Let's Stop Blaming the Banks for our Problems

Most of the headlines about the recent financial crisis have focused on the effects on the national and international economy. We have heard about recession, depression, double dips, unemployment, falls in the value of housing, banking failures etc.

For very many people, however (including me), the most important effects have been on our personal finances. Not only have many people lost jobs and maybe their homes, there are many more struggling with reduced incomes, personal debts and negative equity. There are many more whose investments and pensions have taken a large hit and who have, therefore, had to alter their plans for the future.

In the midst of this, banks have enjoyed a hugely profitable year and have attracted public outrage by planning to pay the people responsible for making those profits large bonuses, in the views of many unjustly. Banks have been helped by the cheap money situation governments have put into place to help people through the current crisis and are blamed, by many, for causing the crisis in the first place. Why then should a few people be paid huge amounts for profiting from a situation that is causing so much suffering?

However, insensitive though some bankers have been and easy target though they are, is it fair to blame them for what has happened or to complain when they reap the rewards of successful years? Don’t sports stars get paid enormous amounts, partly based on their teams’ success, without anybody complaining?

Well... yes they do... but they don’t earn that success by gambling with our money. If they lose twenty games in a row it won’t make any difference to my standard of living.

On the other hand, we can’t just blame bankers for the financial problems of the last few years. To a large extent, we all carry the blame; we are all (or nearly all) responsible in some small way for what happened to the global financial system.

How? We forgot some basic facts that we should all remember  when making financial decisions. We may have been badly advised, fooled by media reports or misled by our friends, but the buck for decisions we make about our money should stop with us.

Firstly, we were deceived into thinking that nothing would go wrong with our economy. House prices would go on rising and money would continue to be cheap and freely available. Despite all historical evidence to the contrary and the warnings of some, the adverts for cheap loans, credit cards offering interest free money for longer and longer periods and 100% mortgages to buy the homes of our dreams called us like the sirens of old and we piled in. Personal debt rose higher and higher and equity release schemes, second mortgages and secured loans ensured many of us kept increasing the debt secured on our home as well. We demanded more and more and we wanted it now.

The banks rushed to satisfy us, emboldened by new financial market toys that gave them the illusion that all this business was virtually risk free, as they could package it all up and sell it to someone else. They never stopped to ask what would happen if that market suddenly dried up and no-one wanted to buy their risky assets from them- because it never occurred to them that this could happen. To be fair virtually nobody thought it could, the brave new world of international finance was seen as protecting everybody, instead of exposing them all to much more risk, as proved to be the case. Banks (seemingly) forgot that more leverage meant more risk and not just more potential profits.

Secondly, we all forgot a very important basic truth. In finance, as in so many things, there is no such thing as something for nothing. If you are being offered a better rate of return for your money, it means it is a riskier investment. If a hedge fund (say) is making enormous returns, they are taking enormous rinks. No getting away from it. So, when we all went chasing those big returns, we were all taking on that risk.

Now it’s all gone wrong, we all need someone to blame. The people we gave our money to, who (maybe) forgot to tell us how risky this all was, are the obvious candidates to shoulder that blame. Sometimes justifiably, sometimes less so. But let’s not pretend that the rest of us are all blameless. We contributed to our own downfall and only by re-learning how to manage our money sensibly and carefully can we contribute to the recovery.