Failed to Spot the 2007/8/9 Financial Crisis
Every politician and banker I have heard speak about it claims that nobody could have forecast the financial crisis which started in 2007, peaked in 2008, and ended in 2009.
Global Financial Credit and Banking Crisis – Foreseeable?
According to all the politicians, bankers, economists and others I have seen and heard in the media, nobody could have predicted it. I believe they are all dumb, I was expecting it, and I don’t actually consider that I was particularly clever or astute. Possibly I was lucky.
Wake Up – The Book
Sometime before it all happened, probably in 2006, a customer who was buying some gold coins from us mentioned that he had seen our name in a book. Although I was used to getting media mentions, it was the first time I was told we were in a book. I was intrigued, and asked what book. The customer get it from his bag and showed me the book and the mention of our website, of which I remain quite proud. I noted the book title, and ISBN, and ordered a copy the same day.
The authors, Jim Mellon and Al Chalabi described in simple terms the general world situation, what was wrong, what was going to happen. I found I understood and agreed with most of what they said, and I was convinced they were sound in their judgments. I published a brief review on one of our websites.
Over the next few years, almost everything they forecast actually happened, even if they got some of the fine detail wrong. I felt quite smug knowing that I was one of a tiny minority who had been granted a sneak preview of the future. Probably the most notable part for me was in Part Two – The Global Economy is Under Threat: Financial Instruments of Mass Destruction, a chapter about derivatives.
The crises had started in 2006 when the U.S. housing market bubble burst. Despite this, banks were still making sub-prime loans to borrowers who could never have repaid, and the banks failed to crash. This was partly because many of the loans were underwritten by the U.S. government via Fannie Mae and Fredit Mac, but also because banks started using Collateralised Debt Obligations (CDOs), and Credit Default Swaps (CDSs).
The big credit rating agencies were suckered into carelessly giving many of these complex documents a triple A risk rating. These were then sold on to large and small banks and other financial institutions in the U.S.A., and worldwide. This was always a meteoric crash waiting to happen. Lehman Brothers, a key player, went bust, as did many other banks and insurance companies. A few, such as John Paulson saw it coming, and made his hedge fund $15 billion betting on it
We were kept very busy for the next few years trying to meet investor physical demand for “Investment Gold”, in the form of gold coins and small (one kilo and under) gold bars.
Lucky or Smart?
So was I lucky in being shown the book, or was I smart for reading it?, probably both, but the luck came first. Nobody else has ever mentioned this book to me, and I guess it was never widely read at the time. I still have it lying round somewhere, and I keep meaning to re-read it; there are still things it mentioned which are relevant today, and events which have not yet happened. Actually, with hindsight I was not so smart. I could and should have made millions by taking out a few out-of-the-money “put” options on a number of highly leveraged banks, even though I don’t normally gamble. I will try to do better next time.
But, if I was not as smart as I should have been, what about the others? The bankers who were part of it, politicians and governments. In the United Kingdom, we had the Blair Brown Labour government. Gordon Brown who used to trumpet his financial prudence, but who famously sold almost 400 tonnes of Britain’s gold reserves at or very close to the absolute bottom of the market. He also removed some of the Bank of England’s regulatory powers, which action is generally regarded by most experts as contributing to and exacerbating the British banking crisis, starting with Northern Rock.
It may sound as if I am bashing the previous Labour government, and yes I am, but fairly and justifiably I hope. What still astounds me all these years later is that no Labour politician from those days has ever admitted they should have foreseen the general crisis or the British banking and credit crisis. Even more astonishing is that no other politician of any colour has pointed it out. Presumably none of them foresaw, and are now too embarrassed to speak out about it, because the obvious question they would face is why they failed to shout about it before it happened, or even while it was taking place. Any of them could have bought and read a £12.99 book and become an instant expert forecaster.
I have now found my copy of Wake Up!, and will be reading it again soon. I am sure it still contains much relevant information today. I would strongly advise George Osborne, Ed Balls, and Vince Cable to get their own copy of this book and read it. You dear reader could do the same, and no, I don’t get any commission from the authors or publisher!