The history of the credit crunch continues to be rewritten

Today is a day for central bankers as both the Bank of England and European Central Bank declare the results of their latest policy decisions. However it will be a Super Thursday only in name as  the main news concerning the Bank of England this week has been the extension of Governor Carney;s term by seven months to January 2020. A really rather extraordinary move on both sides, as we mull not only the possibility of future monthly or even weekly future extensions,, and on the other side what happened to the personal circumstances that supposedly stopped him staying for longer in the first place?

Moving to the ECB the rumour yesterday was that its economic forecasts will be revised down slightly which is likely to reduce the rhetoric about the Euro area economy being resilient. But apart from that there is little for it to do apart from play down the recent news about money laundering via banks being rife in some of the smaller ( Malta and Estonia) Euro area countries. President Draghi may also repeat the hints he keeps providing that he has no intention of raising interest-rates n his term of office. This may have a market impact as more than a few have convinced themselves that a 0.2% rise is due this time next year. Apart from the fact that the ECB changes interest-rates by 0.25% and not 0.2% the apparent slowing of the Euro area economy makes that increasingly unlikely.

Rewriting History

This week has seen a lot of reviews of the crash of a decade ago but the most significant comes from the man at the centre of the response which was Ben Bernanke of the US Federal Reserve. He has written a paper for Brookings which to my mind illustrates why central banks have put so much effort into raising asset and in particular house prices.

Recent work, including by Atif Mian and Amir Sufi, proposes that the accumulation of debt during the housing boom of the early 2000s made households particularly vulnerable to changes in their net worth. When house prices began to decline, homeowners’ main source of collateral (home equity) contracted, reducing their access to new credit even as their wealth and incomes declined.  These credit constraints exacerbated the declines in consumer spending.

Or if you want the point really rammed home here it is.

Mian and Sufi and others attribute the economic downturn in 2008 and 2009 primarily to the boom and subsequent bust in housing wealth,

Thus central bankers including Ben decided that the response to the bust in housing wealth was to create another boom. Many of them including Ben himself did so well before the paper he quotes was written. For example the US Federal Reserve bought mortgage-backed securities as follows.

From early 2009 through October 2014, the Federal Reserve added on net approximately $1.8 trillion of longer-term agency MBS and agency debt securities to the SOMA portfolio through its large-scale asset purchase programs. ( New York Fed).

Thus we see than Ben Bernanke is being somewhat disingenuous in pointing us to a paper written in 2014 when he made his response in 2009! Anyway there is a statistic you may like in the paper.

that the total amount of debt for American households doubled between 2000 and 2007 to $14 trillion?

The banks

They would have been helped in a variety of ways by the response to the credit crunch. Firstly by the large interest-rate cuts and next by the advent of QE ( Quantitative Easing) which helped them both implicitly by raising the value of their bond holdings and explicitly via the purchase of mortgage debt. Some were also bailed out and that mentality seems to be ongoing.

 We need to make sure that future generations of financial firefighters have the emergency powers they need to prevent the next fire from becoming a conflagration. We must also resist calls to eliminate safeguards as the memory of the crisis fades. For those working to keep our financial system resilient, the enemy is forgetting.

That is from an opinion piece in the New York Times from not only Ben Bernanke but the two US Treasury Secretaries which were Hank Paulson and Timothy Geithner. What powers do they want?

Among these changes, the FDIC can no longer issue blanket guarantees of bank debt as it did in the crisis, the Fed’s emergency lending powers have been constrained, and the Treasury would not be able to repeat its guarantee of the money market funds. These powers were critical in stopping the 2008 panic.

In other words they want to be able to bailout and back stop the banks again. Or if you prefer take us back to the world of privatising profits and socialising losses. For the establishment in the US that worked well as the government made a profit and the banks were eventually able to carry on regardless. Indeed the next stage of fining banks also was something of an establishment merry go round as you can argue that it was just another way of the banks repaying the establishment for the bailouts.

