First published in the Telegraph on 5 January 2009
Daddy, what did you do in the credit crunch? As we sit around the embers of the financial system it is time I got something off my chest: I must take some responsibility for the economic crisis. This may come as a surprise to friends and acquaintances, given how many hours I have spent over the past year droning on that journalists cannot be blamed for recession.
I don’t agree with the hysterical moaning that newspapers are to blame for denting public confidence and sowing the seeds of economic doom. This is rubbish. If people took that much notice of headlines they would have sold their homes en masse three or four years ago when so many of us started warning that property prices were heading for a slump.
But we were guilty of a more fundamental failing – one about which most of the financial press has remained shamefully silent. We should have made more noise about the risks of a crisis before it erupted.
And I feel this more keenly than most. You see, I was among the few writers privileged to have been shown the evidence that the crisis was heading our way – more than a year before its earliest impact.
I remember the moment that I twigged that something was wrong. I was sitting in a wood-panelled room in the Bank of England on a rather warm July morning. In front of me were three of the Bank’s leading experts in financial stability – the emergency room surgeons of the City. On the table was an intriguing chart. What it seemed to be saying was rather alarming, or at least that is how it struck me.
Cast your mind back to summer 2006, when the idea of a run on a British bank was among the most peculiar conceits imaginable. Although we had issued plenty of warnings on the levels of debt being taken on by anglophone households around the world, the notion that the entire British banking system could, in little more than a year, find itself on the brink of collapse would have sounded ridiculous. But on this chart was a wiggly line screaming that something was going very wrong: the banks and building societies were lending significantly more than they had in their vaults.
Wasn’t this, well, a bit of a worry? I asked (in the Bank of England understatement is the modus operandi – or at least it was then). The faces that stared back looked drawn, fearful and rather weary. They pointed me towards another set of figures, even more worrying. They implied that if there was an unexpected shock that made it difficult to fill that gap by borrowing short term from other investors, home and abroad, the consequences would be disastrous: we were talking about a year’s worth of profits – pounds 40 billion – being wiped out; about house prices falling by a quarter and the economy shrinking by 1.5 per cent.
The boom went on for another year and a bit, and the eventual slump looks like being even worse, but the fact remains: there was a distinct bat-squeak of worry in the Bank of England in 2006 – and it was more or less ignored. Granted, the Bank had not identified all of the details, nor precisely how this crisis would become the worst since the Great Depression, but it did enough; it identified the root cause of the credit crunch.
So what went wrong? There was enough time to have prevented Northern Rock from embarking on the horrendous borrowing and mortgaging spree that led to its destruction; enough time to have ensured that a fatal breath was blown into the housing bubble; enough time to ensure that while a slowdown was inevitable, it needn’t have been so panicked and painful.
The large part of the answer was the failure of the Bank’s experts to send out a louder clarion call to chief executives; the failure of Gordon Brown to take seriously this threat, relayed directly by his central bank; the failure of City regulators to turn this worrying little chart into action.
It was the media’s duty to make more noise, to scream rather than mutter our worries about the instabilities of the economy. We did our fair share of screaming – in fact, we made rather a lot of that Bank of England report in 2006 – but in hindsight we all ought to have done more. The politicians and policymakers who ignored the warnings might not have been able to so had the commentators and analysts in the City made it too embarrassing for them to have done otherwise.