This, the Thomas Miller Investment Event, was chaired by Ian Fraser, whose book on the RBS collapse, "Shredded", featured in an earlier Edinburgh Book Festival event (see my write-up on "Crisis at Scotland's Biggest Banks").
Robert Peston was educated in north London and at Balliol College, Oxford. He worked at The Independent, Financial Times, and Sunday Telegraph before being appointed Business Editor for the BBC. He has won several journalistic awards and general acclaim for his coverage of the financial crisis and in particular for his scoop on the failure of Northern Rock.
He has written a searching book entitled, "How Do We Fix This Mess" about the current financial problems we have and what is needed to extract ourselves from our difficulties.
Peston first asked for a show of hands on where the audience thought we were today - most people seemed to think that things had not improved. There were only two or three brave people who thought things were better.
He then asked us to look at the producing countries (like Germany, China, Japan and the oil rich states of the Middle East) and to compare them to the consuming countries (such as Britain and others) and said that those countries which were not producers together ran up debts of about a trillion dollars each year. In his view, they are simply out of control.
If one takes into consideration all the debts of the consuming countries, that is government, companies, financial institutions and ordinary household debts, there is the potential for an even greater run on the banks than before.
The problem has been caused in part by relaxing the amount that banks have to keep available to cover lending. With an increase in lending you might have expected the reverse to happen and for banks to be told to hold more in order to protect the savers. This relaxation led some of our big banks to increase lending until they had loaned some fifty times the amount of money they had as capital. Northern Rock, which became the first bank in 150 years to experience a bank run, made loans up to one hundred times the capital held.
It was not just the banks who were at fault, but there was a huge failure of the regulators. At the start of the meltdown we owed some 189% of our gross domestic product (GDP) and at the height of the crisis we were owing 492% of GDP. A real horror story.
Everyone would like an economy to be as strong as that of Germany, but the hard truth is that other countries are uncompetitive. Germany has a massive surplus while other nations still borrowing.
Part of the problem in the UK as well as other European countries is that in the UK we depend on banks for about 80% of our borrowing with only 20% from elsewhere.
In the United States this is reversed and they only depend on banks for about 20% of borrowing with the balance coming from other sources. This is why the US recovery has been faster than that of the UK or the Eurozone.
Peston pointed out that it is incorrect to say that Germany is not pulling its weight: Germany is behind the European Central Bank and without German support it would struggle.
Overall, he thought, there was insufficient global resilience still between the consuming and producing nations. He questioned, however, whether this fall in imbalance was temporary? So far no attempt has been made to tackle the size and shape of the banks who caused the problems. RBS, HBOS and Barclays all need to be restructured, but there has been no meaningful debate about this in the UK. In addition there has been no effort to revisit the Basel agreement which damaged wealth creating and encouraged people to pile into more lending because the banks were required to hold even less money to match the amount loaned out.
Historically lending had been more or less the same for almost a hundred years, but then in the 1990 to 2000 period there was a lending explosion. From 1992 to 2007 there were no recessions; these were amazing years, being fuelled by an unsustainable increase in borrowing. It is sobering to consider that 1982 was the last time we did not borrow from the rest of the world.
Britain is simply not paying its way in the world and this is the reality of the situation. What Peston found depressing was that the reports from business are that the young people leaving school lack the skills that industry need to employ them. This needs to be addressed urgently by government if we are to get ourselves into a better position financially in the long term.
We need to realise that our debts are getting bigger each year by something like £120 billion. Peston stressed that it is going to be a long journey for the UK to mend its financial situation. The cuts in the UK economy are really not deep enough, although he appreciated that there are something like five million people who are trapped by debt and spend up to half their income on paying interest on the money they have borrowed.
Peston pointed out that Ireland, Spain, Greece and Italy had all enforced really savage cuts in wages and living standards, which are much greater than those suffered by the UK, which for these countries, has created something in the region of 25% unemployment. While there is a production gap between Germany and other European nations, particularly Spain, France and Italy and the easy option would be for Germany to spend more on products from other countries, there is absolutely no way of forcing them to spend their money in this way. The same, of course, Peston said, applies to China.
Asked if the Eurozone can survive, he felt it would so long as Germany remains strong, however, any major banking failure will obviously shake the rich economies. If Britain had been a member of the Eurozone he was adamant that it would have gone bust. In this situation he could not see how the Euro could possibly have sustained the losses incurred by the UK banks. For all it was a blessing that we had decided to remain outside the Euro.
Robert Peston's presentation was hard hitting and well illustrated so that the audience was left in no doubt about the severity of the problem. For those who have not read it already, Peston's book, "How Do We Fix This Mess" is obviously essential reading.
How Do We Fix This Mess by Robert Peston (Hodder & Stoughton, 2013)