Who Was to Blame for the Banking Crisis? Essay

1964 Words May 24th, 2012 8 Pages
The banking crisis of the late 2000s, often called the Great Recession, is labelled by many economists as the worst financial crisis since the Great Depression. Its effect on the markets around the world can still be felt. Many countries suffered a drop in GDP, small or even negative growth, bankrupting businesses and rise in unemployment. The welfare cost that society had to paid lead to an obvious question: ‘Who’s to blame?’ The fingers are pointed to the United States of America, as it is obvious that this is where the crisis began, but who exactly is responsible? Many people believe that the banks are the only ones that are guilty, but this is just not true. The crisis was really a systematic failure, in which many problems in the …show more content…
The internal structure of the financial companies played a big role in the crisis. The executives frequently overlooked long-term stability, when pursuing short-term gains. This was done for two reasons. First, the shareholders evaluate the performance of a CEO by the money he or she makes for them, and bad results today can mean no job tomorrow. The second reason is the incentive structure. Better results mean more bonuses, and the executives were striving to produce such results, disregarding the long-term stability of the firm and of the market as a whole. The boards of these same firms can also be held accountable for not stopping the executives from acting recklessly. Many people today like to blame the ‘greedy’ bankers for doing that, but this is not correct. The fact is that it is expected of executives to act in such a way when facing similar situation. This means that the incentive structure itself is flawed. Moreover, the board is responsible for looking after the executives’ decisions, and whether these are taken in the best interest of the shareholders. After the financial crisis unravelled, many MPs in the UK blamed this bonus culture for being a reason for the crisis, and for making the crisis worse than it could have been. After the bailouts of several British banks, some of the companies actually used this money for the executives’ compensation. There were many critics of this, and many opinions were voiced that the

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