Who’s at fault in the financial crisis? I hate witch hunts, they always seem to burn the wrong person in the end. However I must say that I can’t disagree with restricting payouts to people leaving sinking ships.

One party who needs to be held more accountable are the Federal Reserves. For at least a decade Federal Reserves have been finessing a stable inflation rate while allowing asset prices (many are not captured in inflation numbers) to dramatically outstrip wages. This makes the average person poorer in an affordability sense and sends them of to the predatory lenders to get some money to buy what they want – stuff to make them happy.

They have also allowed cheap money to build up in the economy by keeping unrealistically low interest rates for very long periods of time. When what they should have been doing is managing interest rates on a more realistic inflation measure that included assets prices.

The result of consumer-itis (the disease of getting lots of stuff in the hope of getting happiness) coupled with the capacity to buy it (lots of cheap money) has resulted in heavily indebted families with crappy home ownership affordability.

Here’s the rough maths.

When you earn 50k. All your money will go on rent, food and service. Probably 100%. You will probably fund excess using debt.

When you earn 500k. You will struggle to spend what you earn and it will in all likelihood end up in assets. Those assets generally get geared because you are told that is tax effective and gears up those returns. Rising prices (higher percentage of equity you own in the assets) lets you go and get more debt to buy more assets. The whole thing just fuels itself and creates a liquidity bubble. In the end you make stacks of money and end up with a huge gap between the low and high socioeconomic classes.

This crisis unwinds this. The reverse happens, asset prices plummet as assets need to be sold to pay of debt. Unfortunately everyone is rushing for the door at once because someone shouted fire. Those same people arrived at the party gradually. This is why prices go crazy when you see many people unwinding their geared assets all at once.

Some of you are thinking this is about risky investments. Well yes you’re right except that they don’t get created without a market and there has been a strong market of wealthy buyers for many years. The people whinging about those risky investments are the same ones slapping high fives at dinner parties when their geared risky investments paid them nice 25% p.a. returns.

As I saw in a Ted talk recently. It’s a little like blaming America for the war in Iraq. I might think it’s a mistake them being there but common sense tells us that had there been no 9/11 there would have been no war. “No 9/11, No War”. So the witch hunt should turn on itself if it is to be fair. The government is just as much to blame as the bankers who are just as much to blame as the debt binging consumers and return hungry superannuation investors.

Everyone has a choice to put their dollars in nearly risk free government bonds or low risk bank deposits. I think if you were that risk adverse and you lost your money you are quite justified in complaining. Everyone else needs to take it on the chin.

The witch hunt never seems to get it right because there isn’t such a thing as a right choice in the blame game.