Economist Journalist gets back to the BNC!

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Hi, Burnet News Club.

My name is Patrick Lane and I am the banking editor of The Economist. My job is simply to write articles about banks that I expect readers will find interesting. That is a very wide topic; I’ve written about how banks are preparing for Brexit, the growth of digital banks (such as Monzo, Revolut and Starling), why there aren’t more mergers among European banks, and about banks in Brazil, Greece, Indonesia, Singapore and Turkey.

The financial crisis which you’ve been discussing in the Burnet News Club, is still very much a live topic in the industry and crops up in stories very often. For example, the troubles of Deutsche Bank, the biggest bank in Germany, can be traced to Deutsche’s failure to adjust to the crisis. I’ve also written often about new international rules that are supposed to make banks safer and to prevent a repeat of the events of 2007-08.


Q) Why did Lehman Brothers collapse?
From beloved_chocolate at Graveney School

A) That’s a very good question. In a way, it’s the key to the whole crisis. The story begins with a boom in the American housing market. Because interest rates were low and the economy was doing well, people borrowed a lot of money to buy homes. They also expected that house prices would keep going up, because they usually had, so that if they needed to they could sell the house to repay the debt. But house prices eventually went down. To make matters much worse, banks had lent money to people who really couldn’t afford to pay it back, without checking whether they could.

Lehman had indirectly lent money to people to buy houses. It did this by making bets with fancy names (such as “collateralised debt obligations”) that prices would keep going up and that people would be able to repay their debts. It had made those bets with money it had borrowed from other people. When these people realised that prices were falling and that borrowers couldn’t repay, they wanted their money back from Lehman. Lehman couldn’t give it to them.

When it became clear that Lehman was going to collapse, the American government tried to persuade other banks to buy it. They had to do this very quickly, over a weekend, after the banks closed on Friday September 12th 2008 and before they opened on Monday September 15th. (Another failing bank, Bear Stearns, had been bought by J.P. Morgan a few months earlier.) No one wanted to buy it and Lehman went bankrupt.


Q) Did businesses lose money because of the bank not gaining any money?
From consistent_wolf at Beverley St Nicholas Primary School

A) Yes. The banking crisis led to much wider problems. In lots of countries—America, Britain, Greece, Iceland, Ireland, Spain, to name a few—people found themselves worse off. (When incomes fall, that’s what economists call a “recession”.) If people have less money to spend, then businesses have less money coming in. So lots of companies, including carmakers, airlines and shops, lost money. Some went bust.

After the crisis, banks also became less willing to lend money to businesses. The banks had lost money, so they had less to lend, and new rules made them more cautious. So you could say that businesses lost that way, too. It was harder for them to borrow in order to invest, grow and make more money.


Q) In previous years, why did the government not set straight rules for what you can or cannot do in the bank (not asking for loans when you are sure that it is not possible to pay the money back, not tempting individual bankers to take risks etc)?
From adventurous_painting at Ravenscroft Primary School

A) This is a really good question. Actually, there were some rules but they didn’t work very well. Since the 1980s an international committee has set rules for the world’s biggest banks, which many countries then apply to much smaller banks too. One thing the rules say is that banks should be more careful about some loans than about others. Lending to the British government, for example, is much safer than lending to a new, small company. Another thing they say is that even if people can’t pay the banks back, the banks should have enough money of their own that they don’t go bust themselves. After the crisis it was very clear that those rules were not tough enough. So they have been made much more strict.

One problem banks have is that they can never be completely sure whether someone can pay the money back. Suppose, for example, that someone wants to borrow money to buy a house. They have a well-paid job, so the bank is happy to lend the money. If they later lose the job, they may not be able to repay. Neither the bank nor the borrower could have seen that coming. But banks have to be prepared for the fact that some loans won’t be repaid. They just don’t know which ones those will be. So banking is always risky. The question is: how much risk is too much? There is no perfect answer to that question. But even before the crisis it should have been clear that banks in several countries were lending money to people who weren’t able to repay it.

The financial crisis of 2007-08 is still very much a live topic in the industry and crops up in stories very often.

Patrick Lane, Banking Editor, The Economist

Q) Hi, what would happen if the financial crisis happened again? If it did, would it affect children?
From fair_analysis at Notley Green Primary School

A) It’s very hard to know exactly what would happen. A new crisis probably wouldn’t be the same as the last one. In fact, the rules put in place since the last one are supposed to make it less likely. But you can’t be completely sure, and there could be a crisis with a different cause, such as widespread cyber attacks. Every so often, financial crises do happen, even if global ones as big as in 2007-08 are quite rare.

A lot would depend on what governments did. I’d hope that they would act more quickly than they did last time. With hindsight, the American government might not have let Lehman Brothers fail, because its collapse sparked fears about other banks. And I think European governments might have acted more quickly too. Partly because they were slow last time, Europe’s economies and banks have taken longer to recover than America’s.

As for the effect on children, I think there are two parts to that. First, if you have any money in the bank, it should be safe. The government promises that any savings up to £85,000 will be safe. Most people—certainly most children—have much less than that.

The second, more important part is that financial crises make people in general worse off. So families might have less money to spend. Some people would lose their jobs. That would make children worse off. And what the government did would matter too. After the last crisis, the government borrowed a lot to bail out the banks and has since been trying to spend less in order to cut its own debts—which many people call “austerity”. That has meant less money for all sorts of things, including schools, hospitals and benefits, which would also affect children.


Q) How did they get more money into the financial system after the crisis? Did they print it, if so how did they do this, how quick was it and what did people think of it?
From attentive_perspective at Millbank Academy

A) Great question! Governments put more money into the financial system in two ways. First, they bought shares in banks. That made up for banks’ losses and meant the banks could survive if they lost a bit more. Second, they made it very, very cheap to borrow money and then bought lots of financial assets from banks—spending trillions of dollars, pounds or euros—so that the banks had lots of cash to lend to their customers.

The second way is sometimes called “printing money”. Actually, it isn’t printed. Very little of the money in the world consists of cash. Most is just digits—numbers in bank accounts. Governments—usually, a special bit of the government called a central bank—can create as much or as little money as it wants.

All this happened more quickly in some places than others. In Britain, for example, the government was very quick to buy shares in banks—in Northern Rock in 2007, RBS and Lloyds in 2008. In America, once the crisis began, the government was fast too. The money-printing part began first in America in 2008, then in Britain in 2009. In the euro zone it started later. It is still going on, although America has been cutting back for some time.

What did people think? I don’t think they liked the idea of “bailing out the banks” at all. I think people also understood that the economy had to be rescued. But they really didn’t like the uneven, unfair sharing of the costs of the crisis. Bankers are still very well paid. Spending on schools, hospitals and other things have been squeezed.

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