Gordon Brown has proposed that 100% mortgages be banned. Slam. Barack Obama wants limits on bankers’ pay. Slam. The German chancellor, Angela Merkel, promises tougher regulation for hedge funds and rating agencies after a European Union summit in Berlin last weekend. Slam.
Right around the world, politicians and regulators are busy shutting doors on horses that haven’t so much bolted as climbed on board a rocket and left for a different planet. They are wasting their time. There is no point in trying to fight a banking-led financial and credit bubble now. It’s too late. No doubt the world economy will recover eventually, and in time, a fresh bubble will get going. But when it happens we’ll find a whole new way to mess things up – and it won’t be anything to do with the plethora of controls on the financial system now being proposed. It would be better to devote time and energy to fighting the next crisis rather than the last one.
Take Brown’s latest plan to save Britain and the global economy. Resurrecting the word prudence, which appears to have gone missing from his speeches in the last couple of years, the prime minister argued for the return of the “traditional savings and mortgage bank” making loans “on prudent and careful terms”. The 125%, self-certificate, buy-to-let, mortgage, with a discounted initial rate, plus a free flight on Ryanair chucked in, is now to be a thing of the past. Brown has banned them. Mortgages will only be available to those who have saved for a deposit, have a steady job, and presumably can prove they get to bed at a sensible hour and don’t drink too much either.
There’s just one problem. The market has already done the job. Maybe nobody has shown the prime minister how Google works, but it only takes about five seconds online to discover that 100% mortgages are about as easy to find as Bernie Madoff’s trading records. There aren’t any out there. There aren’t even many 80% or 90% deals available, despite Northern Rock’s new orders (see page 32). To get a decent rate, you need to put up a 40% deposit. Banks have returned to policies that were satirised for many years: they’ll only lend money to people who can prove they don’t need it.
There’s no real mystery about that. In a rising property market, it is perfectly good business to lend people 100% of the money to buy a property. If prices are going up by 10% annually, within a couple of years, the borrower will have a healthy chunk of equity in the property. It is only in a falling market that the maths turn toxic. If prices are falling at 10% a year, then within 12 months, you are looking at 10% negative equity. That’s why banks now need those 40% deposits – it’s the only way to have any confidence their loan will still be backed by an asset at least equal to the value of the debt in three or four years’ time.
So a ban on 100% mortgages makes about as much sense as a ban on riding your horse and carriage down Regent Street. Since there aren’t any on the market, and no one had any intention of launching any, it isn’t going to make much difference. The same is true of a ban on bonuses or caps on bankers’ pay. The way that banks do business has changed fundamentally over the past year, and will carry on changing over the next 12 months. The days of trading their own books like a giant hedge fund, or rewarding dealers with “heads-I-win-tails-you lose” bonuses, are over. For example, Swiss giant UBS has introduced the ‘malus’ – a bonus that gets awarded in one year, then gets taken away the next if your unit doesn’t keep making profits.
Everyone in banking is well aware that they have created a system with lopsided rewards and woefully inadequate risk controls. Heads have rolled, boards have been humbled, and shareholders have demanded new strategies. Banking is going to be a dull, conservative industry for the next decade: think the water industry, but without the excitement. Those kinds of jobs pay dull, conservative salaries. The same goes for calls for more regulation of hedge funds. You’ve more chance of raising money for the Sir Fred Goodwin memorial statue in Edinburgh than you have of raising funds for a hedge fund right now. What is there going to be to regulate, exactly?
Politicians love to fight the last crisis the way generals feel comfortable fighting the last war. After the dotcom collapse, we took it out on auditors and analysts for not keeping an eye on all those flimsy firms. Arthur Andersen went out of business. The next time round, it wasn’t the auditors or the analysts who fell down on the job. The problems were elsewhere. Three years ago, when Brown was the chancellor, it would have been a great idea to clamp down on 100% mortgages. Even a warning about house prices would have been good. Yet Brown remained silent. A ban now is just mood music, designed to make politicians look busy and decisive. In time, there will be another bubble, probably caused by the frantic printing of money designed to tackle this one. But the politicians and regulators will be so busy kicking around the ash and embers from the last fire, they won’t notice the new one starting next door.