Who should be blamed?

Here's an excellent post "Bankers aren't special.. But Banks are" by one of my friends from the banking industry. As part of this post she talks about the double standards where we praise banks/bankers when they generate great returns and slam them when things turn sour. Here's my detailed response to the same.

I agree with her view that bankers get paid more as banks are wealth creation engines. Here are couple of points I would like to add on why bankers are paid more - high level of complexity/highly intellectual nature of their work(similar to IT) and high level of risk they deal with as part of their jobs- higher the risk higher the returns! Rightly so that they get paid more.

Banking industry is all about trust and reputation. One of the reasons why people are upset today is because the trust that people had on the banking system & reputable financial institutions is now broken. Lot of people lost their lifetime savings, 401k's and big portion of their hard earned wealth due to unsustainable/risky investment practices of banks. As a layman a lot of these practices looks way too risky to me. I fail to understand how these smart bankers failed to see the inherent risks/defects in the model.

I feel that banks were focused more on short term profits than long term stability/sustainability. Otherwise how else will you justify the leverages(Investment banks have a leverage of 30-40 times their asset base) and risk taking ability in the system? These days its all about the number game. Most banks/banker's performance is judged by the short term returns they generate and in turn their bonuses are based on the same. This blinded their view on the risks and biased their thinking towards short term profits.

I dont think its a problem with the banks alone, this is an inherent problem with our system (Btw I'm not a socialist, I'm a hardcore advocate of open markets). Who should be blamed for this mess - The Banks? Bankers? Government? or we as individuals who perpetually crave for higher returns? To give you a small example when we are putting our money in a fund/bank most of us by default put our money where there is a higher return and in a normal scenario we hardly care about the risks. When we encourage banks to take higher risk, generate higher return and provide them with our money how do you expect the banks to take the blame?

While i still hold the banks/bankers accountable as it is their responsibility to take the right decisions to safeguard/grow our wealth, we as individuals are equally responsible. We need to wake up to the fact that with higher returns come higher risks and be cognizant of this when we push our bankers to generate higher returns. We as stock holders need to realize that companies/banks cannot keep growing forever and generate unreasonably high returns, we need to take a long term view. To conclude, we need to keep our greed in check and come to grips with reality. End of the day its your money that is lost and you are the one who is affected!

Pls let me know your views/comments on this post!

Photo Credits: Nick.Hider & ilovepiano

Credit Crisis demystified by Jonathan Jarvis

Here's an excellent educational video on the credit crisis by Jonathan Jarvis. The video explains how the whole mortgage & credit system works and what went wrong with the system leading us to the present crisis. This is a "must watch" video for folks who are closely following the credit/economic crisis and wondering how this all happened and why no one has caught this earlier.

I loved the way Jonathan has demystified this complex issue and presented it in such a simple and entertaining way. I've spent countless hours reading up numerous articles/blogs & discussing with my friends in financial world to understand the credit crisis, This is the best and simplest explanation I've seen till date. Hope you like it:-)

For those interested in reading more, here's an stirring article from Orin Woodward on why government shouldn't get involved in this credit crisis and use taxpayers money to bailout banks. He says that this is creative destruction and this would help us evolve much stronger from this crisis. While I do agree with Orrin's reasoning, Govt sitting back and letting things take its own course is definitely not an option given the current recessionary conditions & scale of this crisis. Some of the banks/bankers who were the prime reason for this crisis might stand to gain from this Govt intervention, that cannot be prevented and its part of the deal. The risk of Govt not intervening and letting the country/world go into prolonged depression is way too high. It is going to be more expensive to clean up later and people will have to go through more pains (similar to 1929 depression) before we get the system back on track.