Credit crunch redux: pointing the finger

Never one to fear accusations of flogging a dead horse, Jon Moulton was on Channel 4’s Dispatches programme last night to explain to us, once again, the credit crunch. But it wasn’t even the fact that we’ve had this debacle crammed down our throats for the last five months that irked me, it was the smug, gloating tone he reserved for the bankers. I’m sure a fine drinking game could’ve been invented out of that one episode, given the number of times the word “greed” was tossed about with a holier-than-thou smirk on his face. Is he himself not one of those “fat cats” he so readily blames for the downfall of Northern Rock?

In the other corner, “Mark” was just as quick to point the finger. “I blame Wall Street,” he says, “They knew what was going on.” And the homeowners didn’t when they were signing away their contracts? Ignorantia juris non excusat.

In the end it seems to me like there is plenty of blame to be dished out. At the consumers’ end, American subprime homeowners were willingly signing contracts that they would not be able to pay back: stupidity. The mortgage lenders were only rational in succumbing to a series of principle-agent problems and perverse incentives: greed. The credit rating companies whom all the banks trusted were too optimistic with their risk assessments of CDOs: miscalculation. Northern Rock, with their dicey business models, played a high-risk, high-reward strategy with no contingency plan. It gambled on ever-increasing house prices and freely-flowing credit, and lost – that was it. They got their high reward of being the most profitable mortgage lender before this whole mess, and now was the time for the high-risk end of the tradeoff to bite back. Personally I see an argument for allowing it to go bust on grounds of moral hazard, etc. but then one would have to balance that against the instability and chaos which would ensue.

Finally there’s Moulton’s favourite scapegoat: the tripartite system. Here the problem was that the Bank of England didn’t understand CDOs, the FSA misunderstood CDOs and the Treasury was too slow to react to the invasion of CDOs. On top of this there was a severe case of communication failure. Before this turmoil the FSA was praised for being light-touch in its principle-based regulatory procedure, it siphoned business away from New York and into London (though how much of that was already happening due to the SOx Act we’ll never know). The tripartite was essentially a high-risk, high-reward strategy with no contingency plan. (sounds like anyone else we know?)

Thankfully Moulton didn’t try to pass himself off as being non-partisan or apolitical. Subliminal messaging may have been banned but invasive, in-your-face advertising live on. “There is just one problem,” he says, brandishing a giant portrait of Gordon Brown around (eurgh!) “and this is it.” I’d love to see the approvals rating for the Labour party tomorrow. As faithful as I am to the Conservative Party, I despise their non-handling of Northern Rock which pretty much amounts to booing and jeering everything the government does. They offer no credible solution, and neither does Moulton.

What happens now is anyone’s guess. Interestingly enough, Kaletsky believes that nationalisation to close it down was the right move. The Economist is less harsh in its criticism of the government’s ditherings and hasn’t quite decided its stance yet. What’s certain is that the saga is only just beginning: this nationalisation is about as “temporary” as our troops stationed in Iraq.