Leading article

Forget Wall St. The Wolves of Whitehall caused the crash - and could do so again

Greedy, foolish governments got us into the crisis – and they're making the same mistakes now we're getting out

18 January 2014

9:00 AM

18 January 2014

9:00 AM

This week, Martin Scorsese’s film The Wolf of Wall Street opened and the Office of National Statistics reported that house prices are up by 12 per cent in London and by 5 per cent across the UK as a whole. While the former represents the cocaine-fuelled greed of bankers, which many like to think caused the financial crisis in the first place, the latter represents a wider form of greed which has even more to do with the problems that have afflicted the world from 2007 onwards.

The Wolf of Wall Street is no fantasy.  While the behaviour of the antihero, Jordan Belfort, has been ratcheted up for the purposes of Hollywood, the story reflects a genuine sickness at the heart of high finance: its tendency to attract, and tolerate, psychopaths. The theory is that bank directors can use them as truffle hunters use pigs: harness their hunger, then pull them away before they do too much damage.

It doesn’t always work. Especially if a bubble mentality envelops those running and regulating banks, as it did in the run-up to the crash.

The authorities have yet to get to grips with the criminal behaviour which afflicted the boom years. London is doing less well than New York on this score; not for the first time, it has been left to the US authorities to charge a City trader over Libor-fixing, our own regulators seemingly unable to investigate allegations of serious fraud.

London was arguably the first point of contagion for the global crisis: when AIG collapsed, bets taken by its London division were at fault. The Icelanders who almost destroyed their country’s economy tended to do so from London offices. Labour’s fractured regulation turned the City into the world’s banking casino.

But it is a grave error to think that the financial crisis would have been averted had the City and Wall Street been cleaned of criminal behaviour. The crisis was, at its root, the result of mass delusion among politicians, economists and policy makers, who completely failed to spot what we now know to be the worst case of economic overheating in post-war Britain. The banks were the bartenders; the politicians threw the party. They confused the illusory wealth created by debt with earned wealth. Indeed, the tendency of governments to believe that wealth can be conjured out of thin air fed directly into bad behaviour in the financial world.

Britain’s problem was the wolves of Whitehall. Political greed for the City’s tax revenue (and stamp duty from the housing bubble) was a bigger problem. If we fail to recognise that, we risk repeating the same calamitous mistake now. The British government is more dependent than any other on housing market froth, due to the highest property taxes in the developed world.

This helps explain why HM Treasury has encouraged George Osborne to reinflate the bubble now, offering subsidised loans to those refused credit (i.e., sub-prime lending). Where the bailed-out banks have learned the lessons of excessive lending, hesitating to advance 95 per cent mortgages, the taxpayer is now being forced to take the risks of default instead.

Britain is booming again, of that there is no doubt. Business surveys show the highest confidence (and orders) for years, employment stands at an all-time high, car sales are at pre-crisis levels and it looks as if our economy will this year grow faster than that of any other major country. So it has to be asked: why is the economic life support system still switched on?

The money created through quantitative easing continues to slosh around the economy and interest rates remain at a three-century low of 0.5 per cent. In real terms, many borrowers are paying negative real interest rates — in other words, they are being paid to borrow. This idea every bit as crazy as the old 110 per cent mortgages.

Money printing and ultra-low interest rates were both supposed to be emergency measures only for the depths of recession — yet they remain in place in the new boom. We have moved seamlessly from the hair of the dog to another party without a moment’s sobriety.

Just as before the last crash, we were assured that all was well because inflation — on the CPI measure, at least — was falling back towards its target. But the primary error of the crash was that the government confused low inflation with economic stability. Now, like last time, asset prices — from art to fine wine — are soaring.

Housing bubbles are back all over Britain. Historically, the typical house has cost four times the average salary. In parts of Cumbria, it’s now six times. In the Craven district of Yorkshire, it’s seven times. In the Gloucestershire Cotswolds, it’s 12 times.

The banks have been forced to change their behaviour; the politicians have not. Once again, Britain has economic growth driven by consumer spending, much of it funded by borrowing, in many cases against the rising value of property — and all based on artificially cheap credit.

Until interest rates return to normal levels, we will have no idea how much of this recovery is real and how much is another debt-fuelled illusion.

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  • Marcus

    Great article Fraser.
    I do think it is paramount that we look at how this happened and why revealing the truth has been so difficult.
    Tremendous harm has come to these people and yet the very groups supposed to speak up for them, have in fact silenced anyone who pointed out that worklessness and with it social/family break down were growing and massive problems.
    Why for instance did it take Humphreys et al so long to work out the blindingly obvious? He could have made the same documentary in 1985 not 2010!
    If the Left simply blamed lack of money for these problems but yet highlighted them then I could maybe understand. But instead they did not. They just ignored it and when the right spoke up they shouted them down.
    And why did we let them shout us down?
    It’s a very sad state of affairs but unless we work out how it happened, it will happen again.

  • dalai guevara

    These are the harshest, most open and honest words the Spectator has dared to publish in a while.
    With reference to the comment above made a day ago – the reason we will not see this “happening again” is because after the fake assets have changed hands now the real hard assets are changing hands, too.

    The City will find it difficult to command the same authority it commanded twenty or even ten years ago. Unless we are seen separating the wheat from the chaff we will find that we no longer occupy the moral high ground. People all around the globe are not stupid, they k n o w we currently don’t.

  • ohforheavensake

    The 2008 crash did start in the US, you know: and it spread because the international finance industry had lobbied governments (not just ours) for cuts in regulation. They did so, because they believed that the free market was a rational, self-regulating mechanism.

    Oh, and the government-led bubble? Immediately before the crash, public spending in the UK was a touch under 40% of GDP- which was the same level as it was in the last year of John Major’s government.

    So, simply, you’re wrong. And not for the first time.

  • Frank

    The Shadow Attorney- General has a very good article on her website explaining why the authorities here find it virtually impossible to bring prosecutions for corporate fraud – unlike in America. It is just a question of legislation and I find it very interesting that the government has so far refused to do anything to assist the SFO. I am not a labour supporter, so this has nothing to do with party point-scoring.

  • White Wednesday

    And just when you thought it couldn’t get any worse than Dave, the sponsor of renewed sub-prime lending, George Osborne, is now being talked of as the next Tory leader.


  • reaguns

    In both cases the government left house prices out if its inflation calculations, which was ridiculous then and is ridiculous now, as is leaving out some other things. What’s the point in deciding there is no inflation because bread and fuel and clothes prices are stable, if people are paying fortunes more for mortgages and rents, and if loads of money is pouring into housing and stock market bubbles?

    If house prices had been included in inflation, then even Gordon Brown would have been forced to concede inflation was too high, would have had to raise interest rates earlier, and the crash would have been averted or seriously mitigated.

  • Robert N Melshah

    Thank you for standing up for the truth. The financial sector has been
    the absolutely innocent in all this. The 2008 so-called “crash” was no
    fault of our own. We were only brainwashed by the greedy government, who
    created corrupt finance “products”, and wanted to tax some of our
    hard-earned salaries.