‘Banker’- a word that the majority of us probably stigmatise on a day
to day basis, be it with greed, wealth, The
Wolf of Wall Street or simply that opening panorama of The City of London
at the beginning of The Apprentice. A
continuously repeated topic amongst the leading generation is the issue of who
and what caused the famous global financial crash of 2008/2009. When considering our own economy, many blame
the then Labour government- specifically its chancellor, Alistair Darling- for
not imposing enough regulation on the banking industry and more often, simply
the careless act of overspending the tax payers’ money. I can tell you now,
that the latter part of this myth simply isn’t true. This myth however, is likely to stay imposed on our
generation’s interpretations of the famous crash, with much of the right-wing
media repeatedly insisting on its viability. Therefore, I’d first like to set
the record straight and give you a basic introduction on what really happened
and is still happening today. It’s quite an amazing story:
Let’s take a step back in time to 1987- the time of ‘the great’ Jordon
Belfort (The Wolf of Wall Street)-
when a little known concept called the Collateralized Debt Obligation (CDO) was
first introduced into the western banking system; in a nutshell a CDO is a
collection of mortgages sold to an investment bank, which is the sold on to
shareholders such as pensioners and equity investors at various levels of
interest, before supplying the mortgages to those who they are really meant for- home owners. So
essentially, investment banks were able to manipulate the mortgage market by
sharing out their ownership to whoever was willing to invest in them;
investment banks were able to manipulate home owners who were largely unaware
of the structure of the CDO scheme, leaving them vulnerable to greedy hedge
funds and private investors who wanted to make an extra buck off the back of rightful
home owners. This was the case as there were little qualifications in place to
be able to buy these mortgage shares, leaving the risk of mortgages being poorly
funded and insecure. The bankers knew this, but given it would secure them
their own profits in the short term,
they frankly couldn’t have cared less. Between 2004 and 2008, CDOs were sold in
their thousands in the USA and similar ‘sub-prime’ mortgages in the UK, with
the majority of shareholders failing to provide efficient funds to keep them
stable. Individual investment bankers kept more than their fair share of
dividends from them, leaving thousands of households burdened with no funds to
secure the ownership of their homes. This corrupt practice would eventually
lead to the housing ‘bubble’- a run-up in housing prices fuelled by demand,
speculation and the belief that recent history is an infallible forecast of the
future. The bubble burst in 2008/09. A shocking, yet rather dull concept isn’t
it? And this is exactly why the banks manipulated our disinterest and lack of
information, for their own self-interest, eventually leading to the some of the
wealthiest in our society profiting from CDOs and the other 98% of us having to
move out of our homes or find other means of funding them. Those homeowners
effected had little financial security left in their lives and consequently our
economies went into melt down, with the average consumer falling victim to the
greed and selfishness of the few. This was one of the main causes of the
2008/2009 financial crash. Thankfully, CDOs were banned in industry in 2010.
However, just 18 months later in 2011, the CLO (Collateralized Loan Obligation)
was established with almost the exact same purpose. So this corrupt practice is
still happening today, posing the question, should we be expecting a series of
financial crises in just 4 years plus time?
Here’s a good video
link explaining CDOs.
Many investment bankers, particularly in the UK and the USA, who
profited from this corrupt scheme got away scot free and continue to live
prosperous and privileged lives. Many innocent home owners with families or no
family at all, continue to live financially disadvantaged lives. Many were
simply thrown out of their homes and given little or no state help, as the
practices which had resulted in their positions was not seen as an illegal act,
merely an immoral one and therefore the majority of banks and their bankers
were not prosecuted for this. Instead, the UK and USA kept the majority of
their banks afloat by using our money as tax-payers, to bail them out. Now
before we jump to any conclusions, there is arguably a large case for having
done this; if governments had allowed the majority of banks to have collapsed
this could have led to an even
greater scale crash and an even greater effect on you and me in terms of
inflation and the security of our own savings and wages. Indeed, in a recent
interview with the BBC, Barack Obama admitted that he had “a very tough
decision to make” in terms of doing what was fundamentally immoral or what was
fundamentally the right thing to do in the financial context. However,
there is an example out there of an economy who did let all of their
major banks fail and brought all of guilty
bankers to justice, many of whom were actually imprisoned. Their economy is now thriving and their people are some of the most financially equal in the western
world. This economy is that of Iceland and I believe we must learn a series of
simple, but significant lessons from them.
The 2008 global financial crash hit Iceland hard- arguably more so than the UK, given the difference
in GDP to population size. Their currency crashed,
unemployment soared and their stock market was almost completely destroyed. But
unlike the majority of western economies, the Icelandic government let all
three of their major banks collapse and went after reckless bankers.
Furthermore, Iceland’s people demonstrated
their anger at this through literally taking to the streets; it was estimated
that 3% of the population gathered in front of parliament to demand answers. Their
government listened to their concerns and immediately set up a ‘Special
Investigation Commission’ to reveal the truth behind the collapse. The SPI’s
findings were similar to that of what we now know to be our own, but what was revealed
that has not been in our own country, was that almost 100% of credit needed for
large corporations and individuals to lend money was dependent upon investment
banks. Over the next 6 years, the Icelandic parliament would restrict foreign
capital investment and require credit supplied to households to have a 100% dependency
rating- i.e., no ‘fake money’ was gambled with when insuring the public had the
financial means to buy their own homes. I particularly admire this simple but insightful
quote on their reaction to this finding, by a member of Iceland’s SPI, Gudrun Johnsen: “If you don’t know
exactly what happened, you don’t know what type of behaviour you need to
correct, and cultural change is really difficult. There was a benefit in the
entire system going down. We know what failed and as a consequence we were able
to clean the house pretty quickly”. In European banking there is simply an
unwilling culture not to accept
losses. Indeed our own government and the US government responded by literally
printing money. It is evident that the Icelanders knew what they were dealing with and how
it should be dealt with, as a result of a 3 point democratic process: the
public spoke out on their concerns; the government reacted with realistic
action; those accountable were justly investigated and were either brought to
justice or proved otherwise.
Considering these simple, democratic steps to reform, here’s what I
believe the next generation of politicians and bankers must learn from the reaction of Iceland to the 2008 global
financial crisis: we must make the financial system more accountable to its
customers by demonstrating our own understanding of it as the public, through
questioning and demanding regulation; all forms of credit should have a 100%
dependency rating in times of recession to avoid long-run debt that is likely
to affect the poorest in society; most of all, we must maximise the use of
independent regulatory bodies and reviewing commissions to ensure no government
bias is undertaken in such a publically dependable circumstance. Of course, it
is without doubt that overall, as a generation we must learn that it is within
the interest of the majority to bring those accused of the manipulation of hard-earned
public finances to account and if necessary, to justice. It is only then we
will begin to deter greed and instead promote clean methods of recovery in
cases of financial unease, benefiting all
who have been affected by it. Indeed there would be a good chance of such
crises not occurring at all if the next generation of politicians and industry
leaders were to properly act for the
benefit of its people, by making these immoral
practices illegal and instead providing
humane and reliable methods of credit with the aim of improving fundamental living
standards- an aim that would undoubtedly lead to a more stable, diverse and
equal economy.
@jalbryson98 #Yforchange
