Would Margaret Thatcher have rescued the banks?

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If she had been in power in 2008 would she have used tax payers money to prop up the failed banks?

If she did then she would have betrayed her own ideology of keeping government out of private enterprise.

If she did not then our economy would have collapsed.

This would have been a paradox for her because either way Free market economics would have failed.

As it happens she got away with being senile at the time of this issue and probably didn't even know it was happening. But her successors had to use the socialist ideology of buying out the banks in order to save the economy.

So what do you think she would have done had she been in power in 2008?

Thatcher was not an absolutist. She would have nothing to do with privatising British Rail, for example, calling it, "a privatisation too far."

The acid test for Britain came not in 2008, with Lehman, but in 2007, with Northern Rock.

When Northern Rock approached the Bank of England for liquidity support, the alarm bells went off (though, the financial markets and the FSA should have been ringing them far earlier). Faced with the first run on a British bank in over a century, the Government was presented with few options. By that point, the City was generating something like 9% of all British tax revenues. Allowing Northern Rock to collapse into liquidation would have represented not only chaos in the housing market, but aftershocks that would have resounded through the entire British financial services industry as Northern Rock's mortgage backed securities got written off as worthless on countless balance sheets.

Even Thatcher would have been confronted by the inevitability. When confronted by a choice between compromising your principles and financial disaster, she was enough of a pragmatist not to choose disaster.

Ok. Do you think then she would have been quick to encourage responsible practices on the banks? If she had put them under government ownership would she have put regulations in place?

Well that's a much more difficult question.

The root of the financial crisis lay in one major problem: mortgage risk wasn't assessed properly, so mortgage backed securities weren't properly risk rated. From that perspective, there was an enormous failure in government's responsibility for prudential supervision.

I don't think Thatcher's response would have neen nationalization. I suspect that she would have been far more likely to find means to support a private sector buyer (there were two failed attempts to buy Northern Rock before nationalisation), and I suspect that she would have been in a position to negotiate terms.

But part of the problem was that no amount of prudent regulation going forward would have served to make the mortgage backed securities less poisonous.

Actually there is some history, here.

The deregulation of the banks was made under her watch. We talk of the failure of the regulators, etc, But banking pre-80s was a much formal affair. It was quite conservative.

She was specifically against the Old Boy era, an encouraged the sort of aspiring risk takers, like Nick Leeson.

It was actually deregulated in the UK, before the US in fact. With why there was lots of American over here at the time.

The answer is yes as this is what Pinochet did.

I think the point I am trying to make with this question is that the banking crisis has basically shown her policies to be questionable at best.

If she was to continue as the "lady not for turning" then she would have had to let the banks go bust and stayed out of any rescue of them. But that would have led to an economic disaster that would have got her booted out of office.

If she did rescue them then she would be going against everything she stood for and so would have effectively demonstrated that her policies were wrong.

As it so happens she was out of power for 16 years at the time! We could also ask what Attlee and Gladstone would have done.

I'm not inclined to blame someone 16 years later when Northern Rock's balance sheet was probably 90 percent (or more) from after her leadership.

It is more apt to ask what Thatcher would have done because the crisis occurred as a result of policies she put in place in the 1980's, along with Ronald Reagan.

What happened with the banks was a direct result of her deregulation of financial services and her housing policies which triggered the housing market boom.

Not so fast.

She created the regulatory environment in which mortgage lenders could sell off their risks. In conventional banking, if I lend you money, I carry the risk if you can't repay. But when I sell your mortgage to investors, then I am transferring the risk to them. That was the entirety of Northern Rock's business model, and it was made entirely possible by Thatcher's deregulation of the financial system. She created the regulatory environment in which banks and lenders could hold equity stakes in the rating agencies. Banks make more money when more people are qualified to borrow. So they have a direct financial stake in the rating agencies making sure that as many people as possible are able to borrow. She created the regulatory environment in which banks could under capitalize their risks. She removed the authority of the Bank of England to exercise oversight over the financial services sector by the creation of the SIB (which went on to become the FSA).

I am well inclined to blame her, and both of her successors who failed to correct the particular bit of regulatory folly.

You don't have to be a regulatory imbecile to give relatively free rein to the financial marketplace. The UK and US were devastated by the folly of their financial sectors, yet Germany and Canada were not. There is a lesson to be learned here.

So, she allowed, in a model that would'nt take off until later, a bank to turn assets (mortgage notes) into cash. When most companies do this, it's generally called "making a sale".

I know that's a gross oversimplication, but I really can't hold someone responsable when all they did was loosen regulatory oversight 16 years earlier. I blame the regulatory powers, both UK and the US, for failure to properly monitor the quality of the paper that was being bought and sold, and I blame them for not testing out balance sheets if that paper suddenly stopped paying.

The bankers are ultimately for blaming. But Thatcher basically gave them the nod.

I think it would be interesting to have known what her reaction would have been in 2008. If she had to nationalize the banks I reckon she would have given the City of London a verbal beating that Gordon Brown didn't manage to do, and I reckon she would have been quick to lay down some discipline with them.

When I sell you a package of mortgages from borrowers who are all rated "A", but a substantial number of whom are ninjas (no income, no job, no assets), that's not called "making a sale," that's called "fraud."



Who created those regulatory powers? Thatcher created the SIB, which failed to monitor Barings, got reformed into the FSA, and then failed to monitor Northern Rock.

She created a financial system in which the City was trusted to act as an honest dealer and which provided insufficient powers to police the City when it failed to do so.

This was an obvious and foreseeable result, and if you look at the discussion that was taking place in the 80's there were plenty of people predicting the results that were borne out.

Really? She was supposed to understand what her successors and the succesors of bank regulators were going to do over the next 16 years after she left office? By Alex, you're tough on your elected leaders. I just expect them not to steal directly from the Fisc and to make sure they disclose campaign contributions.

Yes it was very predictable. I was a teenager int he 80's and even I saw it.

My alarm bells started ringing during the early 2000's when I couldn't walk down the high street without some sales rep running up to me trying to get me to take on a credit card by simply signing a sheet of paper they waved in my face.

Read up on the history of Venice and the Dutch Republic, Higher-risk investments always look good when your benchmark interest rates plunge. Once you seperate the effective risk and/or social malleus from failed high-risk investments, the end result is always the same.