The Fall of the House of Credit by Alistair Milne

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The Fall of the House of Credit by Alistair Milne

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Category: Business and Finance
Rating: 3.5/5
Reviewer: Sue Magee
Reviewed by Sue Magee
Summary: A convincing argument that the banking crisis was not caused by toxic assets but by the Banks' own financing and a loss of confidence is an interesting but difficult read. Recommended for those with some knowledge or a lot of determination.
Buy? Maybe Borrow? Yes
Pages: 380 Date: July 2009
Publisher: Cambridge University Press
ISBN: 978-0521762144

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It now seems to be established as fact that so-called 'toxic assets' – mostly sub-prime mortgage investments in the USA were the cause of the current banking crisis, but Professor Alistair Milne of Cass Business School argues otherwise. It's his contention that many of these 'toxic assets' were (and still are) sound investments which will be repaid in full without any problems and even the defaults will not be a large proportion of the whole. He argues that it was the initial loss of confidence in these investment vehicles which began a downward spiral and resulted in the collapse of several Banks.

In my youth Banks primarily raised the money which they loaned to customers from depositors and given the apathy of the normal depositor these tend (and tended) to be long term funds on which the Banks could rely. With the expansion of their mortgage business, they required additional funding and turned to 'renting' money from the short-term money market which then funded a consumer boom. Milne argues that it was this which was the root of the problem, but he freely admits that there was mismanagement by senior bankers.

He argues the need for us to reduce our current account deficits but accepts that if every household increased their savings it could well make matters worse – it's our spending which will actually rejuvenate the economy.

Milne provides a considered dissection of the banking crisis up to March 2009. He looks at the historical perspective, the reasons why changes came about and how they contributed to the crisis. Those of us who followed news reports and blogs at the time may well wonder if we are reading of the same events. Gone is the hype and in its place is studied analysis and I found it compelling, but I didn't find it easy reading.

Professor Milne says that the book is for the general reader and I should have found myself over-qualified as a reader, given my background in finance, but whilst none of the concepts was beyond me I found the style difficult to cope with. There is the public speaker's habit of 'tell them what you're going to say, tell them and then tell them what you've said'. Subjects are mentioned, heralded as being discussed further in one or more chapters later in the book and then recapped. Whilst there's detailed further reading at the end of each chapter there are numerous lengthy URLs within the text which drag concentration away from the subject. In fairness, I will say that the book is as jargon-free as possible and there's a glossary to explain those terms which cannot be avoided.

Information is not provided is a reader-friendly way – I was on the edge of frustration with the subject of current account deficits and surpluses. This might sound like a dry subject but is actually interesting and informative. If you earn £100 and spend £105 you have a deficit of £5. If you spend £95 you have a surplus of £5 – minus or plus 5%. Obviously this can't carry on for a country indefinitely any more than it could for a household and Milne gives a table which shows some deficits and surpluses for 2007. It's frightening to see that in the UK we had a deficit of 4.9%, the USA 5.3% and Spain an eye-watering 10.1%. Interesting, enlightening stuff – but he then goes on to discuss these figures, sometimes using slightly different numbers so that I kept checking back to see if my memory had failed me and then discussed the figures for other countries which were not included in the table.

The style is dry and for the generalist, there's nothing to compel you to keep reading which is a great pity. It was probably acquired when he worked for the Bank of England and HM Treasury. The book puts the banking crisis in perspective and understanding what has happened can eliminate the sense of panic. It's a book I'm grateful to have read and pleased to have finished.

I'd like to thank the publishers for sending a copy to the Bookbag.

For more about the banking crisis we can recommend Dear Mr.Buffett: What an Investor Learns 1,269 Miles from Wall Street by Janet Tavakoli and for more complex financial products explained for the non-specialist why not have a look at The Long and the Short of it: A Guide to Finance and Investment for Normally Intelligent People Who Aren't in the Industry by John Kay? You might also like to consider Fans Not Customers: How to create growth companies in a no growth world by Vernon Hill and Bad credit loans are making the vast majority of Americans poor people.

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