On the other side of the coin ordinary people did lose money. Some had their homes foreclosed on them and others lost their savings. The unfairness of this arrives when we look at bank shareholders who had losses. In itself that is not a crime as by being shareholders they take a clear risk. But the rub is that the losses were driven by a combination of fraud and malpractice for which so few have been punished. If we move onto the bank fines we see that yet again punishment hit bank shareholders whereas bank executives might see a lower bonus but otherwise remained extremely well rewarded. We are back to the theme of the 0.01% being protected whilst the 99.99% bear any pain.

Putting it another way here is former Barclays boss Bob Diamond from the BBC website earlier.

Former Barclays boss Bob Diamond has said he fears banks have become too cautious about taking risks.

Mr Diamond told me the risk-averse culture means they can’t support the economy and generate jobs and growth.

Support the economy or bankers pay?


Here is perhaps the biggest rewriting of history as we return to the thoughts of Ben Bernanke at Brookings.

“There’s some folks who don’t like QE, and as each argument fails, they move down the ladder. And so now you have hedge fund managers writing in the Wall Street Journal how QE is creating inequality as if they cared.”

You may note that there is no actual denial that QE creates inequality. Frankly if you boost asset prices which is its main effect you have to benefit the asset rich relative to the poor. However back in March the Bank of England assured us this.

Monetary policy had very little effect on overall inequality

How? Well let me show you their example of inequality being unaffected.

 But it is worth noting that existing differences in net wealth mean that a 10% increase for all would equate to £200 for the bottom decile and £195,000 for the richest.

Apart from anything else this was awkward for the previous research from the Bank of England which assured us QE had boosted wealth for those with pensions and shareholders. I guess they were hoping we had forgotten that.


The last few days have seen quite a bit of rewriting history about the credit crunch as the establishment wants us to forget three things.

  1. It was asleep at the wheel
  2. Those who caused it got off scot free in the main and were sometimes handsomely rewarded whereas many relative innocents suffered financial hardship.
  3. The response not only boosted the already wealthy but contributed to an economic world of struggling real wage growth

The first problem will recur we know that in spite of all of the official claims to the contrary. As to the response one issue is that those in charge are invariably unsuited to the role. They are picked out of academia and/or the establishment and suddenly find that they go from a cosy slow-moving world to one that is exactly the reverse, so we should not be surprised if they act like rabbits caught in a car’s headlights. So on that score I think we should cut Ben Bernanke some slack but that does not eliminate points two and three which are critiques of the economic regime he implemented.

Also if we stay with central banks it could all have been worse as imagine you are at Turkeys central bank the CBRT deciding how much to raise interest-rates and you read this!

Erdogan says must lower interest rates ( @ForexLive )





37 thoughts on “The history of the credit crunch continues to be rewritten

  1. These people will never confess. They cannot. If they do that will call into question their right to govern us and it is this “right” which gives them power and riches.

    However, folk are now much less trusting than ten years ago; they may not be more powerful in actual fact but they are aware where the blame lies. You can see this in the growth of populist movements in the EU and the same goes for developments in the US; whatever your views of Trump he was the “outsider” candidate against “insider” Hillary Clinton.

    If we have another crisis, inevitable in my view, they will indeed use the bail out option again, despite in the EU the existence of bail in as mandatory. If this does come about then the political temperature will go up several notches because there will be considerable resistance to a repeat of the previous (failed) solutions.

    • Hi Bob J

      The simple truth is that the advent of “independent” central banks allowed a swathe of measures that would have been rejected if implemented by politicians. Was that always the plan? No as I do not think that they are that bright. But the establishment trend is always to push the boundaries and the rules. It turned out that the new class of central bankers were able to push things much further than anyone dreamt of.

    • Hi Chris A and thanks for the link

      I have two thoughts for you. The first was made by Mario Draghi in today’s ECB presser that things started a year before Lehmans. He was probably thinking of Northern Rock when he pointed listeners/viewers to September 2007.

      As to nominal GDP targeting I am not a fan simply because it gets revised so much. I can recall more than a fee occasions in the credit crunch era when this has happened. A particularly large one was made in Spain in 2011/12. So you end up chasing what turns out to be the wrong number.

      • Shaun – thank you for your response.

