The current financial and economic crisis is no different from any other when it comes to apportioning blame and apathy. Politicians and the general public blame the banks, banks point their fingers back to the regulators, and the regulators blame the economy. The economy, being an abstract science, has no one to blame. It collectively makes us feel good. If only it was this easy.

Unfortunately there is not a single party to blame. It was, in the end, a perfect storm of greed and stupidity. Banks took too much risk and speculated. Regulators, shareholders, politicians and the general public did nothing to stop them since they quite liked the higher interest, high profits, or increased contribution to the tax coffers. Hands up who thought putting money with an Icelandic bank was a good idea and did not for one minute think that if it sounds too good to be true it probably is. Anyone who did is in good company though. Just in the UK, local government, charities, and public pension funds lost a combined £1 billion.

The net result is that banks now sit on their hands when it comes to lending money unless the client can prove he doesn’t need the funds which in turn harm economic progress.

As Hugh McCulloch eloquently put it in his “Circular letter of the Treasury Department”:

“Pursue a straightforward, upright, legitimate banking business. Never be tempted by the prospect of large returns to do anything but what may properly be done under the National Currency Act. Splendid financiering is not legitimate banking and splendid financiers are generally either humbugs or rascals.”

Although issued in 1863, it is equally applicable to every single financial crisis that has occurred before and after and interestingly enough what we do see is that financial institutions built on a strong set of principles have survived remarkably well. Think, for example, about the building societies, credit unions and cooperative banks. When times were good, they never made excessive profits, but when it all went belly up, they were still doing swell. They know their clients inside out, take calculated business risks, and don’t speculate to nearly the same extent. Bit like old fashioned merchant banking.

Perhaps it is time to stop the blame game, and start considering social responsible finance for all. And this time around, when the going gets easy again – don’t give in to relaxing the rules.

Dr Natalie Schoon, CFA