Is Greed Innate in Human Nature ?

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The turmoil on US financial markets has provoked an understandable storm of criticism of the culture of greed and irresponsibility that has pervaded financial markets in recent years.

Outrageous bonuses and salaries have been criticised, rightly.

Irresponsible sub prime lending by financial institutions has ultimately led to a meltdown.  Sub prime lending became popular in the United States around 2004.
To be honest I’d never even heard of the term  Sub Prime lending until this year when the term was coined by the media during the “credit crunch”

Sub prime lending is when the financial institutions provide credit to those who are deemed under-banked, or “sub-prime”.

Typically those who have been bankrupt, who don’t meet most bank’s guidelines or those who have a history of loan delinquency.  In summary, “sub-prime” are those who are not likely to be able to meet the payments for their mortgage, car loans, credit cards..etc

So how irresponsible are the financial institutions?  VERY

They saw an opportunity when they could target those who had been turned down by the more traditional banks, as they saw them as high risk..  well there must have been a good reason for that!

This may be the end of the big fat bonuses and salaries along with the current “credit crunch”.. take some responsibility for the years of irresponibility.

Can we really move beyond the current culture of greed,  and establish some principles for reforming the global financial system ?

Hopefully the $US700 billion Wall street bail out package will be voted in , along with some reforming regulation.

Adrian Blundell-Wignall, an Australian,  is a senior economist at the OECD.

Blundell-Wignall identifies three factors which kicked off the sub prime lending.

1. The fixed exchange rates, which because of the rapid growth in China and very low market rates in Japan produced a huge financial bubble in the US.

2. The early adaptation to the new global rules on bank capitalisation requirements, known as Basel 2. These rules drastically reduced the capital backing required for residential mortgages.

3. The greater regulatory restrictions on Fannie Mae and Freddie Mac, the two giant US mortgage financers.

This opened up space for other providers to finance mortgages.
Blundell-Wignall argues that the conjunction of these factors produced a giant infusion of money into the mortgage market. The end result was thousands of mortgages being provided to people who should never have been lent money.
Because these mortgages were scrutinised, onsold and insured through complex instruments, a cancer spread through the US financial system ultimately leading to the meltdown.

Is Greed innate in human nature ?

Technorati Tags: meltdown, sub prime lending