        As to the first question, it is really important to understand the reasons for the GFC, because if we don’t we may get another one. The current meme is that it was all to do with the greedy bankers with the US and UK property crash revealing nefarious practices. If that is the cause then maybe putting some more regulations (even more) regulations on property lending might prevent such a crash again. It is a cute morality tale (and I do think there were nefarious practices). But if the crash was actually caused by a fall in demand caused by tight money these regulations would have no effect at all, and we would have a crash again. This tight money causing recessions by the way isn’t a crackpot theory, it’s the main explanation in all the text books. Friedman’s Monetary History of the US explained how the Fed caused the 1930 great depression leading to Bernankes famous declaration that it was the Fed that done it. And then they did it again! The folk wisdom on the causes of recessions just isn’t backed up by any respectable theory.

        On the second question, of course all economic indicators are wrong, especially the ones immediately released. The answer can’t be to just ignore them. If you, as the central bank, see measured GDP falling or inflation rising you shouldn’t just shrug your shoulders and say it may be revised in the future. If you don’t use the indicators, then you rely on the “judgement” of the policy makers. You, of all people, don’t need to be told how unreliable that is. Do we really want our economy steered by Carney feeling a bit grumpy one day due to a row with his wife?

        So the question isn’t to ignore possibly unreliable indicators, it is to make them more reliable. One way to do that is to have the market forecast the future. Actually future predictions are a much better way to steer the economy than looking at the past. Nobody would steer their car by looking in the rear view mirror. So what is proposed are creating liquid trading instruments from which future NGDP growth rates can be inferred. The CB then observes market forecasts of NGDP say over the next year and adjusts monetary supply until the market forecast meets their target. We have seen in recent years that the CBs have been able to bring inflation down to their target level, and they are using inflation forecasts from inflation link bonds as part of this process. If they see market forecasts of inflation exceeding their target, they reduce money supply. We can do the same with NGDP.

        • Many believe the cause was that the Fed had to tighten after a period of having interest rates TOO LOW, as sub-prime mortgages defaulted.

  2. Long I must have lived for I saw a billion become the new million and trillion become the new billion, someone’s doing OK and not me more’s the pity. Looking at all the self righteous justification of the central bankers I found me, myself I humming this.

    I just need space to do me get a world that they’re tryna see
    A Stella Maxwell right beside of me
    A Ferrari I’m buyin’ three
    A closet of Saint Laurent, get what I want when I want
    ‘Cause this hunger is driving me, yeah
    I just need to be alone,

  3. Do the ECB forecasts allow for the bankruptcy of the Republic of Ireland following Brexit?

    I only ask because the EU seems to be suggesting that Brexit means a hard border with the UK in Ireland and there cannot be a hard border in Ireland and a soft one at Holyhead.
    70% of Ireland’s trade with mainland Europe uses the Holyhead-Channel Ports land bridge, and I believe that rise to approx. 85% when UK trade is factored in.
    Sure the EU has plans to divert from Holyhead to Belgian and Dutch ports, but the infrastructure has been estimated to cost more than €30bn and will take years to put in place.
    Meanwhile Ireland goes back to the Stone Age.

    • I have always suspected this is the real reason for all the noise over a ‘hard border’ between ROI and NI. It is tantamount to blackmailing the UK into staying in the single market precisely to allow ROI free access to the continent.

      I don’t have a problem with Irish trucks using the UK but they must be made to pay to use our infrastructure (UK taxpayers have provided it after all).

      Any disruption to Ireland will push their debt dynamics of a cliff and as they are in the EZ it could bring the lot down

      • I also heard that Ireland was trying to get a separate agreement with Brussels that this arrangement could continue (forgetting that is actually the UK to decide who or what transits its territory no else’s the very essence of sovereignty)

        • Trouble is, as was my point, it is not possible to have two forms of border with one country.
          The EU cannot eat its cake and have it.

          • Exactly, they want the precedent set (i.e. soft border between NI and ROI means we have to implement the same at Holyhead)

            They don’t seem to get though that will also mean a soft border at Calais, Dunkirk, Zeebruge and Rotterdam. Still knowing the EU they have not thought that far ahead just hoping the UK will fold.

            It is (just) dawning on them that this is not the case (despite all the remainer noise). You would think after all the history between UK and the continent they would know what a stubborn bunch we can be once our backs are up.

