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Some of the fault lies closer to home
October 8, 2008
My column in the Financial Times this week is on who we should blame for the financial turmoil. I say that home buyers and mortgage borrowers bear responsibility as well as bankers.
“Small island, big problem” was the headline in some editions of the Financial Times on Wednesday. It referred to Iceland, which has almost gone bust and had to seek a €4bn loan from Russia. But it could have been about the UK, which has pumped £50bn of equity into its biggest banks.
The previous moment of maximum danger for British banks in my lifetime came in 1973 when, during the secondary banking crisis, National Westminster Bank needed to assure investors that it was solvent. Words would not do this week: public money was required to prop up NatWest’s parent bank RBS.
When in trouble, humans tend to blame others and many British people have blamed Americans for the subprime mortgage mess, which started the global financial crisis. If only the Wall Street banks had not cooked up loans for people who could not afford to repay them, things would have been all right.
The British, Irish, Spanish and others could have carried on enjoying sharply rising property prices and cheap mortgages. European governments would not have spent the week gazumping each other with ever higher guarantees of assistance to their own country’s banks.
You can read the rest here and comment below.
I would agree that solely blaming the foreigners and bankers for the financial industry woes is probably unfair as there is the matter of buyer beware. That said, knowing that Joe Average’s financial literacy is generally far from adequate, why did supposedly intelligent bankers create an environment where virtually all the retail lending safeguards were thrown out of the window? Over the past 5 years, we have witnessed tried and tested LTV and DTI rules rewritten, mortgage rates at less than cost of funding, etc. The bankers created this environment and therefore should accept the majority of the blame.
Posted by: jdesalab | October 9th, 2008 at 4:32 am | Report this commentPerhaps governments could now take steps to prevent another housing bubble?
A number of options spring to mind like limiting home loans to 90% of a surveyors valuation, taxing capital gains on housing at 30% divided by the number of years the house was owned (and to be fair give an equivalent tax credit on losses!).
Anything that would keep housing reasonably cheap — to paraphrase the Sage of Omamha “Nobody complains when the price of Hamburgers fall why should it be different for housing?”.
Posted by: James Anderson | October 9th, 2008 at 8:30 am | Report this commentI think you have hit the nail on the head when you say “human nature is not going to change”. So many people, particularly politicians and the media are so busy trying to apportion blame. Greed is to blame and that afflicts many on Main Street as well as Wall Street. We seem to live in a society where people demand choice and then when they utilise that choice and make bad decisions they immediately seek a villain to absolve them of personal responsibility. This crisis may be notable for its size and the breadth of people it has affected, but history is littered with previous examples, allbeit less extreme. By the time “next time” comes we will probably have pretty much forgotten about “this time”.
Posted by: Andy Moffat | October 9th, 2008 at 10:16 am | Report this commentBravo. This article offers a more comprehensive view that was absent in your “The Bankers Fall Will Be Fatal” piece.
Posted by: Keith Crawford | October 9th, 2008 at 12:59 pm | Report this comment