Who's to blame for the Credit Crunch?

It’s easy to blame faceless city traders and bankers, or US banks for dodgy sub prime lending for the Credit Crunch, but are they the real culprits?

Let’s look back at the facts: Personal borrowing has been allowed to grow at 4 times the reported growth in the economy leading to a huge level of personal debt in the UK (about £1.5 trillion now!); that growth has papered over the cracks of a creaking economy with a reported overall growth rate of just 2%; that growth in debt fuelled the house price boom, which in turn fuelled unjustifiable consumer confidence and the low levels of growth in the economy; had personal debt not been allowed to grow, the economy would have reported no growth, or a recession, far earlier; as a country we have squaundered our oil revenues, the pot is empty; government borrowing was already the highest it has ever been allowed, and that was before the recent bail outs of the banks, our strategy seems to be to borrow more to get ourselves out of a problem caused by high levels of debt!; banks were allowed to get on with it, largely unregulated, and the regulators, including the Bank of England, did not understand the complexities of the banking systems giving rise to what seemed to be huge profits, which given that banks make up one third of the FTSE led to an unstable growth of the FTSE; we do not make anything any more, we have given up our manufacturing base in favour of creating an economy based on service industries and finance; you cannot build an economy for 60 million plus people based on service, finance, and retail, we have to do something that adds value to a physical product; we now have an economy buoyed up by one thing, consumer confidence, and confidence is transitory, it can go as easily as it can come.; greed was seen as good, it fuelled spurious financial instruments and the taking of decisions aimed at maximising profits in the short term; people (traders, bankers and Joe and Joanne Public) lived for today and chose not to worry about tomorrow, no one stood back and said ‘this is not sustainable’, we have to pay some day. Payback time is now here.

So let’s go back to the original question: who’s responsible for this?

When you really analyse it, there is only one root cause: poor government, a government with an inability to see any further forward than the short term, an inability to take control of the situation or act early on on what was really happening underneath a thin veneer of ‘aren’t we doing well?’ A government that did not lead, but one that was willing to allow itself to ride the crest of a wave, ignoring the bow wave that it was pushing in front of it and which at some time would surely swamp it. The Conservatives started it many many years ago, by reducing bank regulation and restrictions on personal debt. Labour then merely rode the wave, with Tony Blair baling out as he saw the ship was about to be swamped.

So how do we get out of this? Borrowing more to bail out the banks will not get us out of this, the problems are far deeper seated: the property market is shot, our ability to earn money by adding value has been dented by getting rid of much of our manufacturing industry, capitalism as a model has been shown to have some pretty severe weaknesses and governments acting together cannot control the beast. We are truly in for a long and deep recession, but perhaps we need it to bring back a sense of realism.

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