You can argue for a long time about when the Great Financial Crisis actually began. But if you time its miseries from the moment the non-financial world got its first inkling that something was up, you’d probably go for 8 August, 2007.
This was the day on which the French bank BNP Paribas shut down investor access to three of its money market funds and stopped releasing calculations of its net asset values on the basis that “the complete evaporation of liquidity in certain segments of the US securitisation market” made it “impossible to value certain assets fairly”. They no longer had any idea of what the subprime mortgage related securities in their portfolios were worth – beyond a hell of a lot less than they used to be.
Not everyone grasped the significance of this immediately. Look back on the reporting of 8 and 9 August, and you will see bank spokesmen saying that there was no “systemic risk” in the system; that the US subprime market is not a “major issue” for anyone else; and echoing US Federal Reserve chairman Ben Bernanke’s comments from May on how rising mortgage defaults would result in no “significant spillover” to the rest of the US economy.
The run on Northern Rock started just over a month later; Lehman Brothers filed for bankruptcy a year after that; and Iceland’s three big banks collapsed in October 2008. The UK government bailed out its own big banks a few days later – a little over a year after the Bank of England concluded that “the UK financial system remains highly resilient with banks well capitalised and highly profitable”.
This was an extraordinary time. But fast forward ten years and you will, I think, agree that things are just as extraordinary now. Nearly a decade after I was first asked to explain on Radio 4’s Today programme what US mortgage securitisation meant for UK savers, we remain firmly in the crisis that securitisation created.
The main marker of this is interest rates. Every time I speak anywhere about the UK economy and stockmarkets I remind everyone that they should have a very long-term chart of UK interest rates pinned above their desks. That way, every time they start to think that we live in remotely normal times they can cast their eyes upwards and remember that in 2009 the Bank of England cut rates to the lowest in its 315-year history.
Andy Haldane, the chief economist of the Bank of England, reckoned in 2015 (with a fairly extraordinary list of sources) that rates were (and still are) the lowest they have been for around 5,000 years. If the world were normal – if the UK economy was normal – interest rates would be normal. I’m all for looking at economic indicators over the long term but I think it is fair to say that there is nothing normal about interest rates at 5,000-year lows.
It is also fair to say there is very little good about interest rates at 5,000-year lows. You could argue that low interest rates are a function of the effects of the crisis: low growth, high levels of debt and fragile consumer confidence make it impossible for central banks to normalise. In his 2015 speech, Haldane blamed the need to keep rates low on “dread risk” – consumers and companies being so terrified of a re-run of the crisis that they are unable to spend and invest in an economically sensible way.
However it might make more sense to look at it the other way round. Perhaps it is low rates themselves that are causing most of our problems. The knowledge that rates are lower than inflation – that cash in a deposit account is worth less every year – has created a dread risk among savers that they will never accumulate enough to live at all, let alone live well in their retirement. This is compounded by the constant shifting of the state retirement age. I’ll have been a net taxpayer in the UK for 47 years by the time I finally qualify for a state pension.
Record-low interest rates have also created asset-price booms across the board in a bonanza for those already well off enough to take the risk of investing – in stocks, bonds and houses. Companies have been encouraged to indulge in financial engineering above productive long-term investment (why bother with the difficulty of the latter when the former can make you lots of very quick bucks?). This is good for share prices, and bad for productivity, wages and GDP growth.
At the same time, cheap capital has been one of the factors reducing the supply of equities available for ordinary investors to buy. There are fewer firms listed in the US today than in 1976, despite GDP being three times higher, according to Credit Suisse. A similar dynamic could be beginning elsewhere. In 2006, nearly 500 new companies listed in Europe. In 2016, 265 did.
All these things have played their part in giving us the wealth distortions that have in turn been a major part of the drive behind our current political dysfunction. Would Jeremy Corbyn be so powerful today if house prices were not at such silly levels (remember house prices are driven by the price and availability of credit) or if intergenerational inequality wasn’t on the rise? Would an obviously eccentric property developer have become president of the US without a cheap-money boom in his sector? And would overall household debt be rising at a rate to worry the Bank of England if the Bank hadn’t kept interest rates so low as to make debt consistently attractive in the first place?
These things matter hugely to investors and savers. But what do you do about it? The only answer is to be ready. Be ready for wealth taxes to be the political solution to wealth inequality, rather than the real solution – rising interest rates. Be ready for a repeat of sorts: there is trouble bubbling up in various sectors of the global economy (car loans in the US being the obvious one) and too many investors have forgotten that high-yield investments automatically carry more risk to capital than low-yield ones. Be ready for your pension arrangements to be worse than you thought: there’ll be more fiddling on allowances and more movement on state pension ages in an attempt to help out public finances.
You may be wondering how to make yourself ready like this. There’s only one way: do exactly what low interest rates are supposed to discourage you from doing: save more.
• This article was first published in the Financial Times