By John Authers
Robert Peston, business editor at the BBC, broke the news that Northern Rock was to receive emergency funding from the Bank of England in 2007.
In his article he said that those with savings in the lender had no reason to panic and that it did not mean the bank was in danger of going bust. But the next few weeks saw winding queues outside branches as customers rushed to withdraw their money.
In many ways this was the visceral moment the financial crisis hit the UK and banking shot to the top of the news agenda.
But in his potted history of finance over the past century, The Fearful Rise of Markets, John Authers, former investment editor at the Financial Times, recognises that the run on Northern Rock occurred despite generous deposit insurance. All savings up to £2,000 were secure, as were 90% of savings up to £30,000.
This demonstration of irrational fear throws a spanner in the works of economic theory and questions the domination of free market orthodoxy.
No one can predict how humans will react to a given situation and even rational steps to protect savers, such as government deposit insurance, are not always enough. This was confirmed when the government’s increase of insurance to 100% of £50,000 – a move that did not affect the vast majority of people – actually stopped the run on Northern Rock.
The entire banking system is built on sand and the potential for illiquidity is obvious because banks lend savers’ money so it is not always available for withdrawal.
Authers charts key moments from the recovery from the Great Depression to the modern day. Pivotal moments include the relaxation of mortgage-backed bonds regulation by Ronald Reagan, Goldman Sachs’ speech about Brazil, Russia, India and China and Lehman Brothers’ collapse.
The book is also divided into two simple sections: the rise and the fall. The fall begins in Shanghai on February 27 2007 when volatility in the financial markets makes synthetic products more difficult to create.
From Shanghai the book gathers pace as events change culminating in the collapse of Lehman Brothers, the seizing up of credit and then recession.
Authers details the political response to this in startling terms. Stockbrokers who pay almost no attention to politics were hooked on footage of the votes rolling in when, despite expectations, the US Congress refuses to pass the $700bn Troubled Assets Relief Programme in September 2008, on which the United States’ economic future rests.
Authers describes how those on the right believed in free competition and the failure of banks while those on the left detested taxpayers bailing out rich bankers.
Despite bi-partisan and presidential backing the failure of the bill led to a few frantic moments of sales on the New York stock exchange. It took four more days to pass the TARP legislation and calm the beasts of the market.
Authers effectively grasps the real sense of panic that exists during crises and the manic behaviour that ensues. In the absence of certainty and the likelihood of more bubbles and crashes the continued rise of markets is truly something to fear.