Who is to blame?

Alexandra Basha, intern at the UNRIC, UK & Ireland desk, in Brussels

Every day we are bombarded with grim headlines splashed on the front page of every newspaper; the crisis is impossible to ignore because everyone is affected. Understanding its root causes is essential to solving the crisis and preventing a recession of this sort from reoccurring.

The effects of the crisis began to emerge in the United States in September 2008 with failed mergers and conservatorship of major American financial institutions. It has become apparent over the last year that this crisis is not the result of a natural economic process, but a combination of lax rules, bad judgment, greed, and incompetence.

Who is to blame for the worst financial crisis since the Great Depression? The number one villain is probably Alan Greenspan, the US Federal Reserve Chairman until 2006, who was once called the “maestro” by one of America’s most preeminent reporters, Bob Woodward. Greenspan earned this nickname during his tenure at the U.S. central bank, when he was praised for having contributed to a long period of strong economic growth.

Despite Greenspan’s role in preventing the 1987 stock market crash from intensifying and presiding over a lengthy economic and financial market boom, his recent actions contributed to the current economic crisis. His opposition to financial supervision, his decision to keep interest rates very low, and his support for sub-prime lending vehicles caused the housing bubble to form then burst. He even admitted during a congressional hearing in October 2008 that his intuition that financial firms could regulate themselves was flawed.

The second culprit is Wall Street. Reckless borrowing, complex financial instruments and an unregulated market worth trillions of dollars contributed to the crash. Wall Street leaders sold risky mortgage securities to banks, pension funds and other institutional investors worldwide. The riskiest mortgages turned into moneymaking investments for the leaders of investment banks. They were making tens of millions of dollars a year while the poorest, left in the dark about what was actually happening, were falling deeper and deeper into debt.

The credit default swap (CDS) is the centerpiece of the crash of the banking sector. This is a risk saving device that acts as insurance, but even though it was insurance and should have been regulated, it was, in fact, unregulated because of the wording. Instead of using the word “insurance,” which would have meant the government would have to regulate the instrument by law, they used the word “swap.” The leaders of investment banks like AIG, Lehman Brothers, City Group, etc. were supposed to be the most knowledgeable in their field and they were the ones who ended up creating the problem. They chose to benefit by taking on more risk; they made decisions based on pure greed.

The third culprit is Bill Clinton. His tenure was characterized by economic prosperity and financial deregulation. During Bill Clinton’s presidency, he repealed the Glass-Steagall Act, which was the basis of Depression-era regulation. The Guardian writes “In 1999 Clinton repealed the Glass-Steagall Act, which ensured a complete separation between commercial banks, which accept deposits, and investment banks, which invest and take risks. The move prompted the era of the superbank and primed the sub-prime pump. The year before the repeal sub-prime loans were just 5% of all mortgage lending. By the time the credit crunch blew up it was approaching 30%.”

He also signed the Commodity Futures Modernization Act, which freed credit default swaps from regulation. In addition, he rewrote the Community Reinvestment Act, which repealed previous housing laws and added pressure on banks to lend to low-income neighborhoods.

In short, the economic deterioration is due to human errors and misdeeds. Alan Greenspan allowed the housing bubble to develop and then burst; leaders on Wall Street were greedy and incompetent; and Bill Clinton loosened regulation. No matter who you personally think is to blame, it is time for the entire world to react, make things right and ensure it doesn't happen again. ■


Images: Greenspan image from wikipedia.org public domain; Clinton image from UN Photo/Eskinder Debebe