Global Recession- Who Is The Culprit?

Everybody has been talking about the root cause of the financial crisis. Some blame the bankers, some blame the greedy house owners, few blame the FED, many blame the regulatory authorities. Who is the real culprit is difficult to identify. In an integrated world it is not easy to say whether 'X' led to 'Y' or 'Z' led to 'Y'. However here is my assessment-

Two primary causes-
1. Low interest rates
2. Less regulation

I believe that economics is driven by incentives. If you give the right incentives to people then there will be overall beneficial growth.

Low interest rates
The housing bubble collapse is seen as the core cause of this recession. Why do you think there was a housing bubble? Because people who didn't have the money to buy a house also became house owners. They were able to borrow money at a low rate and were encouraged by the Fed to borrow more. In other words these people had an incentive to borrow. Why were the rates so low? Well... Fed chose to keep them low. Their reasoning is that they wanted to take the economy on a growth path after the 2001 recession. But the problem was that the rates were kept too low for too long. Why?

Less regulation
Bankers and other financial institutions wanted investment vehicles where they could invest money. They could not find any. So guess what? They created their own...they created complex structures which were difficult to understand. Nothing wrong till now. Bankers are greedy like common people. They have to be profit seeking. Profit seeking behaviour of the companies is an essential condition for any economy. Innovation and technology development is an outcome of such profit seeking behaviour. It is a reality and can't be ignored or ridiculed. The problem started when the regulatory authorities were not able to (or even willing to) detect it. In other words the bankers did not have an incentive to stop such practices. Why were such practices (totally legal) not detected? Is the answer -crony capitalism

I completely blame the Fed. Alan Greenspan has admitted that he got it wrong. Fed set the wrong incentives for the people/institutions.

Fed did things that it was not supposed to be involved in. Fed is not there to boost the housing market. Today, most of the economists believe that supply of money directs the growth of an economy. Power is in the money. But, money is with the Fed. There should be no room for error by the Fed.

The following are some the responsibilities of 'The Board of Governors
of the Federal Reserve System'- Source: FederalReserve

1. The primary responsibility of the Board members is the formulation of monetary policy. The seven Board members constitute a majority of the 12-member Federal Open Market Committee (FOMC), the group that makes the key decisions affecting the cost and availability of money and credit in the economy. The other five members of the FOMC are Reserve Bank presidents, one of whom is the president of the Federal Reserve Bank of New York. The other Bank presidents serve one-year terms on a rotating basis. By statute the FOMC determines its own organization, and by tradition it elects the Chairman of the Board of Governors as its Chairman and the President of the New York Bank as its Vice Chairman.

2. The Board sets reserve requirements and shares the responsibility with the Reserve Banks for discount rate policy. These two functions plus open market operations constitute the monetary policy tools of the Federal Reserve System.

3. In addition to monetary policy responsibilities, the Federal Reserve Board has regulatory and supervisory responsibilities over banks that are members of the System, bank holding companies, international banking facilities in the United States, Edge Act and agreement corporations, foreign activities of member banks, and the U.S. activities of foreign-owned banks. The Board also sets margin requirements, which limit the use of credit for purchasing or carrying securities.

4. In addition, the Board plays a key role in assuring the smooth functioning and continued development of the nation's vast payments system [see Fedwire and Payment System Risk Policy].

5. Another area of Board responsibility is the development and administration of regulations that implement major federal laws governing consumer credit such as the Truth in Lending Act, the Equal Credit Opportunity Act, the Home Mortgage Disclosure Act and the Truth in Savings Act [see Consumer Information and Community Development].