The age of austerity is over… At least that’s what the papers and online news outlets say. Yet for many Britons (especially those who work in the public sector), the ravages of the credit crunch which began way back in 2007 can still be felt. There are many households who have still yet to recover from the ravages of this worldwide economic depression. The credit crunch / financial crisis of 2007-2008 affected millions of people worldwide, yet over a decade later we still appear to have not yet learned our lesson. Both here in the UK and across the pond, economists warn that the next economic crisis could be lurking just around the corner. Since those who do not learn from the past are condemned to repeat it, this article is intended to dive deep into what caused the credit crunch, how it affected the banking system here and in the US and how it affected millions of ordinary people while the architects of the greatest financial crisis of the 21st century were insulated from the repercussions.
While the crisis itself took place in the first decade of the 21st century, the roots go back a couple of decades to the Presidency of Ronald Reagan. While Reagan may be seen as a fairly tame by Trumpian standards he was every inch a Republican. He was vociferously pro-free market and anti-regulation. As such, upon moving into the White House, he began a campaign of deregulation of the financial services industry. This deregulation would be the untended spark that would soon light the defining financial barn fire of the 2000s.
In fact, the credit crunch can be traced back to one particular piece of legislation; the Garn-St. Germain Depository Institutions Act of 1982. The bill was intended to solve the middling problems of America’s savings-and-loan institutions but would wind up creating an international financial catastrophe. As Reagan said himself, back in ’82;
"This bill is the most important legislation for financial institutions in the last 50 years. It provides a long-term solution for troubled thrift institutions. ... All in all, I think we hit the jackpot."
Of course, it was an important piece of legislation… Just not in the way that he intended. This piece of legislation set in place a frenzy of deregulation that continued with both Republican and Democrat administrations.
Across the pond, Prime Minister Margaret Thatcher held very similar neoliberal sentiments. She had an ideological passion for the financial services industry and set about making the City of London the hub of the country’s economy at the expense of previous economic staples like industry, manufacture, science and technology. In the 1990s New Labour Chancellor Gordon Brown set about further deregulating the UK financial sector, ceding control of the Bank of England entirely to the private sector.
And let’s not forget that the very purpose of private institutions is to make money for themselves.
Emboldened by increased deregulation, financial institutions on both sides of the Atlantic set about selling (and creating) increasingly financially irresponsible products. Products like subprime mortgages and 100% mortgages which slowly but surely created an unsustainable bubble of debt. Watch Adam McKay’s 2015 film The Big Short and you’ll see the short sightedness with which institutions and individuals gleefully set about feathering their nests without sparing a thought for the long term consequences.
Irresponsible lending to unqualified prospects led (unsurprisingly) to mortgages and loans going unrepaid. Private landlords stopped paying their mortgages yet continued to charge their tenants rent. Banks at home and in the US set about leveraging themselves with mortgage payments, reserves and pension schemes to speculate on property assets, overseas government bonds and complicated derivatives like Collateralised Debt Obligations and (crucially) mortgage backed securities. Institutions leveraged bundles of collective debts from one another including mortgages which were going unpaid by people who should never have been given mortgages in the first place.
Essentially, home owners, pension holders and savers gave their collective pot to a compulsive gambler that approached the roulette table with a whole lot of confidence but very little actual knowledge.
As institutions flooded the market with unqualified debts the bubble continued to grow to bursting point. By the time the bubble burst in 2007 institutions were investing billions in real estate investments which would be worthless a year later.
Institutions which had been previously deemed "too big to fail" went into freefall. Jason Taylor, Lending Expert
While it may be fascinating to look at the economic phenomenon that is the credit crunch objectively, we must remind ourselves that this global phenomenon had a colossal human cost. Millions in the US and UK lost their homes and jobs. Repossessions in the UK doubled in a year and by 2009 it was estimated that a family lost their home every 7 minutes.
Aside from this obvious tragedy, the ensuing years of austerity would go on to bring further hardship for UK homes.
One would have expected such reckless behaviour to be punished or at least challenged by authorities. Yet the governments of both the UK and the US responded with nary a single punitive measure brought against the individuals and institutions and individuals responsible for the collapse.
The governments of both nations responded by issuing multi-trillion dollar / pound bail outs for the financial institutions and only one banker in the whole of the US went to jail for their part in the crisis; investment banker Kareem Serageldin.
In order to fund the colossal bail out of the banks, former chancellor George Osborne set about the UK economy with a hatchet. He set about cutting all public spending regardless of its ability to generate more money for the wider economy.
Resultantly, the effects of the credit crunch can still be felt by ordinary individuals and families. The age of austerity saw the UK undergo the slowest post-crisis economic recovery in Europe, sharing the bottom of the league table with debt stricken Greece.
Public sector workers like teachers, nurses and social workers endured a length pay freeze while many UK workers struggled to find further employment in a period of slow economic growth.
An under investment in housing coupled with much more exacting regulations for mortgage lenders has made it much harder for Britons on low to middling incomes to get a foot on the property ladder. The resultant surge in demand has led to private rental hikes in the post-crisis economy meaning that more and more UK workers are spending more of their income on rent leaving them with less disposable income to chanel back into the economy.
Time will tell what the future holds for the economy and the people of Britain. But let’s hope that we as a nation can learn from this catastrophic and completely avoidable crisis.