Though I am no expert on the stock market crash of 1929 or the Great Depression that followed, what a pity that senior bankers and politicians did not study this subject and learn some of the lessons. There are so many parallels that it is uncanny and implies that people who should know better never learn their lessons.
In the run up to the Great Depression, ordinary people were allowed to purchase shares, whereas in the past it had been an exclusive club. In doing so, they increased demand and share prices started their relentless rise. This started to encourage more and more people to buy shares and, you’ve guessed it, the prices started to rise even further. The inexorable rise in share prices encouraged people to start to borrow in order that they could take advantage of the wealth creation that the stock market appeared to provide. The vast majority of these ordinary people had absolutely no idea how the stock market worked, it just looked like a one way bet. Brokers extended credit to share purchasers, in what became know as ‘margins’ whereby the purchaser could buy for example, $60,000 worth of shares, with just $6,000 of cash, the rest was borrowed.
The people of America felt rich, lifestyles improved after the austerity of the first world war and few people raised any doubts, those that did, such as President Hoover, tended to keep it to themselves, rather than be see as the Cassandra. Millions of people were encouraged to invest in the new gold rush that was the New York Stock Exchange, with little or no knowledge of the risks and inevitably with a ringing in their ears that you have to be ‘in it, to win it’. Banks and brokers stoked the money fever by extending loans secured on the shares. Inevitably the bubble burst, some were smart enough or lucky enough to get out before the crash, but they were few and far between. The vast majority of people lost all of their savings. There followed
the Great Depression, which lead to mass unemployment and affected virtually every corner of the world and it lasted 10 years. Some would argue that it also encouraged fascism and communism, if true, then it could well have been a precursor to the second world war.
If we exchange shares for houses, the parallels are uncanny. Many people have jumped on the housing bandwagon for fear of being left behind and a concern that if they were not a property owner, then they were nothing. In fact, there is some irony with that last statement because, as we all know, if you went to a bank and were a home owner, even if you owed £300k on your house, you were more likely to be able to secure another loan, than if you had no such liabilities because you rented. Somehow, owning a home had become the primary goal of a good proportion of the people of this country, actively encouraged by the banks. Loan to Value (LTV) ratios increased from around 75% to, in some cases, 125%. This implied that the banks felt that their investment was safe, because house prices would continue to rise, which meant that in a relatively short period of time, their risk would be covered by the rise in house prices.
If the banks felt that way, why would the buyers not? The ratios were also increased, allowing people to buy a house with multiples or 5 or 6 times their earnings, where previously this had typically been 2.5 times joint, or 3 times a single income. If that were not enough, many of the banks introduced ‘buy to let’ schemes, which allowed people with little or no money to build up a property portfolio in no time and of course, lead to an even greater demand for properties, leading to a further increase in house prices. So, everyone was making money, homeowners, the banks, mortgage companies, estate agents and of course, your friend and mine Gordon Brown, in the form of the Treasury.
After the 1929 stock market crash, Hoover introduced the Securities & Exchange commision to regulate US markets, this had the desired affect. However, over the past 20 years or so, the rules and regulations have been relaxed, seen as no longer necessary and much of what we witness in the United States today can be attributed to the easing of those regulations. Similarly, the much vaunted deregulation of the City was also a pre-cursor to the problems we all face today. Light regulation and a hand-off approach by government and the regulators has allowed the banks to enter very high risk transactions which many people struggle to understand. Yet, in doing so, they have clearly bet everything on it, presumably because they also though they couldn’t lose. Now, clearly all of us must take personal responsibility for our respective levels of borrowings, but easy money is difficult to refuse especially when it is being rammed down your throat on a daily basis, in the newspapers, on TV, in the shops and via direct mail campaigns.
However, when people hold senior positions, in banks, commerce and government, we could all be forgiven for believing that they are well read, experienced, shrewd and knowledgeable. In fact, we tend to take it for granted, how else would they have secured senior positions with such huge responsibilities? As chancellor, Gordon Brown in particular and the Labour government in general have let us down, their collective naivety lulled us all into a sense of false security, with Gordon Brown using the oft repeated mantra that his government policies would lead to an end of “Tory boom and bust”.
We can be forgiven for believing that a man in such a position would be best placed to know whether that was true or not, but instead, we have all come to realise, that politicians do not earn their position because of their knowledge, but instead, where they sit in the party. In other words, they learn on the job. Imagine placing a 10 year old in charge of a London bus if you will! Similarly, bankers have created new financial products, which are so complicated, that few, if any, could actually understand the risks associated with bundling mortgage securities. At best their actions could be described as reckless, but a far better description maybe of a desperate gambler playing for high stakes.
The regulators appear to have either been overwhelmed at the scale of these new securities or, more likely, unable to understand the complexities. As a consequence, those that were entrusted with our financial security, government ministers, regulators and banks, have seriously let the people of this country down, as well as shareholders, many of whom are you and I with pension funds invested in the stock market.
What is particularly galling is the fact that no-one wants to accept responsibility. On top of that, the same people that got us into this mess are, for the most part, still in the same positions. Asking us to believe that they have all the answers. Even though, had they studied their subject matter better and read up on the stock market crash of 1929 and the Great depression, many of the problems we are facing today could have been anticipated and perhaps even avoided. Governments around the world want us to believe that their solutions will work, but how do they really know, what confidence can we have in their solutions? They are spending £trillions on propping up banks, business and economies, but all of this money is borrowed, have they learnt nothing?
The rest of us are having to tighten our belts, but our governments are spending our money in what appears to be a last throw of the dice. They are all frightened of another depression, aren’t we all, but sometimes it is necessary for a period of reflection, instead, governments around the world appear to be thrashing around, panicking in a last throw of the dice. We all find ourselves asking where will it all end, not when?
We must all learn lessons from this. But one fundamental lesson is that no member of parliament should be allowed to take up a position unless they have prior experience. For example, no current cabinet minister has ever run their own business, so what do they know of the problems being faced by business people? When was the last time that an experienced person was placed in charge of the second largest employer in the world, the National Health Service? Take a look at Miliband, he is wet behind the ears, lacks depth and credibility, he may be ‘smooth’ but he does not look like someone that is well read. In fact, he even managed to offend the Indian government on his last visit, are these the sort of people we want to be representing us on the world stage? What of Jacqui Smith, she finds it difficult to string a sentence together has allowed the police and other agencies to trample all over our civil liberties and lacks any obvious gravitas? Little wonder that we are in a mess.
In my view, government ministers and bankers must be called to account because they have demonstrated what appears to be a reckless disregard for the interests, respectively of the people of this country and the interests of their shareholders.
It is a time for change and this must include a look at how or on what basis members of parliament are given key cabinet posts. In no other business or industry I know of do people with little or no experience get elevated to such senior positions based on nothing other than a handshake. Never again should the people of this country be lead by donkeys. We will come out the other side, most likely in spite of this government intervention rather than because of them, but when we do, the people’s voice must be heard. We must demand change.