During 2007, panic hit the financial markets and started a knock on effect within the global economy. Banks were verging on collapse, many had to be bailed out by governments and some even went under. This continued into 2008 and even today we are still feeling the effects of the 2007/2008 recession globally.
When it first started in 2007, no one could have predicted the domino effect it would have and the number of people that would be directly affected by the financial crisis. Through banks collapsing and the financial industry being affected, it appears that every one like you and I have been affected in some way or another. Now nearly 5 years on every time you sit and watch the evening news there seems to be a story that can draw its origins back to the 2007/2008 crash.
Even though most people would agree and the press certainly believe that the mess we are in now is mainly due to the bankers and their extravagant ways and the culture of the banking industry, are they really to blame? Are bankers and the banking sector just an unfortunate scapegoat in this whole incident? Prior to the financial crash the economy was based on debt. Loans were used by businesses and consumers alike to fund their day to day lifestyle. You could argue that, this was unsustainable and cracks had to start appearing somewhere.
The start of the problem can be traced back to the US sub-prime mortgage market and the way loans were given out to potentially unsuitable customers, then debts being traded between banks with untrue credit ratings. So potentially the cause could be argued originated from banks providing loans to unsuitable borrowers for more than the full value of the property.
I believe that a small amount of ‘blame’ could be placed on the customers and businesses who took out these loans often worth more than the actual capital required. I agree that the banks should not have given money out like it was water, but the people who took the loans probably knew deep down that they would struggle to repay the loans and did not consider what would happen if interest rates changed. If going by this argument, today’s society could also take its share of the blame. Consumers have to have the latest gadget and product and are willing to borrow more and more to finance their ‘ideal’ lifestyle. I believe personally that if you cannot afford it and it is not necessary then it’s not worth going into debt just to ‘keep up with the Joneses’.
Critics have tried to identify the major cause of the global economic downturn. Pin pointing the cause is difficult. Many people have identified numerous events which causes knock on events to happen, but no starting point has been agreed in reality. One event that is seen as a major cause is the collapse of Lehman Brothers. They collapsed due to high debt levels.
An alternative argument in the Lehman Brother case could be that the Federal Reserve played a major part through not coming to the aid of Lehman Brother like it did with other banks. Though Lehman Brother’s being allowed to collapse, this started a catastrophic spiral of events that were felt around the world.
The collapses and problems in 2007 and 2008 have lead to a huge sovereign debt crisis especially in the Euro area. Countries are having their credit ratings downgraded due to potentially not being able to repay their loan repayments. The country struggling the most is Greece who are having to implement huge austerity cuts in order to meet repayments.
People again are saying that it is the banks fault for lending to countries, but I personally feel that the governments have to take their fair share of the blame. In the UK government spending was reaching extreme levels and I believe that changes had to be made in order to make the country self sufficient again. Governments were implementing huge initiatives with public money and then spending public money and needing to borrow extra. In Britain the taxes received did not cover the annual expenditure and this has been going on for many years. Today the majority of European countries have debt of at least 50% of the country GDP, so it is going to be a long struggle to regain control of public spending.
Personally, I do believe that the bankers were a major cause of the financial crash but in my opinion there are equally important factors that all helped cause the crash. For the press and media it is easy to latch onto one group and place blame on them, but it has had a negative impact on the reputation of the financial industry which is a major source of income for the country. So, all causes should be identified as opposed to using one group as the main targets.
(References – BBC News, Sky News, Wall Street Journal and The Economist.)
Would you say that the culture of banker’s bonuses is a potential problem? You appear to be in favour of the banking industry and the benefits it brings to the economy, but would you say that extremely high bonuses that are not in-line with performance provide any benefits to the economy?
ReplyDeleteI believe that bonuses should be directly related to performance and companies should not give large bonuses to employees who have poor performance over the appraisal period. The assumption within the banking industry that bonuses must increase year on year, I feel is wrong and does send out the wrong message about the banking industry. In most other industries, bonuses have been reduced to help cope with the recession and impacts we are still feeling today, so bankers should follow suit. High bonuses do not provide any benefits to the economy; they just add fuel to the fire for the argument against bankers and the banking sector.
DeleteBankers do have an important role within the economy and should be rewarded in-line with their performance. This should not be excessive and again they are an easy target due to the press coverage, but celebrities gain vast amounts of money for providing no real service to the economy or in general. Why are they not picked out as being over-paid during this economic downturn? Personally, I don’t agree with high bonuses being paid that are not in-line with performance, but it is unlikely to change, so is something that has to be accepted. I believe that there are other people that are paid too much who do not provide economic benefits, so they should be targeted, rather than banking who help stimulate the economy and growth.