Where to start? After almost a year of speculation about who had let their traders run amok with their balance sheets, who was hiding the biggest losses, who was too big to fail, the credit crunch unmasked its victims this week, delivering the failure of a bulge bracket investment bank, the abrupt halt of the thundering herd and the multi-billion pound takeover of one of the UK’s largest banks. Though it has to be said that for many of the wider population, the most significant early consideration was whether it would get those dreadful Halifax adverts off the telly.
Lehman Brothers’ 158-year history ended in ignominy. The Federal Reserve refused to prop it up or indeed to offer any guarantees to those ready to buy the group (which included Barclays and Bank of America). In doing so, the Fed drew a line in the sand: investment banks could no longer expect the taxpayer to pick up the tab for their incompetence.
Once this principle had been established, other investment banks scrambled to secure their positions. Merrill Lynch was first to go in a deal with Bank of America welcomed by the markets. There was a certain schadenfreude in seeing Wall Street’s most aggressive group taken over by a mom-and-pop American institution. Morgan Stanley revealed talks with China Investment Corporation and with a 70% fall in third quarter earnings, Goldman Sachs must be looking round for a sugar daddy to shore up its balance sheet.
Barclays picked its moment to hoover up some of Lehman’s unwanted assets. They cost it next to nothing and will soothe Bob Diamond’s ambition, putting Barclays firmly among Wall Street’s big players.
The fate of another UK high street bank was more prosaic as HBOS gave in to the inevitable and agreed a deal with Lloyds TSB. There was no Northern Rock-style vacillation from the Chancellor this time and it was agreed that competition would be a secondary consideration to the ‘stability of financial markets’. Nice to know that regulators can bend their own rules when the moment requires.
So Howard and his collection of dancing girls may shortly be off our screens, but is it just bad news for them? Despite apocalyptic talk of the ‘end of the world as we know it’, this week showed capitalism at its most functional. Capitalism is nothing if not Darwinist and this showed those that took stupid risks, failed. And for the most part, it was right that they should be allowed to fail, otherwise what incentive exists to be clever? As Darwin suggested, it is not the strongest that survive, but the most adaptable.
Inflation
It was unquestionably a ‘good week to bury bad news’, as Jo Moore might have suggested. Mervyn King’s letter to Chancellor Alistair Darling went almost unnoticed. He blamed the 4.7% inflation figure for August on high global food, oil and gas prices. This is a little disingenuous. Oil and agricultural commodities prices have now been falling sharply since July. The real blame should lie at the door of greedy utilities companies who insist on raising consumer prices to protect their profit margins in spite of falling prices.
The assumption has been – and indeed King suggests this in his letter – that inflation will come down in response to the global slowdown in food and energy prices, but if they are not passed onto the beleaguered consumer, inflation may stick around longer than expected. King is expecting inflation to peak at 5% in the next couple of months. Borrowers will have to wait a little longer for the, surely now inevitable, interest rate fall.
Given that interest rates remain the only tool to curb inflation, we must question how inflation is measured and dealt with when it entirely misses the house price slump – on which interest rates have an impact – and is geared into global oil and food prices – on which interest rates have no impact. Nick Clegg in his speech at the Liberal Democrat conference suggested that house prices be included in inflation statistics. This seems eminently sensible and had it been done before, may well have avoided the huge boom in house prices that has left so many UK households crippled with debt and without the wherewithal to weather this slowdown.
