Читать книгу What on Earth is Going On?: A Crash Course in Current Affairs - Arthur House - Страница 18
ОглавлениеWhat does it mean?
A ‘credit crunch’ is a financial crisis in which banks refuse to issue credit, i.e. lend any money, to other banks. Where they will lend, for example on mortgages or credit cards, they raise interest rates; this makes it expensive to borrow money, which slows economic growth. The term is often used to refer to the global economic downturn that started in 2007, though the tightening of credit itself was only part (albeit a crucial part) of the wider economic catastrophe.
What caused it?
The credit crunch actually had its roots in a credit binge, an unprecedented borrowing spree in the US and Western Europe from 2003-7. In 2001, interest rates were set low to let the markets recover from the effects of two disasters: 9/11, and the
bursting of the dotcom bubble (a financial crash caused by overheated speculation in internet and technology companies). Low interest rates made it very cheap to borrow money, and the US and UK in particular borrowed record amounts during this period (it was estimated in 2009 that the total debts of the US and the UK were three times as large as their combined GDP, or annual economic output). The money came from the growing economies of China, Russia and the Middle East, where people were saving instead of spending, and it filtered through the global banking system and ended up in the West as loans. Businesses and private equity firms borrowed money to expand or buy up other companies, and individuals used it to take out mortgages or buy consumer goods. The biggest borrowers were the banks themselves (in particular the investment banks of New York and London), which borrowed—or ‘leveraged’ themselves—on a massive scale. But the influx of all this money resulted in a bull market; businesses were performing well and their shares collectively rose. This put pressure on companies to continue borrowing, as their shareholders expected them to keep up with or outperform their rivals to maintain their high share prices. Meanwhile, house prices were rising, which created a property bubble; easy access to cheap credit kept driving prices up and encouraging yet more borrowing. Those already repaying mortgages also borrowed money in the knowledge that the value of their house was rising above its mortgage value. Everything was rosy, as long as it all kept going up.
What about sub-prime mortgages?
In the US, banks and building societies began loosening their lending policies, with many offering 0% downpayments on mortgages so that borrowers weren’t required to stump up any initial capital for their new home. This attracted many people in the ‘sub-prime’ category—those to whom credit would normally be denied because they were considered at risk of defaulting on repayments. With no capital invested, the sub-primers had nothing to lose and everything to gain: if house prices continued to rise, they would make money for nothing; if they fell, they could default on their repayments and declare themselves bankrupt (which carries little stigma in the US). Sub-prime borrowers were also attracted by, and in some cases mis-sold, ‘adjustable’ or ‘floating interest rate’ mortgages, many of which offered low rates for the first couple of years. While interest rates were low, floating rates seemed like a better deal than fixed rates to borrowers who were unaware of the risks involved.
Why on earth would the mortgage lenders want to offer mortgages to these people?
For two reasons. First, if the mortgage holders did default, the lenders could take possession of the house and sell it on for a profit in the rising market. Second, lenders didn’t usually hang around until the defaults happened; they sold the mortgages on to other financial institutions round the world and reinvested the money they got in return. One method of selling involved slicing up these debts and packaging them together with other pieces of debt in financial products such as Collateralised Debt Obligations (CDOs). These were a recent innovation, and often so complex as to mask the true levels of risk inherent within them, but the market for these grew quickly, with more exotic types being developed and staggering amounts of money changing hands between banks, pension funds and hedge funds during this period (£3 trillion worth of CDOs were sold in 2006 alone). The banks were making huge amounts of money by operating increasing degrees of leverage to magnify their returns, all the while exposing themselves to greater and greater risk. At the bull market’s peak some investment banks were borrowing up to 100 times what they had in capital, which meant that a mere 1% downturn in asset value would be sufficient to wipe that capital out.
…and it all ended in tears
The US housing bubble finally burst when people realised how much the market was overvalued, and house prices started to fall. Interest rates were already on the rise, sparking the first wave of sub-prime defaults in late 2006. By March 2007 Wall Street was panicking, and by August the crisis was beginning to unravel across the world. Banks that had bought mortgage-backed securities (including those in the US, UK, Germany, France and Australia) realised that they, and the credit-rating agencies that they had employed, had massively underestimated their exposure to risk. No one wanted to buy securities any more, and their market value plummeted, along with the share prices of the companies that held them. The financial institutions that had lent the vast sums to the banks now wanted to ‘deleverage’ themselves and turn their loans back into capital. In other words, they wanted their money back. Some of the banks in question faced insolvency (not being able to pay back their creditors) and many had liquidity problems (not having enough available money to meet their day-to-day needs). Banks no longer trusted one another and refused to lend to each other; the credit crunch had set in. No bank was beyond suspicion of going bust as a result of the ‘toxic debt’ that potentially lurked within them.
February 2008 saw the first bank run in Britain in 150 years as Northern Rock fell victim to the credit crunch—it ended up having to be nationalised by the British government. The bank wasn’t riddled with sub-prime debts, but it had relied for 73% of its funding on loans from international money markets, so when these froze up it had nowhere to turn but the Bank of England. Next to go was US investment bank Bear Stearns in March, which was bought up by JP Morgan after its share price plummeted. The summer break provided a brief respite, but in September heads really began to roll. American mortgage financers Fannie Mae and Freddie Mac were bailed out by the US government in the biggest nationalisation in history; Lehman Brothers was allowed to collapse (which caused even more panic); insurers AIG were bailed out by the Federal Reserve; Bank of America bought out Merrill Lynch; Goldman Sachs and Morgan Stanley surrendered their status as investment banks and Washington Mutual went into receivership. In the UK, Lloyd’s took over HBOS and Bradford & Bingley was nationalised, while the Icelandic government was forced to nationalise its three biggest banks and the turmoil spread around Europe. By early October the global banking system was on the verge of total meltdown, needing enormous cash injections from governments worldwide to keep it functioning. Interest rates were cut to encourage borrowing and lending, but the world slid into recession nevertheless: companies went into administration, demand for goods slowed, jobs were cut and house prices sank, causing widespread negative equity and further mortgage defaults.
British banks were £740 billion in debt, prompting Gordon Brown to pledge taxpayers’ money to recapitalise them to stop them going broke, and provide them with short-term loans and loan guarantees to encourage them to start issuing credit again. He also set up an Asset Protection Scheme, a sort of insurance policy for the banks in which the UK government absorbed further losses from toxic debt exposures in exchange for a fee. By May 2009, it was estimated that British taxpayers owned 65% of the merged Lloyd’s-HBOS and 95% of Royal Bank of Scotland (the largest company in the world by asset size), which had suffered the biggest loss in British corporate history the previous year.
What’s going to happen next?
Opinion is divided over what lies in store. Some were already claiming to see the ‘green shoots’ of recovery as early as spring 2009, while others fear that the problems are much more deep-seated, and that the recession will last many years. Some economic analysts are proclaiming the end of the ‘turbocapitalism’ of the last 20 years—seeing a continued role for governments in global finance and tighter control of credit and leveraged risk in the future—while others see the credit crunch as a turning point in the balance of world power, as Western economic hegemony ends and the pendulum swings decisively over to China and South Asia.
‘When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.’
Citigroup Chief Executive CHUCK PRINCE, July 2007, a few weeks before the bank was crippled by sub-prime mortgage exposure that led to it losing $32 billion
