As the world economy verges towards some kind of recovery, albeit a fragile one, analysts continue to look back trying to understand why experts didn’t see the signs of crisis in the first place, there remains a lot of questions about exactly what caused the crisis, and more specifically, who is to blame.
We appear to live in a world where blame is thrown around like a tennis ball – a tennis ball that everybody seems to have an allergy to. But the blame has to land somewhere, or at least, there has to be some notion of collective responsibility, and action to ensure that we as a society are prepared for economic crises in the future.
We must stop short of saying however that collective action is the ultimate solution to the crisis. Coordination between countries already existed somewhat beforehand – the problem is however, that some countries were lax on their rules, whilst others changed them altogether, perhaps somewhat provoking the kind of risk-taking conditions that could lead to a crisis, then what would have otherwise occurred in a more risk-averse environment.
But as the world digests what has occurred (and is still going on) since 2007, blame is an unavoidable part of the menu. As the crisis evolves from one that initially started out through record levels of borrowing in the US, inside the rather large bubble of the housing market, with loans characterised as high risk, to a crisis that resulted in massive Keynesian government intervention all over the world, the question is “What next?”
A simple yet accurate way of portraying the crisis to come is “How are governments going to finance their extensive borrowing?” Although ultimately this question is focused towards the United States and United Kingdom, the perilous result of extensive borrowing is all too evident in Greece at the moment of writing. The European Union finally came forward on Thursday 25th March 2010 to offer a package designed to “save” Greece, but the underlining lack of agreement in the Union, as well as questions about its ability to be able to do what it says it is going to do, is highlighted clearly by the fact that the International Monetary Fund is involved. There is no clearer indication that the Eurozone appears unable to manage its own problems – but of course, the whole issue is linked to whether Greece should have entered the Eurozone in the first place.
What is pertinent at this stage is to take stock of just where we’ve been, where we are, and where we’re going. We may examine these stages through the context of the eternal background question of “Who is to blame?”
One may be tempted to blame those who borrowed money in the first place. If ordinary people had been responsible in their personal finances, they might not have found themselves in the dangerous situation of possible default, and the snowball effect of debt that this brings – in many cases, leading to personal bankruptcy. What has happened to us a society? Didn’t we learn from our grandparents and older generations that you only spent what you had? Didn’t we learn that you never “lived beyond your means?” What happened to make us disregard one of the basic laws of personal economics? Did we just become greedy? Did we just want to live now, and not worry about debt because it’s gone when we’re gone? How do we explain individuals’ behaviour?
Sub-prime borrowers would have been classified as such for various reasons. Perhaps they had a bad credit history, or perhaps the hadn’t built sufficient economic connections to be offered a competitive interest rate (as might have been the case for immigrants arriving in the United States) One way or the other, house prices are but a reflection of the overall economic environment, and when there is economic growth, prices rise. This in turn fuels demand for borrowing, with the major motivation for buying to get on the property ladder before it’s too late, or just to make a profit from selling later.
Either way, people wanted to borrow. When times are good, and jobs are generated, there are also more deposits into the financial system in the first place. People feel more secure to borrow, and confident of the future. Who can blame them for that? At the end of the day, choices were made, and consequences have to be followed. The consequences are today, with record foreclosures and levels of personal debt, and consequences shall continue to come.
This is where we might want to introduce the banks into this equation. After all, they fuelled the borrowing by providing it, and low interest rates, although good for demand on the one hand, are not necessarily good for making a long-term profit. For a high return therefore, one must be prepared to take more risks. Were the banks really irresponsible, or just following their business model? With lots of cash available in the financial system, and risk appropriately calculated, what’s the issue?
It seems like one could finish their analysis there, but let’s dig a little deeper. Let’s not forget that banks are not lending their own money to make a profit – but OUR money. And let’s go straight to the point of where the banks must have some liability – securitisation. The supposed financial innovation of packaging sub-prime mortgage debt with lower-risk debt, having it graded as the latter, and selling it to other financial institutions without disclosing the exact content of the debt, calls to mind various adjectives that one could use to describe such behaviour. The subsequent actions of hiding sub-prime debt off-balance sheet brings further colourful descriptions of these financial institutions that are charged with protecting our money and diversifying risk, not storing risk for eventual exposure and collapse.
The final part of this economic crisis equation is governments. They have been accused of deregulating the financial services industry to the point where such innovations such as securitisation were not illegal. Although we can fairly acknowledge that it is one of the responsibilities of government to promote commerce, trade and overall economic development, they also have a responsibility to maintain well-being. If one thing is clear, the fall in world wealth, particularly in the developed world, could not be described as meeting this responsibility – and a certain amount of understatement is needed as one speaks this fact through gritted teeth. So why did the government deregulate and put us all at risk? Is the crisis their fault then?
But governments have two angles that need to be analysed. Deregulation is one, and the other is what has happened as the extent of sub-prime exposure became obvious. Governments, spooked by the massive loss of confidence, particularly between banks themselves, have been desperately trying to save the world economy. The end result at the time of writing is the kind of intervention that socialists could only dream of beforehand. Government intervention is here – and ever-more resources are falling under their control. Is this right in a free-market economy? Is this what Keynes intended when he said that governments should intervene in the economy to stimulate demand?
Not disregarding governments’ motives of wanting to restore confidence and economic growth, as the only sure way to recovery, the consequences of their actions could be to provoke another crisis - a crisis that would not now originate from personal debt, but government debt. Some countries, such as Greece, Spain and Portugal, and increasingly the United Kingdom, are in serious, serious trouble. And it is wrong of people to think that governments have the capacity to solve all problems – the institution of Government has to pay its debts like anyone else. But the same governments are under pressure to not cease public spending – not only because it could be political suicide (Greece, Spain and the UK are all currently ruled by left-wing governments) but also because the act of Government borrowing, ironically, is the only mechanism stopping various economies from slipping back into a serious recession. In other words, increasing debt is supporting government intervention plans with a view to economic growth. And governments are desperately hoping that growth will come – because it is the only real way that debts can be repaid. Fail that, and tax rises and the associated social consequences are all that would be left - anyone else for a dose of IMF medicine?
To close this post therefore, the central substance of its subject remains. Who is to blame for this crisis? Given that governments have stemmed recession only through massive borrowing and cash injections, will growth now come? Will this be enough in the long-term to bring overall public debts down? Finally, how will we prevent such a crisis happening again? These relevant questions all remain for both now and the immediate future. Let’s just hope that these questions still do not exist in their current potent form for our children and grandchildren. So the questions are: “What can we do now?” “What should we have done?” and “What should we go on to do?” Lots of reflection to do, and comments extremely welcome.
Thank you for reading.
