Financial meltdown supplement
Below is additional information/clarification by myself and others that have emailed me. If you have any comments that you would like to place on my site, please email them through to me at email@example.com
Comment by Hugh Pym Economics Editor BBC
"Looks good, one quibble. Quantative Easing hasn't really started yet" (26 January)
Article has been updated since then.
Comment by Figurewizard.com
Thanks for the info on the johnabbey.co.uk article which gives a thorough explanation of the sub-prime fiasco. One point he makes re. the relaxation of regulation in the Clinton era is worth expanding on. From 1933, in the wake of the great depression the 'Glass-Steagall' was introduced into US law. This drew a distinct line between commercial and investment banks, restricting the commercials to generating no more than 10% of their annual revenues in securities trading other than government issue bonds. Also whilst they were allowed to sell insurance products, they were not allowed to underwrite them. Would be investors, depositors and crucially other banks therefore had an informed choice between 'Commercial' - Boring but Safe and 'Investment' - Sexy but Risky. It is arguable that it was the fact of this legislation that played the key role in the relative stability of the banking business both in the US and the rest of the developed world for the next sixty six years. In 1999, under pressure from Citibank, who wished to merge with Travellers Insurance inc thereby forming Citigroup, this act was largely repealed (Gramm - Leach- Bliley act).
Banks in the US and most of the rest of the world took this as a signal first to seek such consolidations for themselves and then to dive head first into the securities markets with precious little experience of them and next to no knowledge of the risks involved. As this article points out the vast majority of securities trades were either directly or indirectly dependent on the uninterrupted inflation of a housing bubble. However, as John Abbey points out the bubble was ultimately pricked by the sub-prime sharks with Northern Rock being an outstanding domestic example. Now thanks to this; boring, safe and sexy have evaporated leaving taxpayers here in the UK, the US and most of the rest of the world to fund the risky. If Gordon Brown ever manages to get a grip he might consider dusting off the old Glass - Steagall act and giving it a go.