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Who is responsible for the Global Financial Crisis?

At lunch today I disgraced myself. I lost my temper and blew the head off some poor fund’s manager – metaphorically. So why did I get upset?

Maybe I have heard the “It’s the Fed’s fault for keeping interest rates too low” story one too many times. There is a view industriously peddled through the financial community that during the last ten years, every time the market got into trouble, (Russian Bond crisis, tech wreck, 9/11, 2001 Recession, 2002 Telco melt down) the Fed would lower interest rates to reduce the financial impact. It is argued that by saving the markets every time the going got tough, central banks (and the Fed in particular) “de-risked” the credit markets and created the conditions for a credit bubble that ultimately collapsed in what we now refer to as the Global Financial Crisis.

So it’s the Governments fault. If the Government had stayed out of the market and let the market feel the pain of its own folly none of this bad stuff would have happened!

I don’t buy this story at all!

The underlying assumption is that movement in the Fed Funds Rate is the key factor in credit decisions. I accept that if interest rates on loans are low, that may fuel the demand for credit. But the supply of credit should ultimately be based on credit decisions. Credit decisions are based on assessments of asset valuations, interest cover, and likely recovery rates. In the past ten years good lending practices have been abandoned, not by the Government, but by the banks and the fund managers who often purchased the loans arranged by banks.  

The Fed cannot be blamed for the fact that Bankers and fund managers threw money and anyone who put their hand out.  If anyone in government is culpable, it might be the OCC (Office of the Comptroller of Currencies – the agency responsible for Bank supervision in the US) who arguably should have intervened to curb the insanity.

By the end of lunch I had recovered myself enough to apologise.

Richard Oakes


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