Instead of asking tough questions about the macroeconomy and shareholder pressure, people are blaming bankers for the credit crisis.
Bankers are not popular at the best of times, but right now it is open season and any pundit with spare column inches – or blog space – to fill is taking a pot shot at them. They have been described variously as greedy and reckless and are being held up as the sole perpetrators of the current crisis. This hardly seems like a balanced and rational assessment.
No influence
A lot of what is going wrong at present has macroeconomic causes over which bankers have no influence whatsoever. They also operate in a shareholder-owning, profits-driven environment that exerts a pressure for short-term growth that could only be addressed by restructuring the entire financial system – not an option that anyone has so far been brave enough to suggest.
At macroeconomic level, the only realistic ‘regulator’ is the IMF, and even it would struggle to deal with Asia’s, and particularly, China’s, current account surplus, which flooded the global economy with liquidity and brought investment returns down to unsustainable levels. Investors searched desperately for yield and the bankers, in their intermediation role, happened upon the US subprime mortgage market as a suitable source.
Overexposure
Bankers can certainly be blamed for having too much exposure to a single and fast-growing asset class but had subprime not proved the weakest link, another asset class would have taken its place.
Missing from the regulatory proposals is anything limiting the proportion of business that a bank can do in a particular sector because, presumably, it would impinge too much on the shareholder-owned, competitive system that allows banks to pick their business models according to market signals.
Dancing dilemma
Herein lies the real dilemma for banking, as was summed up inadvertently by Citi’s former CEO, Chuck Prince, in his now infamous “still dancing” remark made prior to the crisis. By steering clear of structured finance, a major investment bank would have foregone earnings and felt shareholders’ wrath. Mr Prince was already under immense shareholder pressure so this was hardly an option. Would taking banks out of the US quarterly earnings reporting cycle have helped?
These are tough questions to answer and so much more difficult than the easier option of blaming the bankers for the crisis.
