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Are we blaming the wrong bankers?

Take a step back and look at the 'enablers', the men and women making economic policy decisions.

 
Are we blaming the wrong bankers?

Somehow, in the wake of the credit crunch, a myth has been created and fed to a skint public. We've all been led to believe that it’s City bankers, in the mould of Fred 'the Shred' Goodwin, the former RBS leader who was stripped of his knighthood, who are to blame for a financial crisis that was unprecedented in its scale and after-effects.

But no, actually, say a growing number of highly experienced and respected economists and academics, it’s the central bankers who are to blame. These people, says Steve Hanke, professor at John Hopkins University and a hedge fund chairman, were the ‘enablers’.

Hanke, speaking to a high-level group at the Institute of Economic Affairs in London today, described the crisis not as one of ‘market failure’, but government failure. The US Federal Reserve, in particular, was the ‘big enabler’, with its ‘go, stop, go stop’ monetary policy; whenever there was an economic scare the Fed would ‘hit the accelerator’, ie, jack the interest rate lever to stimulate the economy. It was such a stance of easy money that created the bubbles that led to the late-2000s blowout.

‘Commercial banks have been the fall-guys, the villains – central banks have gotten off scot-free,’ he says.

Hanke can count Albert Edwards, a Société Générale economist known for his gloomy predictions, as being on his side. Edwards similarly says central banks – not just the Fed, but the 'copy-cat' Bank of England – have been working hard to ‘deflect blame away from themselves’. The uber-bear, as Edwards is usually described, says ‘both lenders and borrowers inevitably make ridiculous borrowing and lending decisions they come to regret later’ when they are handed ‘excessively loose’ monetary policies, ie, low interest rates to stimulate the economy.

‘The pygmies that populate the political and monetary elites prefer to genuflect to the court of public opinion in a pathetic attempt to deflect blame from their own gross and unforgivable incompetence,’ he wrote in a recent research note.

Why does the public insist on blaming the wrong bankers? Hanke says it is ultimately because the Fed has a ‘lot of power to sweep things under the rug’.

In the US, he says, the epicentre of the acute credit crunch that has since morphed into a chronic debt crisis, everyone – economists, researchers, journalists – is in the hands of the central bank, the Federal Reserve; that is to say it has a ‘monopoly’ over the core research about economic policy. That’s because the Fed either produces much of the stats circulated itself, or it funds much of the economic research carried out, or its former and would-be members working elsewhere produce the analysis available about the Fed. And it’s a similar story in the UK, Hanke insists.

Calls have been made for some kind of conclusive investigation to finger the offenders, be they City bankers and their alchemistic colleagues; politicians, economists, academics and journalists for failing to spot the crisis; poor people who took mortgage loans they couldn’t afford; anyone else who gorged in the debt-feast that led to the crisis; ratings agencies; central bankers; and so on….

But that begs the question: who does that leave to cast judgements? It seems many of us are complicit in one way or another. Central bankers certainly should be called to account, but whatever their personal credentials, a hedge fund chairman and bank analyst are in no position to cast out verdicts.

28 comments so far. Why not have your say?

Philmo

Feb 23, 2012 at 18:28

The people to blame are those who overtly or covertly promoted and/or executed mal-practice, eg:

Promoting and making loans which would be difficult to pay down, sooner or later

Bundling the loan books into a toxic investment

Masking the toxicity of those investments - fraud

Maintaining inadequate assessments of risk wrt loan security

I'm sure the experts could add many more!

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Bill lawson

Feb 23, 2012 at 18:29

Massive falls in share prices was not caused by the banks ,it was the cause of the fall of the banks . and me.

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bob stanforth via mobile

Feb 23, 2012 at 18:52

Let's not forget to blame the faceless but voting public for defrauding loan underwriters and without a hope of paying those loans back. Remember US sub-prime?

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Philmo

Feb 23, 2012 at 19:02

C'mon Bob

It was US politicians who hoodwinked the naive underclasses into the temptation of home ownership. And the greedy loan sharks, of course, did what they do best.

Bill - it was the fall in the banks that started the ball rolling, then they decided to go into self-preservation mode and kept the loan funds to boost their balance sheets!

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Keith Snell

Feb 23, 2012 at 19:30

The blame game is easy for all of them [whoever "they" may be]. Anyone who has complained to a bank abour an error on their part automaticly receives an answer that it was someone else. The same is true of our political leaders [Blair & Brown] the Bank of England the FSA etc etc etc, Blaming the poor for being persuaded to borrow to buy their own homes is really below the belt, as many were incapable of paying back the loans. Sadly they do not have the Education of the Greek Government and should have not been lent the money in the first place. Neither should intelligent? bankers have been lending money to Greece. The list of incompetence is endless. the list of those prepared to acknowledge an error very short. What happened to integrity?

