After the collapse of Lehman Brothers and the rescue of AIG with $85bn from the US government it’s difficult to guess what might come next. Many thought Lehmans was too big, that a bank of that size wouldn’t be allowed to fail. The fact is that not every ailing business can be bailed out – there just isn’t enough money available. Look how much it cost the UK taxpayer to prop up Northern Rock.
AIG has something like a trillion dollars in assets and insures bank loans across the globe – had it been allowed to fail could have had a far bigger impact than the failure of Lehmans. Arguably, the US had to step in and prevent it happening. Many commentators are pointing to the events of the 30s when the economy was “allowed to collapse” by authorities at the time. I’m not sure there is a choice really. When things are this out of balance something has to bring us back to earth. And now that vertigo has set in there will be even less liquidity around to keep things moving.
In the UK we have over a trillion pounds of personal debt. The banks have made borrowing money easy. Over the last decade if you wanted extra cash to enjoy a lifestyle you couldn’t really afford then you could have it – either as a personal loan or credit card debt or just borrow it against the ever-growing home equity. It has come to seem normal to us whereas our grandparents would have been ashamed.
So are we to blame or are the banks to blame? Both behaviours were based on greed but bankers trained in economics and accountancy really ought to know better. And of course their greed was so much deeper and so much more callous than ours. We thought we were taking on too much debt and that we might suffer as a result. They thought we would suffer too. By which time we wouldn’t see them and their ferraris for dust.
The boom and bust economy is nothing new. The knowledge and experience gained during a crash helps us to avoid the next one – until the people who remember the last crash retire and take their wisdom with them, leaving the young guns to take control for the next boom period, oblivious, invincible. The only way to avoid this cycle is to have proper controls over the financial sector. And since we are so influenced by global events we better hope that other countries introduce proper financial controls too.