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‘How Do We Fix This Mess?’ by Robert Peston and Laurence Knight

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‘How Do We Fix This Mess?’ by Robert Peston and Laurence Knight

Post by Ivan on Thu Oct 18, 2012 2:34 pm

Robert Peston answers his own question at the very beginning of this book by saying “I don’t know”. I guess at that point some of those who’ve just bought the book might be tempted to ask for their money back. As ‘The Economist’ reported: “Readers looking for resolutions to current woes will be disappointed by this book. The author’s ability to decipher what went wrong at British banks does not translate into how to fix them.”

Peston is currently the business editor of the BBC, that man with an annoying voice. He used to work in the City for a firm called Williams de Broe, but says that he left there because of boredom. For about eighteen months in 2007-9, while the global financial crisis was occurring, he was always in the news, providing live commentary of what was happening. He wrote this book with Laurence Knight, a BBC colleague and former banker.

The global financial crisis is the most catastrophic global regulatory failure in history and has exposed the myth that markets work best when unregulated. It will be paid for by ordinary citizens, not those who caused the disaster, and they face, at best, a bleak future for at least a decade with consequences lasting long after that. The book starts by reviewing the history of the global crisis, arguing that bankers began to believe in their own infallibility and totally failed to read the lessons of history. Peston shows how, ignoring the principles of sound banking, they constructed ever more complicated financial products that would provide huge personal rewards, but were not fully understood by either those at the top of the organisations or by politicians and regulators.

Peston claims that he saw the financial meltdown coming but he just didn’t know when. He explains the basic banking instability - that it can never pay more than a small proportion of its customers back simultaneously, so that if a bank is highly leveraged with tiny reserves it only needs one person crying 'wolf' to cause the pack of cards to come crashing down, with queues on the streets. Then he complains when other people don't like him crying 'wolf' at precisely such a point! Indeed his first scoop was the Bank of England offering lender-of-last resort facilities to Northern Rock in September 2007. Peston announced on the radio that depositors were safe, but the timing of the story, on the Thursday evening before a planned announcement, undoubtedly gave impetus to Britain’s first bank run in 140 years. On that Friday alone, over £1 billion was taken out of Northern Rock.

Peston then turns to globalisation. While recognising its good consequences (such as raising the standard of living in developing countries) he also discusses the bad. It has given rise to the situation where a small number of countries, principally China, Japan and Germany, have consistently produced surpluses, and others, such as Britain, the USA and most of Europe, have consistently produced deficits. These 'global imbalances' have exposed the economic frailties of the latter nations and were a major cause of the financial crisis.

Next under Peston’s spotlight is the Eurozone, the flawed construction that led investors to believe all debts of Eurozone countries were of equal value. This directly fuelled the debt-driven construction boom in Ireland and Spain, and it now denies countries the traditional remedy of devaluation to cure their problems. Countries such as Greece face not just a decade of hardship, but probably a generation of agony, with the possibility of social unrest.

In the final chapters, Peston reminds us that the problem hasn’t been solved. Those UK banks which are largely owned by taxpayers still behave as independent organisations, paying staff handsomely and still irresponsibly taking undue risks, while failing to provide loans that would get more money into the economy. However, Peston doesn't have any real suggestions, beyond a general rebalancing of the UK economy towards manufacturing (without explaining how) and implementing the changes already proposed by the Vickers Report. As Peter Preston of ‘The Observer’ wrote: "Peston and Knight’s description of how we got into this mess is much more compelling than their prescriptions for how we get out of it."

To be frank, I’m not impressed by this book and can’t recommend it. It was obviously written in a rush and doesn’t reveal much. It’s more about re-telling a tale than suggesting any novel solutions. David Smith of ‘The Sunday Times’ sums up: “Peston is good on the follies of the bankers. There are many moments when you wonder how supposedly intelligent people could have been so stupid, how the herd instinct could have persuaded so many to charge headlong over the cliff. He is also good on the detail. Anybody who wants to know what a collateralised debt obligation or a credit default swap is will find it here. There is, though, not too much here that those who have followed the crisis will not be familiar with."

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Re: ‘How Do We Fix This Mess?’ by Robert Peston and Laurence Knight

Post by oftenwrong on Thu Oct 18, 2012 5:28 pm

Robert errr err Peston is ummmm merely one of the aaaah better-informed ah ah ah ah financial commentators who identifies the problem without offering much by way of ah ah ah ah solution.
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