When I started thinking of “fallen heroes” I wondered if we had any local people that could be added to this list.  First to spring to mind is our Reserve Bank governor, Tito Mboweni, after all he has been the one pushing up interest rates and generally making life uncomfortable by curbing our spending sprees – on the contrary the opposite is true – especially amongst the world community.  Our banks are regulated. Our foreign exchange controls prohibit excessive play in the international markets and we have not been allowed to run riot into debt we cannot afford.  Our credit control act came just in time – unlike in the United States where we frequently heard of NINJA loans, No Income, No Job/Assets – people were granted mortgage loans without having the necessary funds or income to qualify for them, with the underlying premise being that the property would continue to appreciate and cover the debt.  Of course this has not happened – we have seen the Case-Shiller House Price index in the US at record lows and an 18.5% fall last year alone.

I think most people lay the blame firmly at the door of:

1)  Alan Greenspan:
The US Federal Reserve chairman from 1987 – 2006, before that economic advisor to presidents Richard Nixon and Gerald Ford,  — an economist, met his first major challenge in office by preventing the 1987 stock market crash from spiraling into something much worse. Then, in the 1990s, he presided over a long economic and financial-market boom and attained the status of Washington’s resident wizard. But the super-low interest rates Greenspan brought in the early 2000’s and his long-standing disdain for regulation are now held up as leading causes of the mortgage crisis. The maestro admitted as much in an October congressional hearing that he had “made a mistake in presuming” that financial firms could regulate themselves.

Greenspan is the first person to have been appointed to five consecutive terms as the Fed’s chairman. He became known for being adept at guiding the Fed’s board to consensus on policy issues and his public comments were regarded as so powerful that they could send financial markets sharply in any direction. This remained true even after he stepped down as the head of the Federal Reserve .

The Federal Reserve, (which has the same function as our own Reserve Bank) seeks to control the creation of money and to influence key interest rates, thereby controlling fluctuations in prices of financial market assets, such as stocks and bonds. Perhaps most important among the Fed’s responsibilities is to provide temporary loans (through the so-called “discount window”) to banks and other financial institutions in times of need. This “lender of last resort” function was the primary reason the Fed was created by Congress in 1913, since individual bank failure had often spread to other banks, leading to a general financial market collapse.

I think it is interesting to note that less than two months after assuming office, Greenspan faced a financial market crisis very similar to what we have recently experienced. After peaking at 2,722 in August of 1987, the Dow Jones industrial average (an index of 30 major industrial stock prices) dropped by 17% suddenly, on “Black Monday,” October 19, the market collapsed by more than 500 points as terrified sellers dumped millions of shares. Falling stock prices automatically triggered millions of additional sale orders owing to computerized program trading. Buyers that had previously bought stocks “on margin” - borrowing some portion of the purchase price using the stock as collateral - were then subject to margin calls and forced to provide additional collateral when these stock prices fell. Many of these stock holders were thus also forced to sell. What consequently resulted was the then largest one-day drop in stock prices in U.S history, with over 20% of the New York Stock Exchange wealth evaporating overnight.

The financial system neared collapse from a lack of ready cash (a “liquidity” crisis). Many other financial institutions would have faced insolvency had the market continued to drop the following day. Greenspan met with top Fed officials and mapped a strategy for easing the cash crunch, using the Fed’s virtually unlimited reserves to bolster the troubled financial institutions. Before the market opened on Tuesday, October 20, Greenspan announced the Fed’s “readiness to serve as a source of liquidity to support the economic and financial systems.” With the full force and power of the Fed backing these institutions, fear of a general collapse receded and the Dow-Jones industrial average rebounded with rally of over 100 points on that day. This all seems very familiar to what the current Federal Reserve has been doing for the past year and a half.

In 2004, Business Week Magazine criticized Greenspan for keeping low interest levels too long and his concurrent praise of sub-prime lending vehicles such as ARM’s, (Adjustable-Rate Mortgages) resulting in the housing bubble. Some, including Nobel Prize-winning economists Joseph E. Stiglitz and Paul Krugman, assign a large degree of culpability for the devastating economic crisis of 2008 to Greenspan. Stiglitz stated that Greenspan “didn’t really believe in regulation; when the excesses of the financial system were noted, Greenspan called for self-regulation—an oxymoron according to Stiglitz.

However, on April 6, 2005 Greenspan called for a substantial increase in the regulation of Fannie Mae and Freddie Mac, appearing before the Senate Banking Committee, the Fed chairman, Alan Greenspan, said the enormous portfolios of the companies - nearly a quarter of the home-mortgage market - posed significant risks to the nation’s financial system should either company face significant problems.” All considered, during his tenure Greenspan was the leading authority on American domestic economic and monetary policy, and his active influence continues.

The second “villain” on my list is former Treasury Secretary:-

2)  Hank Paulson:
When Paulson left the top job at Goldman Sachs to become Treasury Secretary in 2006, his big concern was whether he’d have an impact. He ended up almost single-handedly running the country’s economic policy for the last year of the Bush Administration. Impact? Definitely. Positive? Not yet.

The three main gripes against Paulson are that he was late in battling the financial crisis, letting Lehman Brothers fail, and the big bailout bill he pushed through Congress has been a wasteful mess and we have seen second and third bailout packages to rectify the initial mistakes.

We could look further into the US financial system and could lay the blame firmly at the door at the originators of CDO’s (Collaterised Debt Obligations - a type of structured asset-backed security whose value and payments are derived from a portfolio of fixed-income underlying assets), or at the credit rating agencies which failed to adequately account for large risks (like a nationwide collapse of housing values) when rating CDOs. But then we can look at the greedy Wall St executives, hungry for bigger and better returns in a thriving economy that seemed to know no end.

And lastly – he stole billions from individual investors, corporates and even charities, so he has to appear on my list of villains:-

3)  Bernie Madoff:
His Ponzi scheme could inflict $50 billion in losses on society types, retirees and nonprofits. He has pleaded guilty of the charges against him and now faces 150 years in jail, he was not granted bail and his case is scheduled for later this year. The bigger cost for America comes from the notion that Madoff pulled off the biggest financial fraud in history right under the noses of regulators. Assuming its all true, the banks and hedge funds that neglected due diligence were stupid and paid for it, while the managers who fed him clients’ money — the so-called “feeders” — were reprehensibly greedy. But to reveal government and industry regulators as grossly incompetent casts a shadow of doubt far and wide, which crimps the free flow of investment capital.

Earlier this month, US Federal Reserve Chairman Ben Bernanke said that the US financial rule book must be rewritten to prevent a repeat of the global economic crisis now gripping the United States and the rest of the world. Some of U.S. financial rules date to the Civil War. Congress, the administration and the Fed want to strengthen the system to avoid any future financial crises from plunging the U.S. economy and many others into recession. .

This has been an exceptionally expensive lesson for the US to learn.  I have highlighted just three people that have had major influence and impacts on our economic outlook, of course there are many others but it is overwhelming to think how a handful of people can have such an impact on the world.