  4. Hello Shaun,

    As basically nothing has changed since 2008 then I’d say that

    3,The response not only boosted the already wealthy but contributed to an economic world of struggling real wage growth

    Job’s a good ‘un then! 😉


  5. ” But it is worth noting that existing differences in net wealth mean that a 10% increase for all would equate to £200 for the bottom decile and £195,000 for the richest.”

    If that increase is caused by asset value increases as you suggest, I am struggling to think of any asset held by the poorest decile that would increase in value at all. For them it probably just means that I will be looking for a higher rent.

  6. As all central banks employ main stream classically taught economists – basically Keynesians – nothing will change.
    Is it a coicidence that economics has being hijacked and totally controlled by Keynesian group think?, or is it more to do with the fact that those policies are of convenience and benefit to banks by always demanding a growth in the money supply during both recessions and booms and therefore no other school of thought is allowed to be heard?

    • Hi Kevin

      The central banks have certainly been taken over by group think. On that subject I have pointed out on social media that first time buyers would welcome the 35% house price fall that Governor Carney is currently warning about. Here is a reply from Christoph Thoenissen who used to work at the Bank of England and is now a Professor at the University of Sheffield.

      “The price of housing is an endogenous relative price. When it drops by 35%, we would be in an economy where no one is thinking about trading up.”

      I simply replied that I bought my flat from people who were trading up in just such a situation………

      • Shaun, do you really believe that if Carney really thought there would be a post-hard Brexit property crash of this proportion (which imv is another plus), he would have sought to extend his tenure?

  7. Gordon Brown warned today of a further financial crash and the Market Oracle say its already here:

    The Oracle cites John Lewis profits being wiped out in fact if you dig deeper John Lewis (excluding Waitrose) lost millions in its first half. To be frank about all this there is carnage on the High Street at the moment and it will get worse.

    Wages are still worse now than before the financial crisis if you take account of household inflation in the last 10 years things are dire.

    With borrowing increasing again people struggling I would tend to agree with the Oracle we are seeing a financial crisis before our eyes the only difference being no one is queuing up en masse trying to get their money out of the banks.

    However child poverty is terrible in this country and too far a margin between the rich and poor.

    Services at council’s cut to the bone in my Town residents are having to do the council gardens themselves!

    The UK hasn’t learnt that much they only way to dig the UK out of a hole is too boost production quickly before things get much worse.

    I have to say negative interest rates could be used to force people to spend but taxation needs to change as well before we get riots on the streets. Our Archbishop of the CEO been very vocal the last few days lets hope is message sinks in.

    • Gordon Brown says the world is sleepwalking into the next financial crisis and blames the dodgy mortgages (sub prime) in the US.

      But things are different now property prices have risen 50% i London people better off!

      As for equality:
      “You may note that there is no actual denial that QE creates inequality. Frankly if you boost asset prices which is its main effect you have to benefit the asset rich
      relative to the poor. However back in March the Bank of England assured us this.”

      The poor are always one step behind, the people with money can spot more opportunities.and act quickly.

      Economic theories need to be re-written what goes up in a unsustainable way must fall back at some stage water always falls to the same level.

      • Hi Peter

        One of the big problems is as I have replied to Kevin above, The central banks are riddled with group think and thus keep going to the same play book. So we seem set to keep going until the day it all blows up.

  8. According to the IFS wages have not recovered to pre crisis levels:

    The institute’s analysis shows median annual earnings fell to £23,327 last year, 3.2% lower than in 2008 when the average wage was £24,088.”

    Then this:

    “The IFS said that had incomes continued to grow at the same rate as the decade before the crash, the average household income would now be £29,900, £4,200 higher than it is.

    Some food for thought:
    If you key in £24,000 into the Money Mail inflation calculator, a £24,000 median wage in 2008 should amount to £31,685.52 today

    I always fancied forensic accountancy but wasn’t bright enough I thought, however the calculations speak for themselves and show why people feel worse off.

    • Wage growth on a historic basis is one argument wages keeping up with inflation is another argument.

      If one take account of the inflation calculator the median worker on £24,000 wage in 2008 is £7,685,52 worse off today!

