As the credit crunch passes its first birthday, many have looked back in anger at the events that created the credit crunch and have looked for someone to blame.

Others have looked forward with frustration. Why doesn’t the government do more, they ask?

Others bury their heads in the sand, and after proclaiming the imminent end to the credit crunch, jump with joy over news that some believe house prices could rise by 30 per cent over the next few years. Oh goody, they say, the good times are returning.

Yet, through all this recrimination and ill-founded hope, the real lesson gets forgotten.

The banking practice that preceded the credit crunch was not all bad. Greed was not just restricted to the banks. The real error was nationwide in its scale – perhaps even worldwide. The real error tells us why crowds can get it wrong. If most people are sure something is true, it does not necessarily mean they are all right.

The danger is that we still haven’t got it.

There are two theories regarding recessions. One sees a recession as a lost opportunity. If the potential for economic growth is 2 per cent a year, and the economy slows to zero per cent one year, then that potential is lost, for ever. The economy will always be 2 per cent poorer than it could have been.

The trouble with that theory is that it assumes growth is something that just happens. Growth, of course, requires innovation. If we stopped innovating, then sooner or later we would reach a point at which there is no point in investing in more machines, other than to replace those that are getting old. We would have reached full capacity. Economists who assume growth can continue at 2 or perhaps 3 per cent a year indefinitely, are implicitly assuming innovation just happens. It’s like magic. Whoosh, there’s some innovation. And boom, there’s some more.

But the truth is, innovation only happens if there are forces at work that create it. Innovation is the result of competition, it’s the result of practice – if you do something enough times you get better at it – and innovation is the result of investment.

Innovation applies to the little things, as well as the big things. So, coffee shops innovate by introducing a standard-sized lid for all takeaway mugs, regardless of size.

Then there are the ways people are organized.

In the United States from 1995 to 1998 there was a sharp rise in the rate at which labour productivity increased. This underpinned US economic growth – which averaged 4 per cent a year during this period. It has been estimated that a quarter of that increased productivity came from retailing, and as Bradford C. Johnson in a McKinsey Quarterly article once said: “More than half of the productivity acceleration in the retailing of general merchandise can be explained by only two syllables: Wal-Mart.”

Here is another example of innovation: As Alan Greenspan said in his book Age of Turbulence, there was a time when negotiations between suppliers and retailers were like a game of poker. Neither side willing to reveal their plans. For the suppliers, this often left them in the dark. How much should they produce. What inventory levels did they require? These days, suppliers often have direct links to parts of retailers’ stock control systems. They know when their customers’ stock is getting low, and they automatically send over more product. (See Age of Turbulence pages 46 and 490.)

Bold banking practice had much to do with the innovation that occurred. It funded investment, it funded new business ideas, and the world was better off as a result. Really better off. Not just in a paper sense, but in the sense that we produced more goods and services than ever before.

It is actually known as endogenous growth. Growth that comes from innovation that is a part of the economic system. Not innovation that occurs by magic – or exogenous growth, but innovation that occurs as a result of the right type of business practice.

And in the theory of endogenous growth, the odd recession from time to time is a good thing. It is like a clean out.

Right now, the government and central banks are busy trying to right the mistakes of the late 1990s and early noughties. They are trying to get the money markets working again.

Talk is that the government is mooting the possibility of gradually removing stamp duty on house purchases – that will get the property market moving again.

But a resurging property market is not the answer. Surging house prices have nothing to do with wealth creation. At best they redistribute wealth, at worst they create an illusion.

Yet still, many call out for the government to rescue the beleaguered property market. Presenters on GMTV ask with incredulity, why the government doesn’t slash tax on petrol and cut stamp duty. They look at banking practice and call for bank lending that is based on good old fashioned values, a return to Captain Mainwaring type bank managers.

And that is the real danger: the danger we solve the symptoms, and ignore the deeper ill; the danger we bite the very hand that could feed the economic recovery.

Even now, some seem to want to measure economic prosperity by how much house prices are surging. The truth is, the last few years have seen a boom built on air. A boom built on borrowing. A boom underpinned by the false belief that house prices only ever go up.

Many would-be entrepreneurs were sucked out of their wealth-creating activities and joined the buy-to-let bandwagon. Investment into areas that created wealth became yesterday’s idea.

The real greed was with all of society, not just the banks. It was the greed that led all those that could afford it to jump into the property boom, exaggerating its effect. It was the greed that led to TV programmes such as Location, Location, Location.

The banks were at fault because they should have known better. But the real problem was not just the banks. Let he who is without economic sin cast the first economic stone. Before we jump on to the anti-bank bandwagon with too much gusto – maybe we should all pause and look a little closer to home first.

© Investment & Business News 2013