WHEN you are older than God, as I am, I think you tend to become rather blasé as yet another political or financial crisis unfolds. I was 23 and working as an impecunious bank clerk at Hill Samuel (now part of Lloyds Banking Group, for the youth among you) when I was exposed to my first financial crisis. I was at the Odeon Leicester Square watching The Longest Day in black and white, when up on the screen came the news that chancellor Jim Callaghan had been forced, on the orders of prime minister Harold Wilson, to devalue sterling against the dollar by 14 per cent from $2.80 to $2.40. In those days that was a major piece of news.
Remember, lines of communication were rather Heath-Robinson in terms of effectiveness. The quality of the financial press was at best moderate, there was no financial TV, Reuters was hardly above pigeon post in terms of effectiveness and who were Bloomberg? Wholesale money markets were relatively small, the Eurodollar market virtually non-existent and foreign exchange trading was limited, due to tough exchange control regulations (these were only abolished by my icon, Margaret Thatcher, in 1979). The 1974 recession, when the UK had the IMF hanging over its every action like the Sword of Damocles, was the most terrifying in my experience as it lasted four years and the level of communication was diabolical. The end of the world seemed nigh.
FROM THATCHER TO DOT.COMS
The Thatcher administration, when Sir Geoffrey Howe was chancellor, was obsessed with the measurement of money supply, while under the influence of Fed Chairman Arthur Burns, who dined out on its importance for years. I am less than convinced the Conservatives understood how to measure money supply. The end result was that official interest rates reached 17 per cent briefly and you could not get a mortgage of more than £30,000 for love nor money. In 1981 I bought a house in Islington for £39,000. I had to borrow the last £5,000 at 22 per cent, in the knowledge I could pay it off in one go with my bonus, despite tax still being 60 per cent, having just fallen from a top rate of 83 per cent. In the middle years life under Thatcher was good. Income tax was reduced to 40 per cent in 1988. But in October 1987 the stock market crash saw many markets fall by 30 per cent in three working days. Alan Greenspan had just taken over from Paul Volcker as chairman of the Fed and he walked straight into a hornet’s nest. Then came a period when the Fed chairman became a prophet. He was viewed as an expert not only on monetary policy, but on technological change, social security, fiscal policy, and other even more diverse matters until he handed over to Ben Bernanke in 2006.
There were other problems, which required significant dexterity, such as the stock market wobble, which triggered Greenspan’s “irrational exuberance” speech. That was followed 18 months later by the Russian credit crisis, which took its toll on the bond market. The world’s economy then made a real recovery, before selecting another gear with the advent of the TMT revolution – telecoms, media and technology. This saw stocks such as Amazon.com, Yahoo!, eBay, Cisco, Intel and Microsoft head off into the stratosphere with totally unrealistic earning ratios attached to their share certificates. Mega-mergers on Wall?Street gave added credence to investment banking activity, and a slew of IPOs and M&A activity contributed greatly to the excessive valuation froth.
RETURN TO THE PAST
The “TMT” bubble burst at the turn of the century. Between 2000 and the spring of 2003 stock market values fell 60 per cent, aided and abetted by the horrifying events of 9/11 and then the Iraq war.
Once the latter was over, stock markets recovered quickly and were flying high when Greenspan retired. Despite his advancing age, his reputation was intact and he started to supplement his pension with gargantuan speaking fees. Then the penny dropped and once the ravages of sub-prime lending had taken their toll, market protagonists realised Greenspan was a key architect of the credit crisis and the demise of the banking sector. At the turn of the century he had encouraged banks to lend money indiscriminately to all comers to beat the threat of recession, in a low interest rate cycle without proper regulatory controls. The rest is history.
The aftermath of the collapse of Bear Stearns, the gigantic, though necessary support for Fannie Mae, Freddie Mac and AIG and the irrational pulling-of-the-plug on Lehman Brothers were breathtakingly frightening. Who will ever forget, whether the support for saving some banks was the correct course of action or not, the incredible effort put in by the central banks in providing daily liquidity as well as orchestrating quantitative easing without the remotest sign of panic as well as great dexterity. The market owes these bastions of financial stability a huge debt of thanks.
Just as the world seemed to be making a fist of dealing with its problem, sovereign debt reared its ugly head. Governments and the consumer are over-borrowed and the matter needs dealing with. The crisis certainly did not need the assistance of incompetent EU political leadership. When will we ever learn?
David Buick works for BGC Partners in Canary Wharf.
• Victoria Bates is away.