REVEALED - we were within minutes of Great Depression II
Brian Dennehy
In yesterdays Financial Times we were told that on 1st October 2008 Royal Bank of Scotland and HBOS (Halifax and Bank of Scotland) were within minutes of closing cash machines, and closing the banks to day to day business on the High Street*.
If the latter had occurred we can only imagine the extraordinary consequences on the lives of all us. Except we don’t have to imagine that hard – the precedent for what would have happened next is absolutely clear. We were within minutes of a repeat of the Great Depression.
On 22nd September 2008 we sent out a note to clients plus some journalists and fund managers, just after the US authorities had already effectively nationalized their banking system:
“From the end of 1929 an economic downturn began which by 1930 was already very serious - we are now also midst an economic downturn, but nothing like the scale of 1929/30. But from 1930 it got much, much, worse, and a nasty recession turned into the Great Depression. It is the trigger for this dramatic change in 1930 that was arguably in the mind of the Federal Reserve when they recommended the remarkable step late last week to, effectively, nationalise the bad debts of the US banks.”
The trigger in November 1930 was US main street banks beginning to close:
“more than 7,000 banks were suspended over the subsequent three years and depositors were unable to access their money for some time. As the door of the local bank was slammed shut, individual depositors couldn't have been sure they would get any money back. Imagine their shock when the bank door was bolted against them, imagine how their behaviour changed instantly, how they stopped buying all but basic necessities, and the overnight impact this had on businesses, and then unemployment, which rose to nearly 24% at a time when unemployment meant hunger and destitution.”
Although much has been written about the Great Depression and its causes, it seemed to me there was (and is) an awful lot of theorizing, yet commons sense dictates that you must look for real causes in the real economy sufficient to change the behavior of real people – the bank closures did that. Our note went on:
“In a paper in 1983, reflecting on this period, it was noted that there was a coincidence of bank failures "with adverse developments in the macroeconomy". It was a bit of an understatement, but, while others tended to over-intellectualise in their analysis, this was an important insight into how shocks immediately change the behaviour of consumers and businesses. The writer of this paper was Ben Shalom Bernanke.”
It will be a long time before we know precisely what influence Ben Bernanke’s insight had on the actions of the Bank of England on 1st October 2008. Yet history leaves us in no doubt as to the appalling consequences if the Bank had not secretly lent £61.6bn to those two UK banks on that day.
At the time I sent out that note in September 2008, one fund manager suggested it was interesting but largely an academic piece. I wish he had been right – the fact is that it was far far too close to being a horrible reality, and now we know the truth.
* see the FT front page
here