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Frank van Lerven @Frank_vanlerven
, 12 tweets, 5 min read Read on Twitter
#10yearson is there a risk of another bailout? As with most financial crises, the 2008 GFC was caused by excessive private debt & unconstrained bank lending – that ultimately allowed for sub-optimal allocation of credit, reckless risk taking and rampant speculation.
In the 1980s, private debt in the UK had never gone beyond 75% relative to the UK economy’s income - by 2008, it increased to 200%. Throughout this period government debt remained steady between 35 – 50% of GDP. Striking given government debt and the ​‘deficit’ got all headlines!
Since 2008, a number of positive regulatory reforms have reduced the risk of another bailout. Including things like ring-fencing and the introduction of a macroprudential regulatory framework- with tools like capital requirements, debt-to-income ratios, counter-cyclical buffers.
But as @martinwolf_ excellently points out, we have gone from the ‘insane to merely ridiculous’. While bank’s capital (shareholder investment that ensures banks have more skin the game and acts as a cushion when loans go bad) may have increased 10 fold...
Leverage (debt used by banks to finance assets/loans) has been reduced from 50 to 1, to 25 to 1. This can mean if the value of the assets banks hold falls by 4-5%, certain banks will be in trouble. A sensible leverage ratio would be around 5 to 1.
More importantly, #10yearson the *fundamental truth is we actually haven’t done enough to reform the day-to-day underlying operations of the banking sector*. The allocation of bank credit is still fundamentally misaligned with key social and public objectives.
The majority of bank lending is still for non-productive and speculative undertakings- with not enough credit financing investment for productive sectors of our economy, household debt-to-income ratios are rising making our economy more susceptible to shocks.
What has been the biggest policy blunder? Or what is the lesson we failed to learn? In a nutshell, austerity. Because we opted for austerity, we left the Bank of England to do the heavy lifting of stimulating the economy.
Main ways the Bank of England can stimulate the economy is by indirectly: (1) encouraging the private sector to take on more debt (2) encouraging less savings and more spending today (3) increasing the wealth of the richest (via QE) and hope they spend more (classic trickledown).
This austerity + Bank of England stimulus package was as @sjwrenlewi suggests purposefully designed. Austerity highlights a massive lesson we haven’t learned:
It was massive growth in private (household) debt that caused the crisis, it had nothing to do with government debt.
What are some of the solutions @NEF is working on: 1) A New Fiscal Policy approach @alfie_stirling 2) Credit Guidance 3)Public investment bank - #StrategicQE 4) Army of mission oriented Local Stakeholder or Regional Community Banks. To name just a few. Let's @ChangeFinance_
Given prominent role @bankofengland plays in lending to banking system – public authorities have an ability to significantly affect the volume and direction of credit flows if they wish. It’s more of a question of whether they want to, not whether they…
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