Who was to blame for the credit crisis?

Sean O'Grady in the London Independent writes this morning on who's to blame for the catastrophic credit crunch which has developed over the past year. While he focuses on the UK, he also makes many arguments which we can also use from an Irish perspective. He believes there are three schools of thought on its cause:

The Macroeconomic School: This blames no one. Basically, much of the money that flowed into the western economies over the past decade came from export-driven emerging economies. That led to their large trade surpluses with us. In effect, we consumed more than we earned, and these emerging economies lent us the money to carry on doing so. With this money we created an asset bubble, an inflation in one particular type of investment. It happened, in Ireland, the US and the UK, to be housing, but it need not have been. The money could have gone into any kind of asset, as it has before. Before the Great Crash of 1929, it was shares, as it was before the dotcom crash of 2000. It could have been classic cars, or antiques, or fine wines. We will always have crashes, and it is foolish to suppose that we can prevent this sort of thing happening again. So, on this view, it is really no one's fault, except, perhaps, our own, because of our unquenchable desire for cheap DVD players, lovely homes and lack of fear about debt. However, people never look to blame themselves first. What is happening now is a reflection of that; we have to pay back our debts and cope with a transfer of wealth and income to China. The financial sector has to shrink and rationalise and we basically don't fancy making that historic adjustment.

Hence our second school of thought.

The Regulatory School: This is the one that holds most attraction for the politicians and public because the public are unwilling to accept simple explanations. They usually want to blame someone. Up to a point, they are right, though. It is difficult to argue that Ireland or the UK's arrangements were perfect on any count. The example of Spain is a powerful one. There, the Government discouraged the banks from joining in the American sub-prime party. Now, as the economy enters recession, we do need the money, and yet they won't lend. Even so, it is also fair to point out that Spain's real estate boom and crash has been almost as dramatic as ours.

The Banking School of Thought: Here, the blame lies with the banks. This is not because they were too greedy but because they were too stupid: they failed to maximise their profits. There is something in this, too. The banks are not some sort of force of nature that has to be tamed by governments and regulators — they are responsible for their own actions. They did not have to offer folks 'Ninja loans' (no income, no job and no assets). They did not have to create financial instruments that their senior managements didn't understand. They did not have to adopt the "originate and distribute" model of lending that converted bankers into dodgy salesmen and distributed risk arbitrarily. They did not have to have bonus systems that rewarded taking on too much risk and short-termism. And they don't have to rely on quite so much funding from the money markets – and often from abroad – as opposed to customer deposits. The growth of the banks' balance sheets over the past few years was impressive; but it was driven by a dangerous increase in leverage (they borrowed too much as well) and by making less and less prudent lending decisions. Should the Irish Financial Service Regulatory Authority or the Government have stopped them? They could have tried harder but the regulators can't make the bankers' commercial decisions for them, and it was those that were flawed.

Of course, these schools of thought are not completely mutually exclusive. In reality, it is more a question of where the balance of blame attaches.

The full article