Marcus Papadopoulos
Chief Executive of Leonard Cheshire

REFLECTING ON THE 10th ANNIVERSARY OF THE FINANCIAL CRISIS

Vince Cable, Leader of the Liberal Democrats, speaks with Marcus Papadopoulos about his memories of the 2008 Financial Crisis and
what has been learnt in Britain since then

The financial crisis which struck the world in 2008 was the most devastating since the Wall Street Crash of 1929, and the effect of this profound shock was the deepest recession experienced in the UK – and many other countries in the West – since the Second World War.
For the British public, the most painful legacy of the financial crash is the deficit reduction measures, imposed by the Coalition Government in 2010, following Alistair Darling’s commitment to eliminate the vast post-crisis deficit.

As for the UK economy, some economists contend that the legacy of 2008 is that GDP, today, is £300 billion, or 16 per cent, smaller than what it should be had the crash not occurred, based on growth forecasts in 2007.

Ten years on, the memories of the crash continue to haunt British society as a whole.

However, lessons have been learnt since 2008, and the banking system in the UK has experienced substantial reforms.

To discuss the legacy and lessons of the tumultuous events of ten years ago, is Vince Cable, the leader of the Liberal Democrats.

As Secretary of State for Business, Innovation and Skills throughout the duration of the Coalition Government, together with
being a recognised and highly respected authority on economics, Vince Cable is perfectly placed to look back on 2008 and consider how far the banking system has come since then.

In this exclusive interview, Vince shares his memories not only from ten years ago but also from 2007, discusses whether he saw the financial crash coming, considers the causes and costs to the UK economy of what happened, opines on the reforms that the banking system has gone through, and whether a crash of the same magnitude, as in 2008, could occur again.

Reflecting on the 10th anniversary of the financial crisis

Q. This year marks the 10th anniversary of the 2008 Financial Crisis. What are your memories from that time?
A. My most vivid memory is actually of the year before, in 2007, when I was climbing in the Lake District and a telephone call came through to me from the Daily Mail, asking for a comment on the problems which were being experienced by a bank called Northern Rock. So I gave some suitably critical comments which made the front cover of the Daily Mail the next day, and thereafter I became the come-to-person for the media on the baking crisis. Alas, throughout 2007 and 2008, I was perpetually commenting on the crisis in the banking system, especially on both Northern Rock and the Lehman Brothers. I have evocative memories of the week after Lehman when the whole system was in meltdown and I was trying to comprehend the sheer scale and seriousness of what had befallen the banking system, while trying to give a responsible and intelligent commentary on the matter

Q Was that a crisis you suspected was coming?
A. Well, not of that magnitude, no.I had been concerned, for some years, of what I considered to be reckless mortgage lending which was pushing up houses prices to unsustainable levels and heavily involving the banks in mortgages which went far beyond prudent levels. However, what I had not fully understood, at the time, was the extent to which that was supported by securitisation and the extent to which this was not just a British problem but also an American one because it was in the United States where the crisis developed its full momentum before impacting on the rest of the world. So while I did know that the banks were getting out of their depth, I never quite foresaw the scale of the banking crisis which eventually emerged with devastating impact.

How would you define the causes and costs of what happened in 2008 to the UK economy?
A. There were several inter-related, underlying causes for the crash.Reckless bank lending and securitisation was connected with the way in which international banking had become much more inter-connected, which, in turn, made bankers feel completely safe.Bankers had an implicit guarantee that banks were deemed too big to fail so they felt assured to lend recklessly with limited capital. Now, in terms of the UK, the argument that the crisis was all the fault of Gordon Brown was – and remains – wrong, in my view. The problem was that
the British banking sector was so big, relative to our economy, that any banking crisis was going to affect the UK more seriously than elsewhere – and it did. That was an indictment of successive UK governments having allowed the banking sector to dominate the UK
economy far too much. Finally, turning to costs, the 2008 crisis was the most damaging financial crisis to engulf Britain since the inter-war
period. It was the first time that banks had collapsed since the middle of the nineteenth-century. And the result of that was a substantial loss
of income and wealth, though this could have been far worse had the crisis not been properly dealt with, and I credit Gordon Brown and
Alistair Darling for their initial actions to shore up the system.

How far has banking reform come since 2008?
A. Well, reform has come a long way since then. The main reform which I was involved in, when I was Secretary of State for Business, Innovation and Skills, during the time of the Coalition Government, was the Vickers Commission, which led to the splitting of the investment banks and the retail banks. That reform has, undoubtedly, made the banks much safer, coupled with the fact that banks are now required to hold significantly more capital. However, the problem today is not with the major banks themselves but with the shadow banks which are operating without the same level of supervision. Furthermore, there are some major problems in the emerging markets, like the Chinese, which could potentially be transmitted to the UK. But, in short, the big banks are safer today than they were before.

Q Could, what happened 10 years, reoccur, and, if so, how can it be prevented?
A. The metaphor which I would use is that lightning is unlikely to strike twice in the same place but we have not abolished lightning. There will always be lightning and there will always be financial crises. The most important thing to make sure of is that the banking institutions are as safe as possible, which they are today, though the same cannot be said of the financial system as a whole. One of my worries is that some of the mechanisms which we would normally use to fight a crisis, such as letting government debt rise, would not be so easily available to fight another crisis today because we spent a lot of our money fighting the consequences of the 2008 crisis.

The problem today is not with the major banks themselves but with the shadow banks