We should have acted to avoid US cold

An American friend of mine who lives in London recently complained that her nationality attracts a lot of criticism from Brits. She said the war in Iraq, climate change and the abuse of human rights are often blamed on her simply because of where she was born.

This wasn’t the first time she aired such grievances, but coming just a few days after Bear Stearns’ collapse caused global stock market turmoil, I couldn’t help but add economic instability to her list.

Before the credit crunch over there caused a liquidity crisis over here, the phrase ‘when the US sneezes the rest of the world catches a cold’ was overused by commentators warning that no market exists in a vacuum. But I don’t believe anyone thought it would get as bad as it has. We’ve spent the past six months waiting for the light at the end of the tunnel but to no avail.

Although the news is bad, it could be worse. Investment banks have reported smaller losses than anticipated and the US Federal Reserve has cut interest rates by 0.75% instead of 1%, suggesting things are not as bad as they could be. In the UK, the Bank of England has acknowledged that fragile consumer confidence means emergency loans to illiquid firms are not enough.

Following a meeting with the chief executives of the UK’s biggest banks, the BoE is reportedly considering adopting a system whereby assets such as mortgages could be swapped for cash loans. This would be a turnaround from its current position.

Unlike in the US where the Fed takes the indulgent view that boys will be boys when it comes to bailing out banks, the BoE is wary of rewarding bad behaviour.

It seems the BoE would rather see institutions that got themselves into trouble shunned by customers, publicly flogged by the media and eventually forced to wear a dunce cap with ‘nationalised’ embroidered on it.

Whether you agree with this approach or not, you can see the BoE’s point of view. Yes, perhaps as part of the tripartite authority it should have seen the crisis coming, and yes it probably should have taken more decisive action once it hit.

But to take the sneezing analogy one step further, if the UK mortgage market had been careful not to go outside with wet hair, it might have recovered from the aforementioned cold more quickly.

I find it hard to believe that it never crossed the minds of lenders and brokers that the good times couldn’t last and that trouble was brewing. It is often said that consumers must take more responsibility for their borrowing decisions. Perhaps it’s time the industry held its hands up and admitted its role in the mess we’re in.