Apportioning Blame for the Crisis

Occasionally a time happens- and this is probably one of them- when you feel a watershed in being passed. The global financial system has ben found wanting and no-one quite knows what will happen; it seems nothing will be quite the same again. So I thought I'd try to identify the reasons why things have gone so irrevocably pear-shaped over the past year or so. I have written a longer briefing on this topic elsewhere but here I'll confine myself to pointing fingers at a few culprits, some well known, others less so.

Ideology
The 1970s were a turbulent and unhappy time for the left: high inflation, unemployment, union power excessive and living standards in decline. Thatcher and Reagan came into power determined to allow market forces to 'work their magic'. Over here this meant crushing the unions, privatisation, slashing taxes and deregulating financial dealings via the Big Bang. These steps helped to launch trading in shares and securities to phenomenal heights and racked up levels of debt in the way investment banks operated. These changes also introduced the City bonus culture and the arrival of the 'super-rich'.

Subprime Loans
Faced with a glut of investment during the 1990s US banks hired it out to initiate a boom in home buying. Urged by government to help the low paid, just about anyone qualified. Some loans were given on the basis of 'no income, no job, no assets' or 'ninja' loans. Often they came with 'teaser' discounts of 4% or below, set to double after a couple of years. It followed that irresponsible lending like this caused an avalanche of foreclosures, rising from a quarter of a million in early 2007 to three quarters of a million in mid 2008.

Securitization
The secondary mortgage market has long existed. This entails mortgages being sold on, like IOUs, to investors abroad who hope the income stream of payees will realise a profit for them. In the past this has worked perfectly well. However these subprime loans loans were dodgy so financiers wrapped them up with good loans in Collateralised Debt Obligations which were so complex few could separate the good from the bad. By now, the 'build my bonus' culture was such that few bothered to look too closely and these toxic CDOs flooded the world's financial system. As debtors in the US began to cease paying, however, the extent of the problem slowly became obvious.

Underwriting High Risk Mortgages
Underwriters are the people who assess the degree of risk attached to loans regarding the borrower's ability to repay. Assessments used to take a week but a near automatic electronic system was introduced in the USA which completed the job in 30 seconds. These guys carry a heavy burden of responsibility in the wake of the crisis.

Credit Agencies
These bodies assess the credit worthiness of issuers of securities plus the securities themselves. Their incompetence was fully demonstrated by the case of Enron but in the euphoria of constant growth and huge bonuses they alolowed their eyes to be taken way off the ball and the CDOs were often given triple A ratings. These agencies also carry a heavy responsibility.

The Bonus Culture
Finally, as we all are now aware, bankers became transfixed by the ridiculous sums they could make if they acquired sufficient business for their firms. Close scrutiny and caution- the once hallmarks of bankers- gave way to a desperate desire to acquire that parking space beneath the skyscraper HQ in Wall St or Canary Wharf, for the new Ferrari. The super-rich thought nothing about spending a £100mn on new yachts or even private submarines to swank their way around the world's pleasure spots during vacations or a hugely early retirement, funded by all those bonuses, companies bought and sold.

Simon Jenkins suggested a week or so ago that a tribunal into the crisis was required. Well, he could fill up his dock from the above three categories with no trouble and if public executions were still allowed many would gather at Tyburn to watch those responsible breath their last. However, there is a problemette here. There is another group of people responsible and this is a huge one: all those people who exploited cheap money by loading up with chronic debt, which they now find they cannot sustain by further borrowing. We are all complicit, to a degree in what has happened and, I'd guess, will have to return to a much more sober and cautious way of spending from hereon. If you need a mortgage, you might even have to spend an awkward hour or so in the bank manager's office, as my generation had to back in the 1960s and 70s.