Who is to blame for the financial crisis – so far?

We can all agree that Bank directos and CEOs who presided over too rapid a build up in loans to people and companies who may not be able to repay are to blame if their institutions then fail or need access to public funds. We all agree they should not have advanced so much money, and should have secured longer term credit to finance more of their business. They should have raised more capital from shareholders in the good days to help pay for the expansion. To the extent that this is just a number of banks that have got into trouble we can blame their bosses.

But this is more than that. This was a credit binge aided and encouraged by Central Banks and regulators. Governments often played a leading role in borrowing more and more, and led the innovatory ways of borrowing without showing it on their own balance sheets. The following are also guilty:

1. The Bank of England, the ECB and the Fed all got monetary policy wrong. They set the wrong interest rates, and ignored the warning signs. They allowed a big inflation to take off, busting the targets they had been set.
2. The Bank of England and the ECB are getting the downturn wrong, keeping interest rates far too high and making recession more likely. The Fed has done better into the downswing.
3. The UK government was wrong to change its inflation target as the boom was building up. Their change encouraged the Bank to keep interest rates lower than was wise.
4. The UK government was wrong to take important powers away from the Bank of England in 1997, making it more difficult for the Bank to understand and respond to the monetary crisis it helped trigger in September 2007.
5. The UK government was wrong to go on its own borrowing binge, through PFI, PPP and renationalisation as well as through conventional borrowing, at a time of big credit increases in the private sector and relatively good growth.
6. The Chancellor was wrong to give a lecture on moral hazard and telll us there would be no bail outs just before the run on the Rock.
7. The UK government was wrong to nationalise Northern Rock, removing a big mortgage bank form the mortgage market at a time when the supply of mortgages was falling rapidly anyway.
8. The US authorities were wrong to try to introduce a package that did not have the consent of the American people, and wrong to try to sell it to Congress by painting a very black picture of the situation. That damaged confidence further.
9. The UK authorities were wrong to starve markets of funds on August-September 2007 leading to the run on the Rock.
10. The UK authorities were wrong to think no deal could have been done to save the Rock owing to their interpretation of the Market Abuse Directive.

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10 Comments

  1. Andrew Forbes
    Posted October 1, 2008 at 12:21 pm | Permalink

    I’d go a tad easier on Gordon in blame for the mess thus far. However, Gordon is fully, personally, individually and unequivocally to blame for the terrible position of public finances (your point number 5). This will make recovery such a long haul, carrying a dead weight, compared to more streamlined economies.

  2. Acorn
    Posted October 1, 2008 at 2:12 pm | Permalink

    While broadly agreeing with your ten points, I am not sure that the BoE lowering the headline interest rate, has much significance at the moment.

    You will see on the link below that the ECB is pumping out cash to the banks, only to have it bounce back into those banks deposit accounts at the; errrrrrrr, ECB. They ain't lending it, they are hoarding it as balance sheet capital.

    We now are all having to take on a new word "deleveraging". As fractional reserve banking loaned money into existence, we can now watch it go into reverse and un-loan money out of existence.

    I am advised by e-mail this morning that I should learn about "TED Spreads". Apparently this is going off the chart and is a primary banking confidence measure in a credit crunch. [difference between LIBOR and the same dated 3 Month Treasury Bill].
    http://www.marketoracle.co.uk/Article6559.html

  3. Robert
    Posted October 1, 2008 at 5:45 pm | Permalink

    I agree with ACORN – my simple analogy is that the economy is like a drug addict that has od/d too many times on cheap money and each new fix, even of greater strength, has less and less impact (i.e. lowering of interest rates would have less effect – the law of diminishing returns) – so cold turkey (deleveraging) is required. Simply put, a sensible pricing of both capital and risk/reward needs to be re-established. There sadly is no escape, whatever the politicians think.

    • Acorn
      Posted October 1, 2008 at 8:59 pm | Permalink

      Robert, the next drug addicts to turkey, after mortgage defaulters, will be credit card junkies. This Turkey will be frozen, not just cold. US card issuers are already cutting back credit limits on cards. They are looking forward to screwing penalty rates of interest out of Joe Sixpack. Don't mention that the UK has a bigger credit card debt problem than the US, or any other nation for that matter; we don't want to start a panic.

      I wonder if we will start seeing "credit card charge 2.5%" at petrol stations etc; not just tour operators?

