Today a prestigious financial institution - Lehman Brothers has gone down. The reason - too many risks taken in the mortgage market.
The attitude to risk may be something to do with youth and age. Perhaps there is too much emphasis on being young these days - at least in the media and the job market. Alas, when the over-fifties are turfed out, something - call it experience - is lost. It’s unjust and in some cases, very damaging.
People of a certain age have experience of previous disasters. We’ve all heard of the Wall Street Crash (haven’t we?), though I wasn’t around at the time in the 1920s. To a lesser extent, the Stock Market crashed in the late 1980s and during the period after Nine Eleven and before the War on Iraq. As far as property is concerned, those people who put all their faith in the unending rise of the property market may not remember, as I do, the property crashes in the Seventies and in the Nineties.
There are other parallels. Some years ago, Lloyds of London suffered a crisis when the Names (people, often laymen, who gave unlimited guarantees to Lloyds in exchange for a very good income when their money was not needed) were called upon to back up their guarantees with cash. It was a disaster and many of those Names lost homes and fortunes. The reason for the call upon their money was because Underwriters in Lloyds had taken on unreasonable risks in the course of insurance. I was told that some experienced underwriters would not have touched those risks, but inexperienced underwriters just wanted to get business, so took on things they shouldn’t have touched.
Does this seem familiar? Just change this to people in the mortgage lending business and you’ll get the picture. Same old, same old. They wanted the business and so they took risks. These risks were parcelled up and sold on - just as they were in the insurance business. Sooner or later, the slices of debt went full circle and losses were made, as they were in the insurance business - and the reason these risks were taken on, in both cases - greed. And, of course, inexperience - because the risk takers presumably have no memory of the crashes of their similarly inclined predecessors.
Another example is the Dot-Com bubble. People ploughed money into a risky area - the dot.coms which became seriously overpriced and eventually came crashing down to achieve what was probably not far off their true value. People who took more than a punt on them lost dramatically. Among them were big companies like GEC who, bored with their ex-MD’s cautious stance, threw their funds into this area of the market, and, as a result, eventually crashed down, transforming themselves into a minnow.
Bubbles, in case you didn’t know, are commodities or similar, whose value become over time inflated beyond their true value. They continue to be bought because of a kind of hysteria - if you haven’t bought, you will fall behind. (In the UK, this particularly applies to property.) At the time, it seems the prices will never fall, but once the end comes, it seems they will never rise again. Neither assumption, of course, is true. This is what caused people who couldn’t afford property to buy at inflated prices and subsequently default for that reason. Their debts were in the parcels handed around from one financial organisation to another. These debts are those now coming home to roost.
If it seems unfair that individuals will suffer, ask yourself if those individuals have been too greedy. Is it the Want It Now attitude that has caused such people to take on risk? An earlier generation would tell you that they - I include myself - were more cautious in their purchases. We personally did buy our plot of land and built a house on it, but very, very slowly, only as we could afford it - and it took as three years (as told in my book The Fruit of the Tree.) In addition, we were restrained with all our other purchases. We didn’t buy anything on credit, and, in fact, I didn’t own a credit card until I reached the stage when I knew I’d be able to pay it off. We (M & I) were married about fifteen years before we could regard ourselves as comfortable enough not to worry about buying clothes, furniture, etc.
It is frightening that such a large institution as Lehman Brothers has come tumbling down. None of us know what repercussions will arise from it - how this will transform itself into higher prices, lower pensions, lost jobs, as the domino effect takes over. But maybe this is the time to learn from the oldies - home cooking, frugal purchasing. For once, let your grandmother teach you how to suck eggs.
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