Kieran Lawrence looks at autonomous weapons and the effect they could have on modern warfare
Continuing a series on world leaders, Miles Deverson takes a look at Angela Merkel
Ben Bland examines the fallout from the Iowa caucuses and looks forward to the New Hampshire primaries.
In the first of a series on world leaders, Miles Deverson takes a look at Nicholas Sarkozy
As banker bashing is all so fashionable today, The Yorker felt it was time to talk about what bankers actually do and why it went so horribly wrong.
First of all, it’s important to separate the two types of bank. First, a retail bank takes deposits from you and me, and gives us a set interest rate dependent on the size of our deposits. Knowing that we will be leaving our money in the bank for the long term (particularly savings accounts), the bank will also lend that money to people, who have to pay the bank a set rate of interest for the privilege.
However, it’s not that simple. Imagine you walk into the bank and deposit £1,000, and intend to leave it the bank to accumulate interest for the next few years. Your bank therefore decides to lend out £750 of your deposit to me, and I spend it on a new computer. The computer salesman then walks down to the street and deposits that £750 in the same bank. The bank then lends some of his deposit out to someone else who goes and buys a computer. And the cycle carries on, to such a point where an initial deposit has enabled the bank to lend out several times the original amount to others. This is known as “fractional reserve banking”.
But this shouldn’t be a problem as I leave my money to accumulate interest and this debt drives growth as increased lending allows increased investment, which increases production and makes us all richer. At least that’s what happened between 1970 and 2007.
Cracks start to appear in the apparatus when this all gets out of control, as it did in the American housing market. All of this new debt fuelled house prices, which went sky creating lots of overprice houses. Banks then gave people with little income loans to buy them and became known as “subprime mortgages”.
But around 2006, US interest rates went over 5% and people stopped being able to pay back their loans as monthly repayments shot up. Because of this, some banks couldn’t afford to give money to their depositors as they weren’t getting their loaned money back. This lead to depositors panicking and big queues formed as people tried to take their money out of the banks before it was too late, as we saw with Northern Rock.
So where do the investment banks, the so called “casino banking arm” come into all of this? Well whilst you might have a mortgage with HSBC, they might not necessarily want to “own” that mortgage. So what they do is sell it to another bank, or hedge fund, at a discounted price so they get their money back (and a little bit extra) and the organisation who “bought” the mortgage gets the money that the borrower pays back (giving them also a tidy profit). An investment bank effectively facilitates these transactions by buying up lots of mortgages, combining them and then selling them off to buyers as one.
The problem was that the investment banks would bundle thousands of these sub-prime mortgages together for sale. Some investment banks, like Lehman Brothers, would often onto these for a bit before selling them on, to increase their profit. At the same time, ratings agencies would tell everyone that they were “triple A assets”, that is to say that there was pretty much no risk with them and that they were easy profits. Except they weren’t, they were largely made up of hillbillies with a $500,000 mortgage on a shack.
That was where the problem was – risky lending can be ok if the banks price it right. On average, they can make profit out of it. The problem was that, to use a motoring analogy, people were selling a clapped out Nissan Micra as if it were a brand new Ferrari. And when people realised what was happening, suddenly the system came crashing down.
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