Plus a change, plus c’est la mme chose
IT is becoming increasingly clear that the current crisis is much more similar to previous booms and busts than is usually understood. London’s secondary banking crisis of the 1970s, for example, saw a number of financial institutions that raised funds on the money markets go bust after the Bank of England hiked interest rates and the value of the commercial property against which they had lent started to collapse. Only one proper book has ever been written about that period – a slim tome by Margaret Reid, available from Hindsight books, which I thoroughly recommend. It is a tale of the rise and fall of a generation of financial entrepreneurs – surrounded by political chaos, hubris, a currency crisis and Bank of England intervention.
Until now, however, most economists have tended to argue that the savings glut in Asian and Arab countries, which helped bid up the price of global assets and push interest rates too low, was a new, 21st century phenomenon. But in a paper published by the Heritage Foundation in Washington, JD Foster, one of its economists, points out that there are parallels with the 1970s here too. The first modern savings glut, he says, came after Opec raised oil prices from $3.50 to $10 per barrel in January 1974 and then to $32.50 by the late 1970s.
While the West suffered, the Opec nations became hugely rich, with their petrodollars recycled to fuel London’s Eurodollar markets — credit markets operating in dollars even though the depositors, financial institutions, and borrowers were rarely Americans. Much of the lending went to what was then called less-developed countries (LDCs). As Foster puts it, lenders boasted of the cleverness of their financial engineering, their massive upfront fees, and the belief that countries cannot go bust. They were convinced that the risk associated with massive lending to poor countries was small. This was similar to the mid-noughties view that home prices always rise – justifying subprime borrowing – and that risk can now be diversified away.
It all came to an end in August 1982 when Mexico failed to service its $80bn, signaling the beginning of the LDC debt crisis. In another interesting parallel with today’s problems, Latin American countries owed $37bn to the eight largest US banks, equal to 147 per cent of their capital and reserves. It repays to study economic history, especially those bits involving money, credit, property and banks. We may now have fancy mathematical models and new-fangled derivatives – but the basics never change.
BETTER NEWS FOR LLOYDS
Lloyds TSB’s purchase of HBOS has turned out to be a nightmare for the firm. But in one respect at least the gamble by Sir Victor Blank, its former chairman, has paid off: it is only being asked to cut its market share by less than 5 per cent, to a little over 25 per cent. That is still much more than Lloyds TSB would ever have managed through organic growth. All of which should provide food for thought for shareholders as they mull over the bank’s gigantic rights issue.
USA STILL WEAK
America’s growth rebound is good news as far as it goes. But the bulk of the third quarter’s growth rate was attributable to car purchases, construction and state spending. I still believe in a global square-root shaped recovery: a growth spurt starting in the third quarter, followed by a lengthy period of stagnation as budget deficits are cut and consumers deleverage. We shall see. [email protected]