9th August 2007 is generally accepted as the start date of the credit crunch, when BNP Paribas froze two funds due to a “complete evaporation of liquidity”. Few would have predicted the ensuing rollercoaster of events.
Many Western economies have been badly let down by those entrusted with their governance. Unsustainable bubbles were allowed to expand recklessly and burst with devastating consequences.
The housing bubble, most notably, was fuelled by cheap credit. But in reality so was much of the economy. In allowing so much cheap credit for so long, the economic boom was sustained, taxes rolled in and votes were garnered by so-called “prudent” politicians.
Of course, this was a sham. In allowing so much cheap credit for so long, growth was stolen from future generations. Think about it, when you spend money you don’t have, that money has to be paid back in future years – thus depriving those future years the benefit of that economic activity.
For the last two years, the UK has been attempting to arrest institutionalised government overspending. Five years after the credit crunch, we continue to pile on more debt. I wrote previously about the size of the national debt when it hit one trillion pounds.
When governments live beyond their means, they can play a “get out of jail” card; they crank the printing presses for a while to stimulate the economy, create some inflation to reduce the debt repayment cost and in extreme circumstances may even renege on lenders (holders of bonds such as treasuries or gilts). Some governments even seem able to continue trading whilst insolvent.
Fortunately, there are clear rules of Corporate Governance in place for businesses. Unfortunately the UK Corporate Governance Code did not apply to UK plc in the run-up to the credit crunch. If it had, then perhaps we might have enjoyed more effective risk management, financial control, leadership and accountability.