The global economic blame game is reaching a crescendo as Americans go to the polls and Europeans approach critical decision points. And everyone -- from economists to central bankers, from TV analysts to the person on the street -- seems to have a favorite scapegoat for Europe's recession and debt crisis, for America's feeble recovery and its recurrent political fiscal dramas, for dangerously high youth unemployment in a surprising number of countries, and for China's sudden economic slowdown.
But four years into the global economic malaise that has followed the 2008 crash, the endless recriminations are more than just academic. They are actually preventing us from coming to a consensus not only on how to dig out of this mess, but also on how to prevent it from happening again. The unhappy result is that the risk of a global recession is rising, as is that of another financial crisis. So can we please get the finger-pointing out of our systems and move on?
Banks are at the top of most lists of bad guys. They lent way too much to credit-challenged entities, often using structured products like collateralized debt obligations and repackaged loans that few of them understood sufficiently, let alone knew how to manage responsibly. This lapse in the most fundamental element of banking -- failing to properly channel loanable funds to productive uses -- was consequential. Yet it was far from the only one.
Banks compounded the mistake by massively leveraging their balance sheets, making a whole set of expensive side bets, and moving activities to unregulated areas. Many did so while benefiting from the protection afforded to them by state-run deposit guarantees, emergency loans from central banks, and, most destructive of all, the notion that they were "too big to fail."
To add insult to injury, many banks (particularly in the United States) are seen as now overreacting. Having lent way too much and in a reckless manner, today they are withholding credit from legitimate borrowers, preferring just to add to the capital they've stockpiled at the Federal Reserve.
Even as I write this, I can hear the bankers shout, "Unfair!" Many of them argue that these crises are due to regulators falling asleep at the switch. They have a point.
Enamored with the textbook characterization of efficient, unfettered capitalism and well-functioning markets, regulators gave the banks an enormous amount of rope with which to hang themselves. In the process, they aided and abetted the illusion that banks could operate outside the constraints of the real economic activity that they finance. The laxity was intensified by competitive hubris -- among cities vying to be the world's financial center (London vs. New York) and among others that, in a quest for greater international respect, allowed their national banks to vastly outgrow domestic realities (Dublin, Reykjavik, and Zurich).