Sunday, 29 January 2012

The Global Debt Crisis -Whose Fault?



So whose fault is the global debt crisis?

When this question is asked on the TV the standard response seems to be 'greedy bankers'. While they certainly played their part through creation of highly complex tradable debt instruments and excessive use of gearing (debt), to place the blame squarely on their shoulders is laughable.

At the end of the day bankers are just people, and people respond to incentives. If they are given huge incentives to take big risks for short term gains, that is what they will do.

Are governments to blame?

To an extent yes, they are in charge of the legal framework that controls the bankers, so they should be held accountable to some degree for the breakdown of the system. It is clear that there is a limit to how 'free' markets should be. Rules and restrictions should be in place to curb the 'greed' of bankers and encourage them to take a longer term view of their strategies and actions.


There is however one set of players who I believe are far more responsible than bankers and government leaders for causing this mess.

They are also a group that has pretty much avoided any apportionment of blame whatsoever.

They are the Bank of England, the US Federal Reserve and the European Central Bank.

All three have been guilty of keeping interest rates ultra low during boom years when really they should have been much higher.

The central bankers have been acting under the false pretence that it is possible for a western economy to grow its GDP 3% a year indefinitely. When figures dropped below this, the Central banks dropped their rates to stimulate new growth.

What this did, through cheap and easy mortgage lending, was create the biggest property boom that the world has ever seen. They did not factor in the industries cyclical nature, and didn’t envisage what might happen when prices eventually toppled.

The scary thing is that these powers that be do not seem to have learnt from their mistakes, they have accepted no blame and are still yapping on about the need for growth to pull us back from the brink.

Growth is all well and good, but it must be healthy, sustainable growth. Not artificial growth that is derived from excessive borrowing of cheap money.

I personally don't think it is possible for a Western economy to grow much more than 1/2% a year healthily. The Bank of England and their global counterparts should take a long hard look at their growth figures and come up with better targets.










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