Do we need an inquiry on the Libor scandal? No. The boom phase of every boom-bust cycle breeds this sort of excess and dishonesty. It is to be expected. All another banking investigation will conclude is that we need more curbs on the banks. That might cure the symptoms – quite probably by killing the patient – but it will not prevent the disease from coming back.
Instead, we would be much better investigating and curbing the excess and dishonesty of the politicians who created the artificial, unsustainable boom in the first place, and thereby encouraged the banks – and we borrowers too – to make some pretty massive mistakes and do some pretty colourable things.
There have been so many boom-bust cycles over the decades that by now we ought to be able to recognise the pattern of what occurs. In the boom phase, business is great. Money seems to be growing on trees. Loans are cheap. Every investment becomes affordable. House prices spiral upwards, so people take out bigger and bigger mortgages. Every deal and every business works brilliantly. Every risk pays off. Sure, there are some sharp operators lining their own pockets, but who cares, when everyone's having such a good time?
In the bust phase, the exact opposites are true. Money is short. Credit is tight. Investments made in the boom phase now fail and have to be written off. House prices splutter, and people can no longer afford their mortgage payments. Businesses go bust. Even small risks come to look frighteningly dangerous. And the sharp operators suddenly feel the heat of people's anger as cash-strapped individuals and businesses start caring about the pennies again.
What we have seen with the banking crisis and the credit crunch, and what we are seeing now with the Libor interest-rate fixing scandal, is simply the unfolding of the bust phase of such a cycle. The rot started during the boom phase, when everyone was happy to ignore the risks and the sharp practices because the party was going so well. It was then, in the boom phase, that the ordure started to pile up. Only now has it started to stink so much that we feel moved to do something about it.
But what caused the boom phase, the devil-may-care party in which all this financial recklessness, all this dodgy dealing, was allowed to streak through the living-room with no one taking their lips off the champagne bottle long enough to notice? Who provided the booze that made everyone – not just the bankers, but the rest of us who ran up huge loans to buy luxuries and houses that we could not afford – drink so excessively on cheap credit and leave themselves with such an enormous hangover? It was, of course, the politicians – on the back of cash provided by the lax monetary authorities. And meanwhile, the regulators who should have been policing the party were already asleep on the floor.
It was America's politicians who, in the name of promoting home ownership, forced US banks to provide mortgages to people who plainly could not afford them – poisonous loans that America's banks quickly diced and sliced and sold on to ours. It was Fed Chairman Alan Greenspan and his counterparts at the Bank of England who made credit so cheap and money so plentiful that nobody thought any of this was worth worrying about. It was Gordon Brown's government, in particular, that fuelled the boom to explosive levels by spending and borrowing as if the reckoning would never come.
And sure, in the process, a lot of people did a lot of stupid things, and a lot of bad things. It's pointless, though, for the people who actually hosted the party now to wring their hands, blame the people who got drunk on their easy credit, and say that we need new investigations over what went on, and new restrictions to stop them doing it again. What went on is perfectly obvious. And it was encouraged by government-created disincentives and excess.
So if we want to prevent the same things happening again, we we would be better going to the real cause of the problem. We would be better off investigating, and curbing, the over-spending, over-borrowing, over-inflating, over-expanding governments who corrupted our entire economic and financial system in the first place.