      Now you know why the High Street is in such a dire state!

      • Question for Shaun if he has time. Any idea which methodology the Mail use in their inflation calculator whether it be CPI or RPI ?

        The difference could make a material difference to my calculations as to how badly off people are today compared to 2008.

  9. Hello Shaun

    This statement :-

    “In other words they want to be able to bailout and back stop the banks again. Or if you prefer take us back to the world of privatising profits and socialising losses. ”

    this is the most chilling of observations

    the TBTF Banks must still be bust ( this is my belief ) as no laws have been changed, no one brought to book ( like Iceland – chrislongs ) and all that money pumped into them by CBs has show nothing…..

    interesting times – we’re in for another spike in oil prices too – that will put the cat among the pigeons !!


    • Hi Forbin

      Brent Crude Oil did go above US $ 80 yesterday but seems to have calmed down since. I would imagine that is due to the downgrade in the hurricane that is about to hit the US east coast. As to the next big move I am not sure as so much depends on what happens next with Iran.

  10. Tip to Erdogan: appoint either Bernanke or Mark Carney, they will eagerly do your bidding….i.e. precisely nothing and print money for you.

  11. Great blog as usual, Shaun. It is bizarre that Bernanke, who introduced inflation targets to the US Fed in 2012, doesn’t even mention them in his paper. If the US Fed had been an inflation-targeting central bank in the noughties, targeting a consumer price series with a net acquisitions approach to owner-occupied housing and with a 1.0% or 1.5% inflation target, it is inconceivable that either the housing boom and bust or the financial crisis would have unfolded as they did. If they happened at all, the consequences would not have been so severe. However, in his conclusions, Bernanke seems to be preoccupied with reforming financial regulations. There’s nothing wrong with this, but he should really give more thought to reforming monetary policy.
    Re Carney, did you notice that he was referenced by the chair of the House of Lords Select Committee Lord Forsyth of Drumlean when the Committee interviewed Philip Hammond on Wednesday?
    Lord Forsyth said: “Chancellor, we hope to produce our report [on the RPI] in the autumn, as you said. Actually, we got on to this because the Governor of the Bank of England said in his evidence that a 10-year transition period, after which new and existing index-linked gilts have been switched away from RPI, might be desirable.” This really stuck in my craw. Pace Carney, the only time the Government of Canada Real Return Bonds, our equivalent to UK gilts, ever transitioned from one index to another was when the RRBs went from one index base to another, and there was no transition period at all. It all happened on June 19, 2007. Carney was at the Department of Finance then, and although both DOF and the Bank of Canada announced the switch, the date was chosen by Statistics Canada to meet its own needs. I sent the Committee a copy of my paper “Governor Carney’s Evidence on Consumer Price Indices before the House of Lords Economic Affairs Committee” but the official who contacted me refused to pass it onto the Lords, so it seems they still have no clue what went on in Canada. Later the Committee did publish a written submission I sent it on the RPI but the word limit was tight and I made no mention of the RRBs. The whole idea of a 10-year transition period is ridiculous. I can’t see why the UK couldn’t stop issuing gilts based on zombie RPI one day and start issuing gilts based on zombie RPIJ the next, and dezombify both of them.

    • Hi Andrew

      I am glad you were following this as it links into something I spotted on Twitter from Chris Giles of the FT.

      “Hammond invites ONS to come and talk to him about RPI
      Good news
      – He correctly says it is up to ONS to produce accurate statistics and keep them up to date
      Bad news
      – He doesn’t seem to worry too much how unsatisfactory the situation is”

      What is missing from that is of course that the most unsatisfactory part of the UK inflation infrastructure is the woeful CPIH inflation measure which Chris was previously such a vocal supporter of and of course he voted for when a member of CPAC. Also that sadly the ONS has produced more propaganda than proper research on this subject.

      In other news I too wrote to the Lords Econ Committee although due to my surname I am a lot lower down the list than you!

  12. Superb stuff Shaun. Perhaps TPTB hope the plebs will one day realise if they hadn’t been so focussed on trying to make money from property non of this would have happened. Gee . The bankers simply compound their mess with (dare I say) alternative facts.

    But, being bankers, they like compounding…..

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