally because governments and politicians like Gordon Brown, thought they knew best, interfered with market forces and interest rates and pressured the banks to lend money, creating a crazy get-rich-quick scheme that fuelled the collective insanity until one day in New York; somebody asked the uncomfortable question about the 'King's new clothes', which caused the whole pack of cards to collapse, starting in Wall Street.

I'm invited to share a dinner with the MEP, Daniel Hannan, this week and I'm very much looking forward to hearing his often controversial views on the same subject and from a European economic perspective.

16 comments:

Anonymous said...

I'm glad you pointed out what WC stands for Simon!

Talking of estate inspections, I see a local Thanet blog that's not noted for it's reliability claims that one local property features just one kitchen shared by 30+ rooms of residents! I know there's a few unscrupulous landlords, but have you ever heard of anything like this?

Simon Moores said...

Thanet has its own plague of slum landlords which is why the Conservatives on my watch started introducing selective licensing to some of the hotspots against fierce landlord resistance.

30 seems excessive and I would question the claim but we have landlords who thrive on misery and need to be dealt with vigorously. Sadly the law restricts room for manoever

Shinguard said...

Simon, I agree with most of your summing up of how the markets collapsed and the subsequent world recession, however, I would say the deregulation of the banks in the UK began under Margaret Thatchers government in 1986 known in the City as the start of the'Big Bang'.

Many people in the financial world made their fortunes over the following 20 years and yes, Gordon Brown should have been more on the ball (as he has admitted) when things started to go wrong.

Like most of these Boom and bust periods it all had to come tumbling down and I don't think this will be the last time it happens.

Greed is a powerful emotion

Simon Moores said...

Quite agree and suspect that following the "Big Bang" of deregulation any political party strapped for cash to fund the welfare budget might have slipped into the same trap but Labour attempted to buy votes with unsustainable levels of debt.

Anonymous said...

So, were the Plebs behaving theirselves and were you taking notes on any drawn curtains to ensure they were all being productive little drones?

Simon Moores said...

Not the smartest of comments. Are you sure you're on the right weblog?

1 o'clock Rob said...

Simon, were do you stand on Thatcher's insistance that Councils sell of their social housing stock but not invest the money in additional housing? Do you think this had any affect on the spiralling cost of housing where house prices effectively quadrupled over a 20 year period? Could we lay partial blame at that policy? the lack of social housing leading to limited housing stocks leading to spiralling prices?

Simon Moores said...

My first property in London was a flat in a block which bordered on a council estate opposite. as a consequence, I had direct experience of some of the problems that many residents living on estates encounter, in terms of anti-social behaviour.

While I was there in the eighties and early nineties I saw the place transformed as council tenants bought their flats in the housing blocks opposite. As one might expect there was a positive shift in a number of directions.

Like Bill Clinton, Margaret Thatcher had good intentions and the right to buy gave an impetus to a recessed economy. The failure of councils to invest in further housing stock was lamentable but in London, for example, you also need take account of immigration at levels which overwhelmed local authorities and drove house prices consistently upwards.

James Maskell said...

In reply to 2:08, my last place had at one point 12 people sharing a kitchen and using 7 rooms.

When I moved out, I visited a place not far away where it appeared the kitchen was for over 30 rooms to share. It was an absolute dump and understandably was deserted.

DFL said...

Simon, I was brought up in a council house on a council estate in inner London. We enjoyed a crime free existence, no such thing as anti social behaviour, and every house had someone working in it- it was a condition of getting one. The council would inspect gardens and properties regularly. Cut grass and tended bushes were neacessary, and any damage internally would be fixed as it would result in you getting evicted.

My mum still lives there, and the shift has occurred where many houses are occupied by families without anyone working. Most of these are privately owned, now rented out privately with neither the tenant or the owner giving a fig for the neighbours around them nor the properties or gardens.

This has happened since the late 80's, and we all know who instigated it. Every positive has equal negatives, something maggie and pretty much every politician fails to grasp. Some people need the discipline to keep in check with their lives/property. Right to buy has outsourced responsibility to the private sector with no downside for homeowners with poor tenants.

Oh, and you failed to mention that bankers actually did not fully understand the mortgage backed securities they were buying had sub prime, or loans to individuals with less than perfect credit history/repayment capabilities. So stupidity as well as greed played a part. I should know - I am one!

Simon Moores said...

I quite agree with you sentiments on the credit instruments. They were little more than a pyramid scheme wrapped up in smart packaging.

My argument is that the bankers were themselves instruments of government policy, here and in the USA.

Governments wanted poorer people to own property in order to raise their life outcomes and either placed direct or indirect pressure on the financial system and the lenders to achieve this.

Human nature being what it is, the smart opportunists saw where they could make money from the exercise and did.

Anonymous said...

I suppose the real difference is that when I was a child growing up on a council estate, the houses were occupied by working class people. Now social housing tends to be occupied by non-working folk or, in the big cities, immigrants.

Long gone are the pleasant London estates of friendly neighbours, open doors and salt of the earth folk. What Aunt May in Rotherhithe would make of it all now, long gone with her apidestra, I dread to think.

Retired Chep said...

Ipswich is putting up council rents by 4.5% saying that govt has directed local authorities to increase rents.

Felixstowe (misreading the central diktat ?) has increased beach hut rents 20%.

As far as rented housing goes Universal Credit looks fair set to create chaos. The one payment per household system is going to entrust each household to use its rent element to ? Pay the rent !

At present local authorities and councils are protected from the realities of this situation. Because they can get housing benefits paid directly to them. Private landlords (Thanks to Tony Blair) can only gain payments direct once their benefits tenants are 2 months in arrears.

Under Universal Credit every benefits household every 4 weeks will be sent the rent money to do with what they will.

What could possibly go wrong ?

I think I sent you details some time ago of the Bolton BARLO scheme. Bolton and Area Residential Landlords assn run by the council. My impression is that voluntary scheme works well. Say BARLO contact a landlord about anti social behaviour of a tenant ?

The landlord could start Section 21 proceedings to eventually gain possession (Non blaming cause giving County Court Judge no option but to issue a Possession Order)

The day before a Section 21 bailiffs eviction is due the tenants become the responsibility of the council to house.

So I imagine that the landlords you criticise in Thanet may already be weighing up how to make their troublesome tenants the councils responsibility to house and the council's responsibility as landlords re anti social behaviour.

I have awkward tenants up north but last year I stopped them getting a newly refurbished Council/Housing assn house. This is the value of immediately county courting all rent arrears even if you don't seek repossession. £1500 worth of unpaid CCJs and a damaged house.

Better you may feel to make those tenants live on in the mess they created.

They now have a new £2000 central heating boiler after blowing out the last boiler by leaving the balance line on. The costs of repairing after them knock out any profit every year.

I am refusing to fix a kicked in front door and damaged house interior. And they can weep to the council all they like. Those council officers make the mistake of bothering me and the council will get the tenants as their own.

On the other hand if the nice BARLO people email me about a problem such as my tenants blocking drains, out of control staffies etc I am on it.

Licensing in Thanet does not enjoy a successful history. The paramilitary styled 6th Thanet Gun range being a case in point. Licensing deals onloy with those people already minded to obey the law anyway. The rogues just ignore it or get round it.





Anonymous said...

The WC Party that is a good one Simon I wonder now if Hart will flush the Cistern(System) and that this party will go down the pan!!

Anonymous said...

I don't think JW will like this!

http://thanetstar.com/article/john-worrow

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