Current mood:
worried Category: News and Politics
She also had the guts to face up to the IRA and allowed Bobby Sands to die of hunger strike in the Maze prison, a policy that I wholeheartedly
applauded.....
However she also introduced us to the new “Greed is good” philosophy, and famously once said “There is no such thing as society” when it is blatantly obvious that there is such a thing as society and its function governs our lives and well-being.
Thatcher believed that certain industries (especially banking) functioned better in a de-regulated environment. Prior to her
taking power, banks were strictly regulated in their ability to borrow and
create capital. By the time she departed in 1990, banks were practically unregulated and were allowed to borrow up to 10
times their liquidity ratio.
In addition, she opposed the general consensus of “mutuality”, a status that had created building societies and had prospered since the mid 1700’s. Mutuality meant that building societies functioned by offering decent saving rates to savers, and affordable mortgages
to borrowers, making a profit out of the difference between the two rates. There were strict regulations covering the amount that building societies could raise on the inter-bank markets, and their mutuality ensured that they were not chasing short-term profits to satisfy the stock market, as they were owned by their members (essentially the savers and borrowers) and any profits were returned to their members.
Thatcher passed legislation allowing these building societies to “demutualise” and offer themselves for sale on the stock market.
This was a fatal step and led ultimately to the collapse of Northern
Rock in 2007. Most building societies followed this route since it made the existing board directors extremely rich, and there was no short-term downside.
Unfortunately the long term downside was that these newly privatised building societies (Abbey National, Halifax, Alliance and Leicester,
Woolwich, etc) were now owned by institutional shareholders through stock market flotation and were now driven to consistently show short term profits. Those that stayed mutual (Nationwide, for example) were not in this boat and did not have to strive for continuous short term profits.
Those that did were subject to takeover (Woolwich, Cheltenham & Gloucester) and fought viciously between themselves to take a larger slice of the mortgage market. This led to a decline in the traditional
standards required of borrowers before they were prepared to grant loans. Whilst mutuals could and would only offer three times annual earnings as a maximum mortgage, “demutuals” would offer
seven or even eight times annual earnings in order to lend larger sums and generate larger profits. It also led to demutuals lending sometimes more than 100% of the house value, something that mutuals would never do, primarily because mutuals practised fiscal probity, and
had to raise capital from their savers.
The results? Well we see them all now – a massive increase in
house-prices, caused by the demutualised building societies extravagant lending policies, and the resulting credit crunch when it was discovered that many British building societies/banks had bought large slabs of sub-prime lending from US wholesale banks and did not have any capital assets in their balance sheets to be able to trade out of this mess.
This indeed is Thatcher’s legacy – her policy of unrestrained “greed is good” deregulation of the banking industry has led directly to the current crisis. If you are in any doubt, go and look up “derivatives” on wikipedia.
What’s needed now is nationalisation where necessary and a return to mutuality where such a route is possible. Banks should never again be able to trade without regulations.
 | Currently reading: Britain under Thatcher (Seminar Studies in History Series) By Anthony Seldon |
No comments:
Post a Comment