Based on most news reports, people want to pin the blame for the global recession either on greedy US bankers, risky sub-prime mortgage lending practices, a lack of government regulations, or some combination of the three. But I view these as mere symptoms rather than the real causes. In my view the United States rightly deserves much of the blame, because the real roots of the problem do lie both with American business institutions and with American consumers.
You might also recall that when the current financial mess first began to unfold in the States, most European and Asian business and government leaders expressed a cocky confidence that their respective economies had ‘outgrown’ their reliance on America as the world’s economic engine. But we quickly learned that when America catches a cold, the rest of the world still sneezes.
As for the ‘real’ root causes of the downturn – instead of railing against greedy bankers, people need to take a look a bit closer to home. Much like successful con artists, the financial success of those greedy bankers was also based on their ability to take advantage of equally greedy consumers. That’s right – we need to begin by pointing the finger at ourselves before we start pointing it at others.
American consumers started and sustained the global economic boom of the past 25 years by living well beyond their means. But now their bills have come due, and the rising tide of unemployment and home mortgage foreclosures is the unpleasant consequence of years of economic profligacy.
Another part of the problem is that many credit-worthy homeowners across America, Ireland, the UK and the rest of Europe bought bigger and more lavish homes than they could actually afford. Some others also bought second homes and investment properties, thinking they could profit from the real estate boom. And it is these mortgages that are now going into default. But let’s be honest here: no one pointed a gun at their heads and made them take these kinds of monetary risks. They did so because they were every bit as greedy as those bankers they now want to see hung by their thumbs.
Regarding the lack of financial regulation, the real cause in America wasn’t so much the lack of it – rather, it was the ability of financial institutions to shop around and choose who they wanted as their regulator. The world’s largest insure AIG, as well as the two largest bank failures in the US, Indy Mac and Washington Mutual, all chose to be regulated by the Office of Thrift Supervision (which has now admitted it failed to do its job) instead of agencies like the FDIC that had a reputation for more stringent regulatory oversight.
But the real culprits behind all the easy credit available in the US and Europe were the three major global bond-rating companies – Standard and Poor’s, Moody’s and Fitch. When AIG and other financial institutions put together those ‘securities packages’ that included sub-prime mortgages and credit card accounts, they rated them as AA or AAA investment grade bonds when they were anything but safe investments. Then banks across the world then bought these bonds and made ever more risky loans because they thought the bonds were safe and solid assets. How wrong they were.
While I’m in agreement that the world’s governments had to step in and clean up this financial mess, the danger I see ahead of us is that our leaders don’t yet have any realistic plans for spending within their means. I think erasing these huge deficits will become the biggest political issue of the coming decade in the US and Europe.
Charles Laffiteau is a lifelong US Republican from Dallas, Texas who is currently pursuing a PhD research programme in Environmental Studies at Dublin City University
