Financial Frankenstein.

Brian Reade has recently written about our collective obsession with the housing market – specifically the misguided belief that somehow our wealth is measured by the value of our home. (NO SYMPATHY NOW YOU’R BRICKING IT  – Daily Mirror 10th April 2008).

I still remember those far-off Seventies when every day was sunny and our financial life was so  blindingly simple. 

The Bank issued chequebooks and dished out overdrafts and small loans, the Building Society lent you money so that you could buy a house (after you had spent several years saving up for a deposit), and the Insurance company insured your life so that your wife and kids would be provided-for in case you died .

The Bank, the Building Society and the Insurance Company each stood at its own apex of the Financial Triangle. Then something happened .  The dark clouds of financial greed scudded in, fanned by the hot air of Thatcherite rhetoric. Laws and Rules were changed.

The Bank decided that as well as being a bank it would become a Building Society and Insurance Company. It would provide bank accounts, mortgages and insurance.

The Building Societies’ Act was changed , allowing the Building Society to become a Bank and also provide chequebooks, overdrafts as well as mortgages. It also started selling insurance.

The Insurance company also had a go at everything and all three institutions even had a go at  becoming Estate Agents.

Three venerable institutions had become indistinguishable. Three Frankensteins.

New technologies meant that they could all invent new financial products which evolved from being difficult but not impossible to understand,  to totally incomprehensible.

Thatcherism had also imported the American corporate concept of “optimising the client base”, “cross-selling” and the word “synergy” was added to the corporate Thesaurus. Or to put it simply – if you had a list of clients, you designed more products and sold them to your existing clients and then you sold your clients’ details to another company who sold some more and gave you a rake-off.

What happened to the original building society concept?  In those days, members would pay a small regular amount of money into a  fund. When the fund was big enough to buy a house, all the members’ names would go into a hat and one lucky saver became a house owner.  Then they all repeated the  process until they all had a house.  Savings drove the process – not borrowing.

Banks were originally paid a fee to look after our money and their profit margins were quite small.

Insurance companies  used to work on a similar principle to the Building Societies. Members paid a small amount into a fund  on a regular basis. When one of them  died, the family received a bit of money from the fund so that they could keep going.

The root cause of the current house-market predicament has been Change.  Let me explain.

For the last thirty years we have grown to believe that all change is good. For instance read the Executive Recruitment pages and count how many times you see the word “change”.  A good example is our education system. By the mid seventies it  had reached what can be described  as “Steady State”. It worked and it was simple. Teaching Assistants, Dyslexia , Exclusion and BMW-driving Education Authority Execs had not been invented.

Then the Agents of Change trained their rheumy eyes on  the whole system. You know the rest.

The Financial Services industry, just like the Education industry has  evolved too many sub-strata of  cost-centre. (A cost-centre is part of an organisation that adds to the cost of running the organisation).

Imagine a finite pool of money sloshing about within the housing sector. Currently, there is not enough to satisfy demand because that pool of money is hemorrhaging in the direction of the various non-productive cost-centres. A cost-centre can be anything from an over-paid Chief Executive (yes,yes, we know all the arguments), a bonus-fuelled City barrow-boy  to an inept financial regulator.

We have created a composite financial Frankenstein yet we continue to worship it and the perceived riches that it has brought to our mortgaged doorstep.

Brian Reade was right (“You over-borrowed and overheated the market”) but much of the blame lies with Thatcher’s financial  love child that was handed to us after conception. We embraced it, loved it and believed its increasingly outrageous promises for 30 years.   

It  has now matured  and is ready to screw us.