Not all boom, but some free market bust.

In my previous post (It’s the economy…) I outlined how Dominic was wrong to blame the boom and bust in the housing market on the “Barber boom” under the Heath government.  (And sorry it’s been so long since that post, I didn’t want to put “I’ll be on holiday for the next three weeks”, paranoid about net-savvy burglars, emphasis on the paranoid).

This is not, I think, an isolated error in Dominic’s book, but a systematic one.  The problem is misanalysed as one of spending too much, too much Keynesian demand management, and too much state intervention, thus suggesting (as we will see later) that cuts in state spending and neo-liberal policies to encourage the free market might be the answer.  In this case, the easing of credit and the encouragement of a free market in bank loans led to a housing bubble.  The same is true, at least in part, of the secondary banking crisis.  This is thrown into the mix without any particular context by Dominic to add to the general sense of doom.   So we are told that these banks were “[b]urned by reckless lending” and were “in meltdown” (Seasons, p9).  In fact, many of these banks were banks only in name (and many not even that) being established under section 123 of the 1967 Companies Act.  (Margaret Reid, The Secondary Banking Crisis 1973-1975 (London: Macmillan, 1981), pp34-69)  Many were primarily involved in various forms of financial speculation rather than purely taking deposits and making loans.  The secondary banking crisis crops up a few more times, as part of the general picture of doom but with no explanation as to what it was or what its causes and consequences, it is just another example of bad stuff.  So we have that it added to the “perfect storm” that Labour inherited in March 1974 (Seasons p46), but here the sources quoted

(Denis Healy, The Time of my Life(London: Penguin, 1989)p392; Barbara Castle, Diaries 1974-1976 (Weidenfeld and Nicolson, 1980) p42-3 and the Cabinet Minutes for 14th March 1973) do not mention the secondary banking crisis, it has simply become part of the mix of harbingers of economic doom.

It is notable, however, that Healy does reference the secondary banking crisis in his memoirs in a way considerably more accurate than Dominic does.  “The previous Governor’s handling of the white paper on Competition and Credit Control, which encouraged the banks to compete more vigorously with one another for lending, had led to an explosion of uncontrolled credit….. This had been a major factor in bringing Barber’s dash for growth to a full stop; it had also helped to produce the crisis in the secondary banking system that had rumbled on through my period at the Treasury…” (Healy,p374).  Healy is perhaps being a little loose with the term “white paper” here, the C and CC plan was drawn up by the Bank of England and approved by the government in September 1971.  (David Kynaston, The City of London volume 4:: a Club no more (London: Chatto and Windus, 2001)pp436-40).

Healy does not have much else to say about the secondary banking crisis, as Margaret Reid points out in her history of the crisis, this was a crisis in the City and dealt with by City institutions under the Bank of England.  It did not become a big political issue.  (Reid, p19)  This is reflected more accurately in Dominic’s reference in Seasons p54 which argues that city morale was badly bruised by the crisis in the early months of Wilson’s government.

Strictly speaking “secondary banks” is a (widely used) misnomer in this instance, and was originally applied generally to all banking operations operating in the wholesale money markets that grew up after the Conservatives liberalised banking around 1958.  The banks concerned were more correctly “fringe banks”, with high leverage (that is they borrowed on the wholesale market to lend again, or more often to speculate in short term investments on their own account) and had little in reserves that would cause problems if they could not continue to borrow on these markets due to a fall in confidence in their ability to repay the loans (Reid, pp13-27).  This is similar to the events of 2007-8, apart from these there were a relatively small number of fringe banks, and the bail out (the “Lifeboat”) was organised by the Bank of England with assistance from mainstream clearing banks (who of course stood to lose since they would ultimately be left holding much of the fringe banks’ debts).  Much more could be made of the secondary banking crisis, which bears striking similarities to the more general banking crisis from 2007/8.  But most importantly, what Dominic does not point out is that, as in 2007/8 this banking crisis was the result of easing the regulation of banks.

The secondary banking crisis, and the collapse of the commercial property market which was part and parcel of the same issue, was certainly precipitated by the Barber boom.  With even more money in the economy the possibility of borrowing to buy and then sell land, shares and so on at a profit was encouraged.  But so were the risks that any increase in interest rates of a small fall in prices would bring the whole inherently unstable house of cards down.  (Reid, pp58-85)  Which is, as Dominic is quite correct to point out, what happened at the end of 1973.

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About Matthew Cooper

This blog is written by Matthew Cooper.
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