Who’s to blame for the financial crisis?

The Guardian, the newspaper, recently ran a fascinating series titled “The road to ruin: Twenty-five people at the heart of the meltdown.” Written by city editor Julia Finch, the series satisfies a public yearning not only to understand the causes of the global economic crisis, but more important, to know whom to blame. The list begins with the heads of public financial institutions like Alan Greenspan, 1987-2006 chair of the US Federal Reserve, and Mervyn King, governor of the Bank of England.  Then it names the politicians whose policies spawned unforeseen crippling consequences: former US Presidents Bill Clinton and George W. Bush, and current British Prime Minister Gordon Brown.

As expected, the list of culpable bankers and credit ratings analysts is the longest.  It includes: Abby Cohen of Goldman Sachs, Kathleen Corbet of Standard & Poor’s, Maurice “Hank” Greenberg of AIG, Dick Fuld of Lehman Brothers, former Citi boss Chuck Prince, former Merril Lynch boss Stan O’Neal, and former Bear Stearns boss Jimmy Cayne.  The report briefly explains the role that each one played in paving the road to ruin, and provides readers a glimpse of the mechanisms of the self-stoking financial system that lies at the core of the present world economy.

All of the individuals named have one thing in common:  they are all top decision-makers. They knew that their decisions have long-term and far-reaching consequences.  They should have been more circumspect, thoughtful, and restrained in their decisions.  Yet, none of these people is in jail. Many have finished their terms of office or have been fired from their jobs, but it will be very difficult to hold them criminally liable unless there is direct evidence of financial misappropriation or dishonest transactions.

To isolate their actions from the specific contexts in which they were embedded, and then attribute the economic mess to these actions, is faulty cause-and-effect reasoning.  It may be emotionally satisfying and politically convenient, but it only hides from view the deeper systemic origins and immense complexity of the crisis.  It also encourages simplistic solutions that can only intensify the effects of the crisis.

Let us take as an example the reason for Bill Clinton’s inclusion in the Guardian’s gallery of culprits.  Clinton, says the Guardian, “beefed up the 1977 Community Reinvestment Act to force mortgage lenders to relax their rules to allow more socially disadvantaged borrowers to qualify for home loans.”  The former president may be said to have, in a sense, primed the sub-prime housing mortgage crisis that triggered the present economic turmoil.  Yet, at the time this policy was announced, it was hailed as a wonderful piece of social legislation.  It extended the American dream of home ownership to many homeless Americans who were marginalized by low incomes.

It didn’t take very long before mortgage lenders would plow enormous amounts of credit into this newly-opened field.  The rise in housing demand drove home values to unprecedented levels.  This in turn prompted banks and home mortgage companies to offer more credit to existing homeowners corresponding to the increased market value of their homes.  There were fantastic margins to be made from the buying and selling of mortgages, and bonuses were being offered to high performers.  No Wall Street firm worth its name could afford to be left out of the game.

This type of predatory lending sparked a new era of reckless consumerism in America that was matched by the easy availability of cheap imported goods.  It gave rise to mounting credit card debts that were totally out of proportion to prevailing income levels.  The haze of prosperity was thick enough to conceal the danger.  Neither Clinton nor Greenspan would have seen the catastrophe looming in the horizon.

Even as it singles out the most important people who could be blamed for the crisis, the Guardian concedes that “we all played a part” in the creation of this “man-made disaster.”  A fuller examination of the making of this mess will therefore have to go beyond the scrutiny of the actions of top decision-makers.  It has to look into the logic that lies at the heart of the financial system itself.  The making of this crisis has to do with the nature of money, and how governments lost control over its issuance by virtue of the expansion and increasing complexity of the market.  Some analysts date the start of the crisis to the growing use of financial instruments known as “derivatives.”

Warren Buffet, the billionaire investor, called them “financial weapons of mass destruction” from which, he said, he stayed away because he could not understand them.  But Alan Greenspan held a positive view of derivatives, characterizing them as “an extraordinarily useful vehicle to transfer risk from those who shouldn’t be taking it to those who are willing to and are capable of doing so.”  Whatever they are on balance, what is certain is that these financial instruments have penetrated every economy in the civilized world, respecting no boundaries, obeying no nation state, and fuelling growth both illusory and real.

If one bears in mind that derivatives are nothing but a new form of money, one can appreciate Niklas Luhmann’s description of money: “In each successive pair of hands, money can be used as if it were freshly minted – even if acquired by fraud or theft.  It operates without a memory.  Thus at the next stage it also forgets the risks that had been assumed in acquiring or spending it.”


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