Whose fault is it?...

“Economic crisis”, “recession”, “inflation”, “buying power”… We all hear these words several times a day. We do for about four to five years now!! The 2007 crisis, as we usually call it, impacted the world economy and still has impact now. Why? What happen? Could it have been avoided? What can we do to prevent it to happen again? Is it possible to prevent such crisis to happen? Whose fault is it? These are the points I’ll try to deal with in this post.

First, I’d like to start by a “historical part”. Starting from the beginning, a vast distribution of mortgages was made, notably by American banks. This made most of their assets “illiquid”, which is in my opinion a pretty bad thing, especially for a bank! Indeed, let’s take the example of a bank according a loan of $100,000 to an individual to buy his house. In a way, it can be argued that there is no real importance if the bank owns the $100,000 “liquid” (the cash) or “solid” (the house, until the individual repay the bank). However, if the house price drops while the individual is repaying for it, then there will be a problem for the bank. The 2007 crisis started with too many mortgages accorded to too many people who weren’t able to repay the banks. And this led to the destruction of bank assets value.

There were a few signs that a recession will show before 2005, but then why these signs weren’t noticed by anyone? There are a lot of different organisations and people working in the financial sector, all of them scrutinizing the market, hopping being able to predict what will happen!! But then whose fault is it? Is it exclusively one person’s fault? I don’t think so! The problem in this kind of crisis is that they are international… when it started in the US, the “western countries” were not touched yet, and then probably thought they wouldn’t be touched by it… (Could this reaction be an ego matter? Maybe!). However, the bank system being touched in the first place, and banks being interrelated worldwide, how could we have missed it? Indeed, relations between banks are based on confidence on each other, and once this is broken, it is then very hard to fix!...

This diagram highlights quite well how a crunch starting in the United States can affect the United Kingdome.

On another hand, it might not be only the bank’s fault. Other players were also “in the game”. They could have interfered before leaving the situation becoming that bad. Whether it is government, rating agencies, experts, companies… everybody could (should?) have seen it coming. Some companies saw it coming and tried to protect themselves by securitising. This works like described in the diagram below.

To conclude, I think it is not a “one person fault”. This economic situation is very closely linked with politic choices, more than usual, if I dare say so. I think that the situation is what it is now, and instead of looking for someone to blame for it, we should all together (banks, governments, companies, experts, citizens…) to find a solution to finally get over this crisis.