Financial crisis of 2008: who is to blame?

To use an American political cliche, there is plenty of blame to go around. First and foremost, the greedy behaviour of the Investment Banks, and secondly the non-existent Congressional oversight.

Number one rule for profit-making companies is to maximise the profit of their shareholders. In the world of investment banking the more risky the behaviour of the bank, the more profit the shareholders will make. Thus, there is a built-in mechanism for greed in the capitalistic system. However, internalising the profits and externalising the damages is disadvantageous to the taxpayer. More specifically, the banks, or to be more precise, their risky division (investment banks owned by the parent bank) have been engaging in the derivatives market, which is highly complex and speculative, and when the banks would make profits they would give it to their shareholders, however when banks are in danger of failing, the bankers demand from the government to bail them out or otherwise the banking system would collapse (systemic risk) and take with it the whole economy.

The overwhelming part for the blame lies with the regulators, and generally with the government. Since the late 1970's successive governments have deregulated the banking sector to a point where the derivatives market size was 500 trillion dollars and the regulators did not know anything material about it. The government also failed to separate the big banks to investment and commercial thus not letting the risky activities of the investment bank affect the commercial part of the bank. In addition, the government failed to stop the banks like Goldman Sachs, Citibank, and Morgan Stanley developing into huge banking conglomerates. These banks became so big that in case they were to fail the economy would collapse also, and not only that of the United States. This scenario would have materialised if Congress would not have passed TARP in September 2008 to save the ailing banks.

So, it would be preferable not to ask bankers to be less greedy but to ask governments to regulate risky financial activities that banks undertake. Thus reducing the chance of the economic system collapsing in future crisis.