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Philmo

Feb 23, 2012 at 20:03

Keith

Hear, hear!

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Anonymous 1 needed this 'off the record'

Feb 23, 2012 at 20:27

Dont forget the tv property hype fast buck boom. Dont forget the buy to let boom buying up lots of cheap housing stocks forcing lower end house prices up and borrowing on one house to buy another .Dont forget the people who lived it up with credit cards while the sensible ones had to wonder why some people had a better life style than them while on the same income area. Dont forget the money that we now borrow as a country debt to give away to other countrys who then give it to other countrys or buy weapons from other countrys. Dont forget the art gallerys or works of art built on roundabouts while companys go bust.

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landlord 88

Feb 23, 2012 at 21:09

The bankers were merely playing the game within the rules laid down by our elected leaders - if it were not so, they would all be in jail by now. The Central Bankers are certainly instrumental in the longest boom in history - Alan Greenspan the maestro being the foremost among equals and Paul Volcker could only look on in disgust at the undoing of his years of hard work. Our political leaders who are responsible for setting the policies for the way the country works seem to have got away with it. Most of all, the people who are responsible for electing our lords and masters are revelling in portraying themselves as the victims - I think thats you and me. I suppose blaming others feels so much better than blaming ourselves.

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Neil Murphy

Feb 23, 2012 at 21:44

We all know central bankers played a major role, as also dod ratings agencies by mis pricing exotic derivatives, as did governments by allowing the massive trade imbalances to build up, as did those in financial services who created the shadow banking system and used massively excessive leverage, who mis-priced and mis-managed risk, and governments who borrowed too much when they should have been saving, and ordinary people who believed that the good ties would last for ever and property prices could never fall etc etc etc.

To use a cliche, numerous people contributed to a perfect storm. Read Nouriel Roubini on the causes, he paints quite a comprehensive picture, and did so before the crash occurred.

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Jack Porter

Feb 24, 2012 at 07:09

of course we are blaming the wrong people. There are few at the top of the Banking profession, whether in Central banking or commercial banking and THEY are to blame.

The vast majority of the people working in banking are utterly blameless and are normally hadrworking, honest employees on relatively modest salaries and a good pension.

Those who are to balme have brought a fine profession into disrepute.

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Geoff Harrop

Feb 24, 2012 at 09:05

cliché for those interested in the é accent. Use the AltGr key next to the space bar and press it with the e.

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Anonymous 2 needed this 'off the record'

Feb 24, 2012 at 09:22

I knew things had gone too far when self-certification for mortgages arrived.

I was running a pub, and to my knowledge 4 regular customers took out these deals through a broker, also a customer ( I am sure there must have been others who I did not know as well, who also used the pub) . I would not have let any of them run a tab for the evening.

Within 4 years they were all out of their homes through inability to pay the mortgage. They were a decent bunch of lads, but with no financial common sense at all, and would not have been in that situation, had the lending rules not been relaxed to such a ridiculous degree. Central Banks and Governments have a lot to answer for in this case.

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Peter Young Engineer

Feb 24, 2012 at 09:23

I think we all have to take some responsibility however ultimately for me it is the Politicians and especially the Chancellor and Prime Minister as they headed the Government that managed (or was supposed to manage) the economy. They in theory and all the advice, technology and experts they can employ to help them understand what is going on.

It was they who got greedy for all the tax income received which they wanted to throw away on the Health Service and other projects, oh, and buying votes.

Who wrecked the pensions? Who abolished Boom & Bust!!!!

So it really was Tony Blair (by omission) and Gordon Brown (by arrogence and incompetence).

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J Reid

Feb 24, 2012 at 09:26

An excellent piece that needs to be pursued, with some questions asked and answered by various parties who think they have escaped unscathed.

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Anonymous 3 needed this 'off the record'

Feb 24, 2012 at 11:07

This collective responsibility term fascinates me. I come from an era when the mortgage rate was once 16% and you could only get a mortgage if you had a PAYE job or could provide three years of audited accounts. Now I'm getting less than 1% of cash savings to bail out the feckless, most of whom should never have been given a mortgage.

I also remain fascinated that HMG decided to tackle public sector 'waste' by sending in Eric Pickles to put in place measures that resulted in thousands of people being thrown out of work. Most of those people were hard working, honest, taxpayers with legit mortgages (ie not fanciful self certification).

Collective responsibility? Don't make me laugh

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ologig

Feb 24, 2012 at 11:38

'Somehow, in the wake of the credit crunch, a myth has been created and fed to a skint public. We've all been led to believe that it’s City bankers, in the mould of Fred 'the Shred' Goodwin, the former RBS leader who was stripped of his knighthood, who are to blame for a financial crisis that was unprecedented in its scale and after-effects.'