  4. Glen
    Posted October 1, 2008 at 8:18 pm | Permalink

    The Government licence the banks. A bank has to have a licence from them to operate.
    The main function of a bank should be to provide funds for the economy to operate.
    What has happened?
    The banks have behaved as if their prime concern was to make money for those who already have lots of it, with Government connivance.
    Not only that but there are no more bank managers who understand business and can assess risk by looking at the business as a business.
    Instead they only look at ratios and credit history. They do not look at potential for a business.
    All the Spin that we get never talks about other forms or systems, only the redundant one we currently have that allows the banks to create debt without having assets to support that debt.
    Now the banks will get money to stay afloat from us but they are now stopping lending to us so that they can get their house in order while we loose ours as well as our jobs, homes, cars etc.
    In my opinion the whole system is rotten and should be replaced by one that does what it should do: provide liquidity to ensure the economy can grow healthily.
    And notice that SME's will again bear the brunt of these mechinations.

    No political party seems to understand this or have the guts to make the right change now. I believe there will be a big political change and that neither main party is going to be liked for these events.

    Is it time for a new party to stop the Old Boy's club that exists in both main parties?

  5. Bazman
    Posted October 1, 2008 at 9:47 pm | Permalink

    Probably the 'light regulation' attitude of the present government set by the previous Laissez-faire one. Idiots. The taxpayer is always the Mummy.

  6. mikestallard
    Posted October 2, 2008 at 8:14 am | Permalink

    Of course your analysis is correct. The Banks and Gordon Brown have behaved shockingly badly.
    In all the discussion about the triumph of nationalisation and the end of capitalism, it might be helpful to remember where this crisis started out.
    If you insist that everyone has a right to a mortgage, be they black or white, rich or poor, unemployed or work shy, then you are wrong. So you are to blame for the crisis. This, for come reason, is never discussed.
    If you then take the false mortgages and treat the worthless paper promises of such poor people as money, then you are a liar and you are wrong. So you are to blame for the crisis. This, for some reason, hardly gets a mention.
    If you insist that everyone is equal, therefore the same, then you are wrong. Some people spend their lives working hard at helping other people. These people used to be called professionals. They included doctors, nurses, army officers, some teachers, ministers of religion, university doctors, members of parliament and family solicitors.
    They also included the Bank Manager and the stockbroker.
    The whole point was that they were straight, decent, honest and they did not work just for money, but because they enjoyed their job and did it for their clients, patients, pupils etc.
    So they got respect.
    Now, to a large part, they have, quite often, disappeared into their Unions and into a mass of "ancillary workers" to be replaced by people who are not respected any more and who, quite often, are neither honest, nor interested in their "job". (Doctors? Nurses? Teachers? Members of Parliament, Ambulance chasing Lawyers, debt rationalisers?)
    I think the disappearance of the professional is one of the most serious causes of the banking crisis. Maybe they disappeared, in banking, at the time of the "Big Bang"?

    • Bazman
      Posted October 5, 2008 at 12:06 am | Permalink

      Sounds like a Britain that never was and never will be. Professional socialism and unions. What about a fairs day work for a fairs day pay. Not dying for your job. Not a career or service. The old Cliché about Tories not wanting workers, but servants. Nonsense. I dof My cap to you Mike.

      • mikestallard
        Posted October 5, 2008 at 10:29 am | Permalink

        Thank you, my good man. Here, take this sixpence for your troubles.

  7. Glen
    Posted October 5, 2008 at 10:53 am | Permalink

    The problem is much deeper.
    Our model of resource creation and it's valuation is fundamentally wrong.
    Economies need to be based on the value of natural capital ie the real value of sustainable environmental resources.

    A simple example is the price of wood.
    It does not take into account the value of the forest as a natural waste processor, creator of habitat for all the life forms in it, it's ability to hold water and hence reduce flooding etc. There is a mass of information available on the internet about this but our economic system doesn't recognise the value. Hence we have built an artificial system which will fail in the long run.

    We need a political group with the will to revolutionise the way we live and work, not fiddle with what is broken.

    Only ostrich mentality seems to be most of humanities reaction to our terminal current dream of what the real economy is all about and if we don't do something radical then nature will show us the error of our ways.

    Bazman: I think you missed the point, you can do your "job" with love without being a servant or a lacky. however, the economic system which currently rewards unsustainable behaviour doesn't encourage people to do that.

    It will change, whether it changes with ease and grace or with horendous conflict is in our hands. Currently though I give us a 5% chance of the former

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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