Dulce Et Decorum Est

Managing Director of Hutton, Tom Mardon discusses the present generation's attitude to our history of global financial crises, and the inevitable spiral toward a future credit crunch.

I was recently privileged to hear a very moving and sincere declaration of Wilfred Owen's First World War poem.  It struck me to hear it from a ten year old who clearly had done the thinking behind it - but it also got me thinking.  Do we learn from history?

Owen and his peers Sassoon and Frost wrote not just to express their contempt and bitterness towards the act of war, but also to act as a clarion to the wider world and future generations as to the reality and futility of combat.  That we remember their words a century forward speaks to the sublime power of their voice, but the fact that the world has learnt little, means their actual influence is diminished.

This isn't whimsy and I do have a point.  It is well proven that humankind sees as far as the end of its own nose and tends to learn little from its own mistakes - “plus ça change, plus c'est la même chose,” as a wise Frenchman once wrote.  Like a perpetual teenager with our underdeveloped cerebrum, we don't factor in risk despite what our parents tell us about the consequences.  And that is what is happening with the credit crunch.

I won't be so crude (as some politicians have been) as to draw a direct analogy between the events after World War One and our current post-credit crunch world, but there are traits shown in both periods which highlight that we don't learn. Whether it is to avoid the inevitable mistake or the tendency we have as a species to punish before we truly understand the occurrence – the repetitive cycle is to our detriment.

Why did the credit crunch happen?

A lot of people would tell you it was down to Clinton's housing election promise when first president, and the subsequent pressure in the banks to open the mortgage market.  Some will tell you it was the fault of the banks themselves who encouraged reckless leverage and willingly played the moral hazard game. And some will tell you that Greenspan and Brown conflated the whole thing with the combination of embarrassing hubris (boom:bust is history) and riding of a cheap credit and populist wave.  Truth in my eyes is - we all conspired. Whether unwittingly or with intent, it was the same emotional drive - from the student taking the £800 credit card to enjoy the last summer of freedom to the NINJAs in Dade County to the CDO alchemists at JPM.  We all took cheap utility without paying an economic price and we still owe for it.

As all school students know, we ‘punished’ the Germans post WW1 via the Treaty of Versailles and the Weimar Republic.  The economic conditions created were at least partially linked to the events of Europe in the following twenty five years, and certainly linked into the Great Depression.  Bernanke was a renowned student of the 1929 Wall Street Crash and the effects of the remedies.  Rather than pointing too many fingers post-crunch, he supported the banks via TARP, freed them to make the money to repay the debt and took time and advice to curb some of the more obvious contradictions in their role as intermediaries via Volcker.  Sure, Lehman went down and perhaps everyone needed some blood to be shed, but the narrative there was a swift beheading rather than death by 1000 cuts.  The US has its issues, but it strikes me as a better example of taking one’s medicine and moving forward.  Bernanke actually broke the cycle and learnt from the past, unlike Europe.  Yes, the Euro and the constraints it placed on many countries to devalue their currency exacerbated problems, but fundamentally this article isn't about the politics of the shared currency, it’s about the notion of punishment.  The burdens placed on banks here and in Europe via Glass-Steagall style breakups, capital charges, levies, transaction taxes, and the vast amount of regulation with the attendant diversion of resources and senior executive time, means that the emphasis of the institutions has not moved from the perceived risk taking to the hoped for prudent and sober market intermediation. Instead the themes have been introspection and crisis management, which ironically leaves the customer as rejected and on the outside as before.. In punishing the system we have jammed up the means of moving forward as swiftly as the U.S.  This potentially has left us weaker to another shock (such as Greece) than we could have been.

I think we have not heeded the lessons of the past, and without even the eloquence of a poet to pass the message forward I do cynically sit there waiting for the post-2009 generation to get fed up with the politics of an era they didn't define; to loosen the shackles, probably too much, and then head for the next crunch.  And one thing is for certain, there will still be someone with a big stick at the other end of it ready to beat everyone associated, the more the merrier.