Writing in 2007 about Amy Womble, a widowed mother-of-two from North Carolina caught very much at the sharp end of the nascent subprime mortgage crisis, a Herald reader dismissively asked why he should “care about Americans who borrow more than they can afford to repay, and those who are stupid enough to lend it to them”.
Less than 12 months later the global financial system was on the brink of collapse. The banks had packaged up all those risky loans as mortgage-backed securities and sold them to investors looking for the biggest return on their money. When Amy Womble and the rest couldn’t pay up, the system imploded triggering a crisis of confidence with major institutions scrambling to collect any and all that was owed to them.
At its peak, the UK government was forced to stump up about £137 billion in efforts to save the likes of the Royal Bank of Scotland (now NatWest), Lloyds, Northern Rock (which was acquired by Virgin Money), and others. Lenders withdrew lines of credit en masse leading to the ruin of tens of thousands of businesses across all sectors and the loss of an estimated 3.7 million jobs.
I’m not sharing this story as a means of claiming any superior economic prescience to the world’s foremost financial minds. It’s merely a stark illustration of the unintended consequences of seemingly small actions – and the failure to take timely preventative measures – in the interconnected world of global finance. The........