Friday 15 December 2017

Bankers are still trying to bamboozle us with jargon

'Bankers New Clothes' will help you understand how our system is still as dangerously flawed as ever, writes Carol Hunt

Carol Hunt

Carol Hunt

Have you heard the one about Kate? She had thirty grand to buy a house with. The one she liked cost €300,000 so she borrowed the extra €270,000 from her local bank. The market collapsed, Kate's home fell into negative equity, her business went bust and she couldn't meet her interest repayments. But she didn't worry too much. She used mainly other people's money to get herself out of her fix and she had a gullible but wealthy Auntie Claire to go guarantor on another home – meaning our Kate didn't have to provide any equity at all. It's a win-win all around for Kate – because the banks were still happy to lend cheaply to her knowing that Claire would foot the bill if the worst happened. No risk for anyone.

Except Claire.

The above are scenarios created by finance academics Anat Admati and Martin Hellwig in their recent acclaimed book The Banker's New Clothes: What's Wrong With Banking and What To Do About It. And 'Kate' is not an example of all the hapless borrowers who were given 90/100/110 per cent mortgages on homes they bought during the 'boom' years, because this is not a morality tale about personal responsibility.

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