What do you think we are stupid? You may have been led to believe that Goodwin and his ilk were alone to blame, but we weren’t. The public have precious few avenues down which to go to object and revolt, and this was a convenient one. It was up to the people in-the-know to inform us of the real culprits, but strangely enough, that information has only just surfaced via this article, funny that isn’t it?

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smoking gun

Feb 24, 2012 at 18:23

No Goodwin & ilk were not the only ones to blame but neither are they blameless. Far from it as being the leaders at the top they were allowing things to happen with no regard for the consequences so long as they got their pocket money and that is where the rub is when they were then and still are for pocketing immoral and undeserved bonuses. So although they cannot be totally blamed they and several others (world wide) who have got off scot free have to accept the responsibility of the mess the world's economies are in. But this does not absolve Central Banks either.

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Anonymous 1 needed this 'off the record'

Feb 24, 2012 at 21:00

Collective responsibility my foot ?

the goverment spent money like it was not theirs

the bankers gave money away like it was not theirs

the carefull people in this country who only bought what they could pay for got kicked in the teeth by many groups of greedy people buying on borrowed money including the past and present goverment eg pfi . knocking down good well built schools for tin built sheds and calling them improvements.

goverments borrowing money to give away to other countrys.

living on an island with mass unemployment and borders like a sieve and a law system out of touch with the working classes of this country.like not protecting people from the greedy money controllers or this would not have even happened. Yes many none jobs were made up like and health and safty gone crazzy no down right //// daft

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Pat

Feb 26, 2012 at 10:03

Banking can be seen as the oil in the engine. Without it, the engine is to grind to a halt. To view banking as the 'engine' for growth is misconceptual. We all know who are responsible.

There is a limit by which the bank can charge for loans. Expansion by acquisition and mergers has its limits.

Perhaps the bankers should re-examine its worth in society and its warrant for high renumeration and bonuses. It is the depositors' money they make profits on.

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Stanley Spencer

Feb 26, 2012 at 10:03

There were a lot of commentators saying that "this can't go on!". How right they were. I think the governments we re hoping that the end wouldn't come on their watch. Like the optimist falling off the Empire State building as each floor passed they could be heard saying "so far so good".

stan

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hooligan

Feb 26, 2012 at 10:12

The "blame game" can be useful in identifying the root cause of problems with the "big picture". I am of the view that there is “no right answer" to managing the economy. The democratic model has morphed into welfare democracy and the agents of Government, whether they are regulators or central banks, are a reflection of what I consider to be this flawed democracy. I do believe that people are fundamentally rational and good natured, but because our government system has evolved by pandering to the whims of minority groups acting out of self-interest (whether these groups are unions or religions or centralised bodies or banks or oil companies) we do not have a method of government that has any moral compass or a government that has well thought out (and affordable) goals. We vote for promises that are made by false prophets and our tax rates and villains are simply a reflection of our apathy and lack of ability to produce politicians of the calibre of the likes of Thatcher. In short we have lost the ability to produce rational thought.

Consider that governments are increasingly voted in by large swathes of those who choose to live off benefits and who are not genuinely in need of help. The mechanics of government administration via the tax and national insurance system is hopelessly inept so that tax avoidance and evasion is rife amongst companies and individuals. People grapple with methods to recover taxes paid to (more and more inept) governments that set tax rates at increasingly high levels simply because our system of governments will always run deficits and never repay the resulting debt. It should be clear to all that the government system taxes the “good” people in society whilst the “bad” people draw benefits, indulge in crime or seek to rotate their taxes back to themselves by tax avoidance.

The tax avoiders and system manipulators are simply being rational. Why pay money to a bunch of horse trading politicians who are taking the country down the toilet by attempting to deliver on promises made by previous horse traders that simply can’t be met? What is so right about operating governments to make decisions with our taxes along the lines of “give us your half your income and we will spend it on what we like”? This evolved welfare democracy is not democracy at all and is the path to ruin. We must come to terms with that simple fact. Until we do, the enablers of the system, whether these are the government agencies of central banks and regulators or the villains who exploit the stupidity of the state sponsored misallocation of tax payers’ funds, will be a feature of modern life. I remember when these guys were portrayed as heroes, not villains.

