That sinking feeling

I’ve been wondering these last two weeks whether the collapse of Lehman Brothers was rather like the Titanic hitting an iceberg. Just as those who sailed in the ill-fated liner, the bankers and economists at the helm of our financial system thought it was unsinkable.

Even after the Lehman crash, the passengers down in steerage were told not to panic as those at the helm prepared lifeboats that they knew couldn’t help everyone. So Lehman went under and HBOS was swallowed up while AIG
was saved and the band played on.

Now all hands are at the pump while the US Treasury secretary, Hank Paulson works out a rescue package with Congress. Perhaps the Titanic analogy is too obvious and not particularly helpful. After all, the Titanic sank while the financial system is going to be saved. It is, isn’t it? But at what a cost?

Reckless lending

Just as there was a place in a Titanic lifeboat for J. Bruce Ismay, head of the White Star Line that owned the ship, whose insistence on a fast passage led to rash behaviour by an otherwise prudent captain, the US Government is now preparing to help the very bankers whose reckless lending endangered the entire capitalist system.

When the Titanic sank, many of the poorest passengers paid with their lives. In the latest financial crisis it is the taxpayers who are being asked to bail out those who feathered their own nests in ways that have brought our banking system to the brink.

We know this is unjust and so do the lawmakers. But our fortunes are so intertwined with those we have trusted to handle our savings and investments that, even in the face of their continued enrichment, underpinned, as it has been, by greed, we must dig in to our own wealth to save their undeserving necks.

Remember how all of this was triggered by the sub-prime mortgage debacle, caused by unwise lending? That didn't happen so much when lending on house buying was largely the responsibility of building societies. The concept of mutuality that underpinned the building societies meant that those societies were owned by their savers, not by investments in the hands of fickle fund managers. This is still the case with a few of them such as Nationwide. But others, like Bradford and Bingley, wanted to become banks and turned their backs on the prudence expected in handling mutual funds.

Panic for survival

Will the bail out work or is it simply rearranging the deck chairs on a sinking ship? In theory it should help a lot. The banks, after all, could be doing more to help themselves using their collective liquidity could they not? But through their own fears they are pricing their credit out of the market. It is the equivalent of the Titanic lifeboats standing to for fear they will be swamped in the panic for survival.

What we are seeing today are the unthinkable consequences for a society forged from the principles of “buy now, pay later.” We have lived for too long on the promise of future earnings.

I recall going in to a car showroom a while back. The salesman was unhappy about selling me a car for cash because his own bonus favoured selling cars on a financing deal. When credit begins to take precedence over cash there has to be something wrong.

Respect for thrift

But the banks have not respected thrift. Their undoing has been to court borrowers, no matter who they were or how sound their credit rating. Now this policy has gone in to reverse but still they are loath to welcome savings, treating savers like non-paying guests.

Even if, as now seems likely, Paulson succeeds in securing an agreement for the US administration’s proposed $700bn bail out of its ailing banks, we need to do some hard thinking about the fundamentals of the system.

The easy answer, I suspect, will be to build better lifeboats and stronger safeguards. But this will not remove the frailties of a system that relies on spending-fuelled growth and the unacceptable waste arising from profligacy. Where were the so-called “risk managers” in banking when we needed them?

Another "ism"

In the long run we may need to find another “ism,” something, perhaps, that is focused more on long term sustainability with greater sensitivity for the environment. The invisible hand of self-interest can no longer be regarded as the tide that raises all boats. That same self-interest means the tide has gone out when the banks are thirsting for liquidity.

Now I really am mixing my metaphors with banks sinking, others beached, lifeboats becalmed and the rest of us standing enthralled on the tideline watching the white water in the distance that might just be heading our way.

Great depression

And what if the rescue fails? What then? What if we’re plunged in to a recession or depression that Warren Buffet has warned could be “long and deep?” I wasn’t alive during the great depression but my father was and he couldn’t find work. It was the same all across Europe and North America. The US spent its way out of depression on grand infrastructure projects. Germany re-armed.

War should not be seen as an inevitable consequence of economic failure but war can arise from instability and, so often, conflict comes from the left field. Here we are today, worrying about Islamic fundamentalism, but what happens if the Chinese economy collapses or if Russia goes in to decline?

I’m not sure that you or I can do anything about that but we can do some things as individuals. We can live a little differently. We can save instead of spending (ignoring what our economic masters tell us we should be doing). If we can’t afford something we shouldn’t buy it. We can learn to appreciate what we have and know what it is to have enough. Life is less complicated that way.

Read my thoughts on the "economics of enough."