Bankers or bubbles: What caused the financial crisis?

Our readers reckon that greedy bankers played a bigger role in causing the global financial crisis, but Wharton professor Franklin Allen blames the real estate bubble.
<div class="ArticleImageCaption" style="text-align: left;">Don't blame greedy bankers, says Franklin Allen</div>
<div class="ArticleImageCaption" style="text-align: left;">Don't blame greedy bankers, says Franklin Allen</div>

We asked our readers about the causes of the crisis last week, and whether a real estate bubble or greedy bankers had played the bigger role. Voting was relatively close, but the banker bashers won out in the end.

The question was prompted by a speech given by Wharton finance professor Franklin Allen in New Zealand earlier this month. Speaking at the Financial Management Association’s Asian conference in Queenstown, Allen said that the real estate market was the real culprit in the global financial crisis.

“Governments and central banks did a wonderful job of saying the problem is these greedy people in Wall Street,” he said, according to New Zealand’s Guide2 newswire. “My own view is that much of the blame lies in the public sector ignoring property bubbles.”

Allen argued that lowering interest rates when property prices were rising created a bubble that eventually led to the crisis. “We tend to have a financial crisis when the bubble bursts in the real estate market,” he said. “Real estate markets are very different to stock markets. Stock markets are efficient and the prices adjust quickly. That is not true of real estate markets.”

He also questioned the wisdom of bank bailouts, saying that liquidation would have been a better solution.

Our readers evidently do not agree with Allen, voting 58% in favour of blaming bankers, while the remaining 42% pointed the finger at the property bubble.

Allen is not short of an opinion. Recently, he has also criticised US politicians calling on the government to counteract rising oil prices by dipping into the country’s strategic oil reserve. “The government definitely shouldn’t do that,” he said in a recent Wharton commentary piece. Even if prices rise above $150 a barrel, the reserve should be left as an emergency fund in case of a sudden disruption in oil supply, not as a way to mitigate oil prices, he said. “It’s a month supply. If something drastic happened in Saudi Arabia, it would be for that. They shouldn’t touch it now.”

Returning to the subject of the financial crisis, our friends at Next Media in Taiwan have launched a new video on their website, this time telling the story of Iceland’s decision to reject compensation deals with the Netherlands and the UK.

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