Borrowing and house prices threaten to return us to 2008

I STILL remember the look on my colleague’s face when on returning to the office after a two-week holiday I asked her what I’d missed.
Jeff Salway. Picture: Jane BarlowJeff Salway. Picture: Jane Barlow
Jeff Salway. Picture: Jane Barlow

At first she looked astonished, then she asked if I was joking. She had good reason to. I’d somehow managed (deliberately) to avoid the news entirely while I was away – and that month, October 2008, was somewhat eventful.

The financial turmoil that had unfolded during my break wasn’t exactly a surprise. A month earlier, a year after the collapse of Northern Rock, Lehman Brothers had triggered the next wave of panic when it filed for bankruptcy. HBOS was rescued by Lloyds TSB just two days later after a run on its shares.

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But perhaps the biggest shock in this part of the world came on 13 October, 2008, when the government was forced to rescue Royal Bank of Scotland, Lloyds TSB and HBOS.

Six years later the repercussions of those events and of the wider financial crisis are still being felt, and will be for years to come.

The economy remains hooked on quantitative easing and it’ll be years before it’s withdrawn entirely. Interest rates, which were cut in October 2008 to 4.5 per cent, have been at 0.5 per cent since March 2009.

The impact on ordinary savers has been brutal at a time when wage inflation has stalled and household bills have soared. The main story on this page highlights the impact this could have when interest rates start to rise again.

Unfortunately, the IMF warned on Wednesday, the global economy’s continued reliance on low interest rates is among the greatest threats to its stability, due to the risky borrowing and investing it encourages.

Nothing new there. Nor, sadly, is there much that’s really new in the banking system that came so close to meltdown.

Very few of those responsible for the crisis, or various scandals before or since, have been held to account and none have faced criminal proceedings. Last week saw two non-executive directors at HSBC flounce out in protest at strict new rules for board members that are designed to help prevent a repeat of the crisis.

HSBC has also been vocal in lobbying against the government’s ring-fencing proposals, which are aimed at protecting retail bank customers from the riskier investment banking operations. They aren’t due to take effect until 2019.

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Meanwhile, the government sees no problem with creating another debt-fuelled boom in which house prices in many areas of the UK will again soar to levels from which they can only crash, with disastrous consequences for homeowners.

No wonder so many respected pundits are warning that a failure to learn from the crisis leaves us at risk of a re-run that could be even more catastrophic. Martin Wolf of the Financial Times writes in his new book that another crisis is “more or less inevitable”.

Little wonder that confidence in the economy and the banking system remains fragile. That the Prudential Regulation Authority last week moved to bolster the Financial Services Compensation Scheme is probably no accident. It proposed to increase the FSCS limit for annuities from 90 to 100 per cent of the fund and to protect savings of up to 
£1 million where money has been deposited temporarily (such as after a windfall).

However, it still won’t clear up the biggest consumer confusion over the FSCS. Currently it applies per banking licence (or PRA authorisation), and not per banking brand. So if you have cash deposited with Bank of Scotland, Halifax and AA Financial Services, for example, the total protection is only £85,000 as they all share that same Lloyds Banking Group licence. Clearly it would be better for transparency and consumer understanding for the guarantee to operate on a per-brand basis, but the FSCS continues to resist this.

It might seem trivial now, but six years after Scotland’s biggest banks hit the wall we need to learn every painful lesson we were taught, because too little has been done to prevent it from happening all over again.