The credit crunch hit us largely due to casino banking operations, over leveraging and speculation.

In the US, the sub prime property market collapsed due to the extensive lending to those who could not afford to sustain their mortgage payments.

The banks have been involved in the sale and purchase of over valued mortgage securities resulting from the over-valued property markets. This resulted in trading activities whereby banks obtained portfolios whose values were supported in some instances more by speculation rather than substance.

You only have to look back to the last bubble that burst to consider how substance matters far more than speculation in the longer term. The dotcom boom was a drop in the ocean compared to this credit crunch but it demonstrated how speculation is no substitute for substance. So many internet companies went to the wall once the demand for their websites simply was found not to be there and no income stream resulted.

The tragedy in this whole mess is that many of us have suffered due to the actions of a few bankers, whose bonuses packages encouraged short termism and excessive risk taking. In some instances this approach led to the acquisition and the trading of derivatives whose values were not even understood. The risks associated could not really be quantified in some instances.

The structure of banking risk / reward systems needs to change to prevent the re-emergence of casino banking which has not been eradicated notwithstanding the credit crunch and the recession. I believe that letting banks go bust would have been painful but bailing them out will also be and this approach now affords them the luxury of being able to do this again.

Indeed we could now be suffering the after effects for a generation. Had banks gone bust the banking culture would have needed to change rapidly and a return to more traditional banking practices reinstated with the emergence of a gap in the market for new banks to enter and compete.

 Sometimes it is necessary to be cruel to be kind. Bailing out the banks means we have taken the easier option. The pain will be spread far and wide for a very long period. No-one will escape punishment given the bailout. Surely those who caused the mess should be brought to book, stripped of their bonuses and prosecuted where appropriate?

This entry was posted on Thursday, March 4th, 2010 at 7:23 pm and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.