I’ve thoroughly enjoyed reading Robert Peston’s How Do We Fix This Mess? Its author is so famous, as the BBC’s Business Editor, that his photo is on the front cover. Yet he’s modest enough to start the book with: “I don’t know. But don’t stop reading now.” Indeed, the title is misleading because he sensibly does not try to dole out generalised policy prescriptions. (Oh and – note to publishers – that’s enough long and chatty subtitles, thank you. They’re becoming annoying.)
The book draws on Robert’s long experience as a journalist covering the banking industry. (I should say that I’ve known him for years and followed, albeit far less successfully, in his footsteps at The Investors Chronicle and then a national newspaper, The Independent in my case, the FT and Sunday Telegraph in his.) As he says, it must seem to others to have been a boring reporting beat, but it has paid off handsomely in equipping him with the knowledge and the contacts to report superbly on the financial crisis to UK and worldwide audiences.
How Do We Fix This Mess combines chapters giving the context for the crisis, and – the heart of the book – chapters describing what happened in the course of the crucial events starting in late 2007. Scene-setting chapters describe the process of innovation and growth in financial markets and the creation of new kinds of derivatives; the inadequacy of the regulatory regime, and how it came to be so feeble; and the globalisation of the world economy and rise of China. These are all excellent overviews, although some readers will find this familiar territory.
I found the chapters on the early days of the unfolding crisis the most interesting, from the warning signs about Northern Rock through 2007 and the extraordinary run on the Rock in September that year. As Robert points out, the fact that Northern Rock’s business model involved online banking, with very few branches, meant that even a small proportion of depositors wanting to withdraw their money (my sister was one of them) translated into a big queue outside the branch. Some people accused him of causing the crisis, as if the drying up of credit markets and an unsustainable business model were somehow caused by the reporting of it. He is also very interesting on the part played by the Bank of England, much criticised for its handling. As Robert says, Mervyn King was right to say bailing out the banks would contribute to moral hazard – look at where we are now, still hostage to these titanic, toxic institutions – but the book criticises the Bank of England for not raising interest rates or taking other actions in the years before 2007 to puncture the evident bubble in asset markets. MPC minutes from 2005 and 2006 show little concern with its unsustainability or the need to raise interest rates: they were reduced once in 2005, and raised twice in 2006, but by just 0,25% points each time.
The book then turns to the Euro crisis and ends with the Libor scandal, and, rather than a list of things governments and regulators must do, Robert writes: “Perhaps the most important [cause of sluggish growth] is that there is a growing realisation that we have to take steps to live within our means, over the longer term…. The innocent pay a price for the national indebtedness that they did not cause or choose.” He professes himself optimistic:
“The clean up will take years. And there is no quick fix, so you need to brace yourself for perhaps a decade of economic stagnation. As it happens, I don’t think that is reason to weep. We are a very rich country. And we can be a very happy country if we learn how to make the most of what we have got.”
I must say, I’m far less optimistic about the way the economics and politics of the coming lost decade will play into each other. Let’s hope I’m wrong and the mess is fixable. Either way, this is a terrifically interesting and well-written book, which benefits greatly from its author’s detailed knowledge of the banking industry that is at the heart of this crisis.