Who is to Blame?

PRINCETON – Now that the economic crisis looks less threatening (at least for the moment), and forecasters are spying “green shoots” of recovery, an ever more encompassing blame game is unfolding. The financial crisis provides an apparently endless opportunity for unmasking deceit, malfeasance, and corruption. But we are not sure quite who and what should be unmasked.

Leading bankers were initially the most obvious culprits. They presided over institutions that made large profits for a substantial period of time by mispricing risk, and then argued for public support on the grounds that they were too big to fail. They appeared arrogant and overpaid, and were easily demonized.

But what about the political process? Why were the banks not more closely controlled and better regulated? It is not that politicians were “bought” in a simple sense; rather, they convinced themselves that financial innovation opened the gate to greater general prosperity, increased home ownership, and, of course, popular support in elections.

Governments are now vulnerable, and politicians are under attack almost everywhere. Administrations have collapsed in the Czech Republic, Hungary, Iceland, and Ireland. Riots and paralyzing strikes have crippled Thailand, France, and Greece. In Kuwait, the government dismissed parliament. Britain is convulsed by a scandal about parliamentary expenses that has no equivalent since the attacks on “old corruption” in the early nineteenth century.