Personally, I believe that in the same way that the seizure of my income in the form of taxes is a privilege granted to government (not a right of government to levy taxes), the system should be adjusted so that you get more say in government proportional to the amount of taxes you pay and that the electorate should determine the percentage allocation of taxes to different spending departments. This would remove the role of government to that of an administrative one. I do not believe that central banks have any role as a valid government agency, other than ensuring that the amount of notes and coins in circulation is sufficient to perform the role of a transmission of economic activity. In other words I believe we should adopt a system of “tax contribution weighted proportional representation” of government. I am more in that part of the camp of Mises and Hayek which has at its core the maxim of "improve your behaviour by observing as big a picture as you can and attempting to avoid (obvious) bad behaviour".

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snoekie

Feb 26, 2012 at 19:02

Peter, smoking gun make good points, as do others.

Bliar, Brown, Balls, Cooper and others, not forgetting King played major roles, Bliar principally by omission, he was focusing on war.

King was the compliant lackey, not the independent, and still continues in that role today.

Until their take over of HBoS Lloyds were being respectably cautious, but the chief crooks, tempted them too far, as did Europe, yep Europe.

These most blameworthy individuals are still enjoying the fruits of their incompetence, as do many bankers who should have known better.

BTW I do not eculpate the Yanks, but there was no excuse for our twankers from following suit.

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Brian Stafford Garthwaite

Feb 27, 2012 at 08:29

HMG were receiving considerable tax revenue from the Banks and did not want to kill the goose that was laying all these golden eggs.After all for politicians that was money that could be spent to keep voters happy, which of course could mean VOTES. Did not the last HMG move responsibility for banking from the Bank of England to the newly created FSA?

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dd

Feb 27, 2012 at 09:24

FSA:

"light touch" regulation, as instructed by G Brown.

yet more civil servants, big government.

What was wrong with BofE role as regulator? What needed to be fixed, at that time?

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Jack Porter

Feb 27, 2012 at 09:52

Oh DD you are right but it is a huge subject. One thing was that the 'Banks' had respect for The Old Lady and we had a divide between the Commercial Banks and the Merchant Banks. Bankers were respected for their honesty and integrity. Bnak shares and dividends were a major part of Pension funds and personal Investments.

Nuff said...

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dd

Feb 27, 2012 at 10:10

Yes, I remember ... !

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vod

Feb 28, 2012 at 17:10

Yes. But...

How about a realisation of their faults,

brought about by a contrived situation....

Having gone as far as possible with gearig and all the other tactics/terms, the experts/ academics use for spending profits/gains before they materialise, another pot of money was found.It was in the small pockets of millions and millions of relatively small individuals who knew they could not afford to buy whatever. Collectively this was a massive pot of cash. How to get it?????

In this techno world, various scenarios can be run One went like this; a means was found to offer a credible financial route for the honest but gullible to realise their aspirations. And then the interest lever would be pulled, asit was. However that would leave the lenders with worthless assets due to the millions of bad debts flooding the market. SO !. How to get back the money, which they didn't have to loan in the first place, collect a profit and get off the hook?????

This particular scenariomay have suggested to bundle them up and sell them on for the projected profit to be realised by the new purchaser, who might just not realise the circumstances of the original borrower. ?????

When the scale of the situation became apparent it needed to be covered by some term which didn't imply anything such as incompetence, fraud, gullability or other which might suggest things being amiss.????? Sub Prime !!!!! Brilliant !? !? !?

BUT ! There's always a BUT !? !? !?.

The academics, the experts, the institutions, bankers financiers, governments and yeay, even the originators who may have run the original scenario. ALL WOKE UP !

And realised that the situation applied to, WOW , the whole of their world !

Although in denial, a new term was perhaps needed again. Something which was collective m'bey, but could obviously not be applied collectively surely, to suggest arrogance, ego, greed or the betrayal of all the good hard working people, even within their own industry. It, The Term, needed to be GLOBAL. That was it ! The bigger it could be made the easier it would be to hide behind. Besides which , the more involved the more to bare the cost. Brilliant. ! It's every body@s fault !!! WE, could call it .....

" THE CREDIT CRUNCH ".

Well said Phill, Keith and Jack. Let's hope people on mobiles have stopped long enough to see where they're going.

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smoking gun

Feb 28, 2012 at 20:45

One of the big problems was, and no doubt still is, that few of us (i.e. general public, man in the street), and I include myself, really did not know too much about banking; or perhaps I should say, what went on in the banking circles. Most of us only saw what went on in our local branches where we lodged our cash and hoped for a decent return (and I am sure many of the local bank employess had little knowledge either) without really appreciating that the money we were lending the banks was being used for straightforward gambling when it should have been used to provide loans to and investment in industry and commerce and properly vetted people for new homes.

And their biggest mistake: they thought their gambling would go on forever and never be noticed. But are they suffering or being punished for their mistakes? No. Its you and me and the other men in the street (and women too.)

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