Bill Jamieson: Crisis or correction? Either way get ready for more trauma

The widely criticised mortgages of Northern Rock were mostly repaid. Photograph: Neil Hanna
The widely criticised mortgages of Northern Rock were mostly repaid. Photograph: Neil Hanna
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Ten years on from the great financial crisis and many articles and TV broadcasts have reminisced on the darkest days of 2007-09. “A crisis that changed the world” is the popular summation. Our financial system and economy were shaken to their foundations. Its destructive effects can still be felt.

My lasting memory was of the deep foreboding that marked many commentaries at the time. These featured dark prophesies of a severe and sustained depression; of western economies gravely if not terminally wounded and high unemployment persisting for a decade and more. The stock market? Few would dare trust it again.

Banks collapsed and some of the biggest institutions such as HBOS and RBS were rescued by the taxpayer. Thousands of businesses suffered as lenders rushed to pull in loans. A housing market collapse was widely predicted.

The word on everyone’s lips – now as it was back then – was “crisis”. But how devastating did it prove? Was it, as some believed, a crisis that would take a generation to recover? Was the world permanently changed?

Today, the calculation of damage and impairment persists, a prolonged grief over losses suffered and what might have been. Of course there is permanent damage. Banks still struggle with non-performing loans. The credit seizure destroyed not only thousands of small businesses but also the wherewithal of their owners and their families.

But did we really experience a “crisis” that was fateful? Or a severe but necessary correction to a period of excess, without which there would indeed have been a global crisis like no other?

Ten years on we can see from World Bank data that the global economic heart did miss a beat. World GDP growth plunged from 4.25 per cent in 2007 to minus 1.7 per cent in 2009. America’s economy suffered a GDP slump of 2.7 per cent. In the UK the shock was more severe, with GDP contracting by 4.3 per cent.

Most underestimated the capacity of central banks to slash interest rates – and keep them low for so long. For as marked as the plunge was the recovery. In 2010 the global economy rebounded by 4.3 per cent. And last year, despite a China slowdown and geo-political worries, growth was a respectable 2.4 per cent.

In America growth is now running at an annual rate of 2.6 per cent. In the UK the economy quickly regained growth momentum, with GDP rallying to 3.7 per cent in 2014 – though it has cooled since.

What of employment, where sustained misery was predicted? In the US unemployment is down to 4.4 per cent, its lowest since 2001. In June, the economy recorded the 81st consecutive month of job growth.

In the UK we now have more than 32 million people in work, lifting the employment rate to 74.9 per cent, the highest since records began in 1971. Unemployment has fallen to 1.49 million, taking the rate down to 4.5 per cent, the lowest since 1975.

Nor has Scotland missed out, despite the traumas suffered by its two largest banks. The employment rate is 74.1 per cent and unemployment down to 3.8 per cent, lower than the rate for the UK.

What of business births and deaths? Did the events of 2007-09 not inflict lasting damage and destroy the confidence of entrepreneurs? After the traumas in the financial sector and the panic as banks pulled in loans, business births soon recovered. According to ONS data, by 2015 business births had recovered to 383,000 – the highest number since records began in 2000. Here in Scotland business births rose from 15,530 in 2010 to 21,235 in 2015.

As for business deaths across the UK, the rate was down to 9.4 per cent that year, the lowest since 2006. And business births have exceeded business deaths every year since 2011.

What of house prices, where a sharp and sustained fall had been widely predicted? Today the Halifax puts the average price of a home at £219,266, or 10 per cent above their August 2007 pre-crisis peak. Indeed, the average price is now more than £64,000, or 42 per cent, higher than its low point of £154,663 in July 2009.

Soaring mortgage defaults and arrears were also widely feared. UK home repossession rates indeed rose from 25,000 in 2007 to 45,000 in 2009 before subsiding in 2013 to 0.07 per cent of all mortgages – much lower than the previous house bust in the recession of 1991 when repossessions rose to 75,000.

Banks, of course, suffered – losing billions in sub-prime loans. But was the damage as wholesale as often depicted? According to a recent report by credit agency Moodys, 92 per cent of the 81,002 AAA-rated structured finance securities issued between 1993 And 2016 repaid their investors in full, without missing an interest payment. The widely criticised mortgage deals of the stricken Northern Rock were mostly repaid in full.

Lloyds Banking Group, having spared the government a massive rescue by taking over HBOS, has been returned to private ownership, the government shareholding repaid in full, and dividend payments resumed. Barclays, which resorted to help from Qatar, has repaid this in full, interest payments met, with the Qataris bowing out with a handsome profit. RBS, whose headlong acquisition expansion hit the buffers, has had to downsize drastically and its share price is still way below what the government paid. But it is building its core domestic retail and corporate lending presence and the brand name survives.

And the stock market? In the US and the UK, share prices have since hit all-time highs.

Was the meltdown of 2007-09 caused by securitisation, global imbalances, lack of transparency, faulty rating agencies, mark-to-market accounting, deregulation, failure of risk management systems or fateful “black swans”?

All of these. But the greatest failure was human: the reckless use, misunderstanding and ignorance of financial instruments. There was government failure too: the US politically driven push into sub-prime lending to households who were ill-equipped or simply unable to meet the monthly outgoings once the starter discounts expired.

We grossly underestimated all this – just as we underestimated the ability of the economy and the financial system to respond, adapt and correct. The legacy is a massive government debt pile.

Will there be another such trauma? Certainly. Confidence, exuberance, group think, excess and delusion are permanent features of the human condition.