International Bank Study, Shows Mega Banks In The U.S. Produce Financial Instability And More Severe Crises- Was The 2008 Financial Crisis Caused By The Big Banks?

According to wallstreetonparade.com– It took eight years of research to compile a data set of annual balance sheets of more than 11,000 commercial banks dating back to 1870 in 17 advanced economies. And in every country, the study arrived at the same finding: concentrating the banking system in the hands of five or less giant banks leads to financial instability and more severe financial crises. The bank balance sheets of the following countries were examined: Australia, Belgium, Canada, Denmark, Finland, France, Germany, Italy, Japan, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, the United Kingdom, and the United States.

The 150-year banking study is titled: “Survival of the Biggest: Large Banks and Financial Crises.” Its authors are Matthew Baron of Cornell University; Moritz Schularick of the Kiel Institute for the World Economy and Sciences; and Kaspar Zimmermann of the Leibniz Institute for Financial Research SAFE.

Any analysis that says “x caused the 2008 financial crisis” is so simplistic that it’s more wrong than right, and it doesn’t matter which x the analysis points the finger at.

You could blame the big banks – they were the institutions that went bust or would’ve gone bust without government intervention. But why did they go bust? Because assets that they owned, based on the value of property and mortgages, collapsed in value. Why did mortgage-backed securities collapse in value? Because people were defaulting on mortgages.

Consider this – if you were to lend me money, and I refused to pay you back, wouldn’t you be a bit peeved if everyone blamed you for any financial problems that arose? Wouldn’t you be saying “hey, don’t blame me, blame the guy over there who took my money and won’t give it back”? I think that would be a pretty natural thing to do, and I think you’d have a perfectly legitimate argument that at least some of the blame should fall on me.

So maybe you should blame the people defaulting on their mortgages – they’re taking the loans and not paying them back. But why did they take the loans in the first place? Because they were desperate to get on the housing ladder, which was at least partly because the low prevailing interest rates and government policies were encouraging rapid house price growth. So perhaps you should be blaming the Fed for keeping interest rates low or the government for not keeping the market in check and allowing a bubble to develop?

Or perhaps you should be blaming the mortgage brokers who were prepared to organise mortgages for them that they couldn’t pay back, especially when rates reset? I mean that’s pretty despicable, right? Except that, why wouldn’t they do that? If someone tells you that your pay is determined purely by how many mortgages you arrange, nothing else, and you have people queuing up to take out a mortgage from you, why wouldn’t you do your best to give it to them? If you’re the mortgage company you might get upset that brokers are arranging mortgages that are going to end up in default, but if you’ve got wall street banks lining up to buy the mortgages to package them into CDOs do you really care that much? The marketplace is telling you that there are people who want to take out mortgages at the market price, and people who want to buy the loans at the same market price, and you can make a fortune being the guy in the middle who connects the two groups. Can you really be blamed for taking the money and not asking any questions? Generally saying the market is wrong and you’re right is a bad idea, and when your job relies on you not saying that you’ve got even less reason to shout “stop!”

So now we’re back to the banks again. They were buying up the mortgages as quickly as they could, to package them up. It’s definitely their fault, right? Except…why were they doing that? They were doing that because investors wanted to buy them. Banks are in the business of providing services to their clients and if enough clients want a product and the bank can make money providing it, the bank provides it. That’s what they do. So the banks were just supplying something that people really wanted to buy. So it’s really the big pension funds and the like who were buying the CDOs that are to blame, surely?

But then you look at why they were buying such toxic crap. Well they were buying it because it was rated AAA and they could get a much higher yield on AAA Mortgage backed CDOs than they could on any other AAA product. And they had rules about what they could invest in, which made it essentially impossible to reach their target returns without investing in this kind of product. And it was AAA so it was safe, right?

So maybe you should be blaming the rating agencies. They’re the people who were supposed to be ensuring that the products based on mortgages were rated appropriately. They didn’t do that. In fact they got it hopelessly wrong. But then again, they were (a) being paid by the banks to rate the products so if they didn’t do it then they lost all the business and (b) they were following rules which had loopholes that highly paid bankers are paid highly to exploit. This is what happens in competitive markets. Especially when those markets aren’t well regulated.

So it’s all the regulators’ fault, yes? They were supposed to make sure the markets worked properly and they didn’t do it. They were supposed to do that on their inadequate budget, with all the people who were either not smart/talented enough to work for the banks, or who had half an eye on getting a job with the banks where they could do more fun things for multiples of the money. They were working in a slow moving bureaucracy trying to regulate fast moving banks creating financial products as quickly as they could. They didn’t have enough people or resources to even try to understand fully what was going on, let alone stop it, and anyone smart enough to figure something out would probably just get hired away anyway.

So it’s the government’s fault for not giving the regulators the resources to do their jobs. That’s it. Because the public was queuing up to vote for whichever party promised to put an end to the financial innovation that had driven the economy forward in recent years, right? Voters would have come out in droves for the presidential candidate who said “we’re going to put you out of work and reduce the value of your property because the economy is bubbling out of control and we need to stop it before it’s too late”, don’t you think?

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So there we have it. Everyone involved in the process bears some portion of the blame. If you bought a house in the few years beforehand, you helped fuel the bubble. If you organised a mortgage that would never be repaid, you helped fuel the bubble. If you traded mortgage products, either as the bank selling them or the investor buying them, you helped fuel the bubble. If you rated any of these products AAA, you helped fuel the bubble. If you supported any party that supported deregulation of the financial markets and relied on the economic growth created by the finance industry and the housing boom, you helped fuel the bubble.

And guess what? You were doing what you were being incentivised to do. All of those people were acting in their own best interests, and aside from a few they were acting completely legally.

Now this isn’t to say that everyone should be blamed equally. Personally I think the ratings agencies were particularly reprehensible, since their whole job was to rate things accurately and that they failed to do. And they failed both because they were incompetent, and because they weren’t trying. I don’t see very much in their behaviour that isn’t worthy of criticism. I have no idea how they’re still in business, still pedaling their nonsense. But maybe that’s me. They’ve probably played a less important role in your life and you care less about them as a result.

The banks are a more complex issue IMO. For sure, there were some extremely poor and pretty immoral decisions made, but those were generally made by very few people with a lot of power. It’s not widely realised for example that a lot of senior managers at Lehman were pleading with Dick Fuld to reduce risk, to stop pushing these products, to back away from a housing market that they saw as alarmingly overblow. What exactly are we faulting those people for? It’s not clear to me that they deserve the blame and vitriol they’re received, though maybe for other people the fact that they made so much money during the boom times overcomes everything. For sure, I think there are two separate issues – (1) how much wrong did someone do and (2) how much did they benefit from that wrong – that make the blame equation that much more difficult.

If at the end of all of that you think the banks are the big baddies, then fair enough. They were certainly important players, and some people working for them made millions, tens of millions or even hundreds of millions of dollars. I don’t blame people for having negative attitudes towards bankers. But the answer to “Was the crisis caused by the banks?” is no. It’s much, much more complex than that.