‘Plus áa change, plus c'est la màme chose’ — the more things change, the more they are the same. That is certainly true of financial panics, but exceptionally true of the 100-year comparison between 1907 and 2008.
I've been having my own ‘plus áa change’ moment from the 2008 financial panic and the abrupt takeover of Bear Stearns last week.
My family memory goes back to the Wall Street panic of 1907, which has been followed, almost as though the actors were repeating their lines, by the panic of 2008.
In 1907, my mother, then an American schoolgirl, went with her family for their usual holiday in the Adirondacks. She was the eldest daughter, a confidante of her father's.
At that time, my grandfather was a senior executive in the American Trading Company, a global export-import business with extensive interests in Japan and Latin America. My grandfather had helped the Morgan bank to develop its Japanese connection. He had no doubt that JP Morgan was the greatest of American bankers; most bankers deal in money, but Morgan dealt in trust and judgment.
My mother remembered her summer months with her father in 1907. Thanks to JP Morgan, he had succeeded in saving the American Trading Company. As they walked across the hills, my mother had to reassure her father that the panic was over; he was still suffering from seeing the threat of insolvency in front of his company.
In the panic, JP Morgan himself, supported by a syndicate of New York banks and by the American Treasury, had decided which firms, in a parched desert of illiquidity, should be lent the cash to survive. Morgan decided the Knickerbocker Trust was past saving. He drew the line at the Trust Company of America, bigger than Knickerbocker and marginally sounder.
The key conversation was remembered. Morgan asked Benjamin Strong, later to be the first New York governor of the Federal Reserve Bank, whether the bankers would be justified in seeing the TCA through.
Strong said he thought they would. Morgan replied: ‘This is the place to stop the trouble, then.’ That is the bankers’ equivalent of the Duke of Wellington's order at Waterloo: ‘Up guards and at them again.’ In 1815, that order gave victory; in 1907, Morgan's decision brought the panic to an end. Among its other consequences, it saved the American Trading Company.
In 2008, the players have been remarkably similar. The bank that took over Bear Stearns is the product of a merger between JPMorgan and the Chase Manhattan, itself the result of a merger between historic New York banks. The Federal Reserve gave assistance; that matches the public support of the American Treasury in 1907.
Bear Stearns has had the misfortune to be cast in the joint role of the Knickerbocker Trust and the Trust Company of America. They are the last victim and the first survivor. JPMorgan has indeed taken over most of Bear Stearns’ liabilities, but the shareholders have been offered only $2 a share.
There will presumably be litigation, but I suspect the panic has been halted. It is characteristic of a panic that nobody without the courage and authority of a JP Morgan is willing to lend. All banking depends on trading in debt, including trade in the bank's own debt, and it is fatal to the banking system if debt ceases to be traded. When a panic occurs, it is necessary to supply funds on a sufficient scale to cover all the foreseeable needs of the solvent banking system. One has to restore the morale of the lenders.
The role of JP Morgan himself has long since been transferred to the central bankers of the world. In the crisis of the world slump of the Thirties, the Federal Reserve failed to stamp out the embers of the 1929 Wall Street panic. The United States suffered a slump that lasted for the best part of a decade.
I can see no sign that this is likely to happen again. In the early Thirties, the world's central bankers were obsessed with the fear of inflation; that fear was rooted in the recent German inflation of 1923, when the Mark and debts expressed in that currency became worthless.
The biggest difference between America and Europe and between the Federal Reserve and the European Central Bank is that the Americans fear another slump and the Europeans fear another inflation.
Another great slump is avoidable. But there will be consequences. Under the leadership of Alan Greenspan, as chairman of the Federal Reserve until January 2006, the supply of money became too loose. Banks, businessmen and consumers will now find it harder and more expensive to borrow. Hedge funds and private-equity companies will no longer be lent almost unlimited funds at low interest rates.
Housing has fallen in price in the United States and has started to fall in Britain. America is already in recession and Britain will, at best, have low growth. There will probably be some unpleasant after-shocks, as there were after the 1987 stock market crash.
The ugliest feature of the 2008 panic has been the growing evidence of old-fashioned crookery in the financial world, among dealers, speculators and speculative institutions. A British bank, HBOS, was subjected last week to a fraudulent bear raid, supported by what would have constituted ‘insider information’ if the information had not been an invention, a bare-faced lie.
Some people have made large sums of money out of this fraud. Our regulations on such frauds have not proved effective. There needs to be a thorough inquiry; one can only hope there will be prosecutions.
In the meantime, bankers should remember they are bankers, not bookmakers, by profession.
Lord William Rees-Mogg is a former editor of the Times. This column first appeared in the Mail on Sunday
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