The credit crisis is now more than one year old and governments are still trying to kick start their economies though luckily we are seeing the first early signs of growth.
But the question remains “Who’s to blame for all of this” ….
So many articles have been written about this, though by listing the main factors may be we can achieve a better perspective on what occurred.
The factors:
- Central bankers kept interest rates artificially low, believing they could sustain forever growth, creating a false economy.
- Nobody wanted to believe that real estate prices where over priced and did not reflect the inflationary reality anymore as the home and value is a men’s pride and joy and the main topic in each family debate.
- Bankers believed that by securitising mortgages they were spreading the risk and were repackaging all what they could find, thereby few still understood what they were buying let alone measure the risk of it.
- Rating agencies believed that their systems were fool proof and that they could accurately rate companies and assets alike even in troubled economic times.
- Households believed that the good times could not end and overextended their credit to the maximum.
- Investors believed that once insured (through CDS contracts) that they could take on more risk and did not believe their counterparties could ever be on the brink of disaster.
- Finance in big corporate organisations was and still is perceived as a pure numbers game whereby risk measures such as “Var” are believed to be adequate enough to detect a changing global financial environment.
- Politicians were far too occupied working on domestic problems and be re-elected, instead of monitoring how their banking system and corporate organisations became global in scale and for governments to look for ways on how to adapt to this changing environment, tax rules and other financial constraints.
- Free and self regulating markets was what finance professionals believed in, maybe forgetting one of the basic principles called “Agency Theory”.
But then came as what can be seen as the first trigger ….. the commodities and global fight for Energy and oil, pushing up the prices with the resulting high inflation. Households felt the pinch in their pockets and the dices started rolling. Real estate and securitised mortgages were the first to collapse and the foundation of our financial system on a global scale started shaking.
Well who is to blame …. Probably all of the players above … still, the name of the game is to point fingers at each other …. So shall we ever learn or is this human nature or shall we put it down as behavioural Finance a science we still have to explore just like outer space.
