When Scotland’s oldest bank fell to pieces last month, Alex Salmond had no hesitation in casting the blame. As shares in HBOS plummeted, Salmond launched a scathing attack on the “bunch of short selling spivs and speculators” that supposedly lay behind the slump. It was typically crowd-pleasing stuff, and won the former Royal Bank of Scotland economist a rousing reception at Holyrood. Unfortunately for Salmond, his explanation of HBOS’s downfall was nonsense.

Short selling has long been an accepted part of the financial landscape. It involves a hedge fund or other investment vehicle borrowing shares for a set fee, in the belief that they will fall in value. Having sold the shares on the market, the fund manager hopes to buy them back later at a lower price, return them to the original owner, and pocket the difference.

When HBOS collapsed, the press immediately pointed the finger at short sellers, who were accused of spreading false rumours in a bid to depress prices for their own ends. Yet it soon transpired that the traders were right to be selling HBOS shares: there were serious weaknesses in the bank’s balance sheet, and it was always going to be a target for the likes of Lloyds TSB. The wave of short selling that sparked such a furious reaction was a symptom of HBOS’s malaise – not the cause.

The hysterical reaction to the HBOS fiasco is a perfect example of the populist tendency among journalists and politicians to make scapegoats of wealthy bankers at every opportunity. Yet there’s a grain of truth behind the hyperbole.

Wholesale banking is a fundamental product of a capitalist, free market-oriented economy, and there’s usually a reason for the mammoth pay cheques enjoyed by the most successful bankers. By and large, the highest earners at banks are incentivised in a way that’s directly linked to shareholder return. If the system works as it should, then high bonuses for bankers will be accompanied by higher dividends for shareholders and a rise in value for the bank – leaving everyone a winner.

Yet it's now clear that the system has malfunctioned. The problem started with the arrival of a new generation of managers at the top investment banks, many of whom brought an unprecedentedly aggressive approach and a huge appetite for risk. There's a vast amount of capital circulating in the global financial system. But it's a finite amount, and the competition among banks for investors' cash is fierce.

With management desperately looking to boost returns on a risk-reward basis, any salesman who was deemed to be getting less than an optimal number of sales out of a customer was liable to be replaced by someone who could extract more value from the account. This sort of approach can breed enormous internal competition - at times to an unhealthy degree. Salespeople concerned only for their own survival can end up selling their customers products that are entirely unsuitable. This sort of risk-taking can contribute to a weakening of the entire financial system.

After twelve years of working with leading investment banks, earlier this year I made the decision to leave the financial services industry. With such fierce competition for a limited amount of investors' cash, traders were taking ever greater risks as they strove to make a profit. I could see that things were going the wrong way – it was clear to me that a significant correction of the market was about to take place.

I got out just in time. We are now faced with the worst financial crisis in decades, and the prospect of a downturn in economic fortunes that could be even worse than the Great Depression of the 1930s. We can expect significant layoffs in the banking sector, and those considering a career in the City would do well to think in the long term. Anyone hoping to go in to make a quick buck will be sorely disappointed.

The situation will improve only if financial authorities wake up to the scale of the challenge they face. Throughout modern history, the engine that drives the world's markets has periodically needed a cog change – now the whole system needs to be replaced. The crises of the last 18 months have shown that the market has massive flaws in its current form. The current compensation model works to reward those that take the highest risk - arguably those who weaken the system the most. We need to work to restructure the financial sector so that it's those who contribute towards the stability of the system who receive the most generous pay cheques.

But the world’s business and political leaders must be desperately careful to keep their heads, and not to give knee-jerk responses to the growing media clamour. There’s no way of punishing an entire sector of the economy that wouldn’t be disastrous for the country as a whole. Reactionary proposals such as outlawing short-selling or capping executive pay would be inappropriate and counter-productive. This is not the public sector.

Provided our politicians put their concerns about re-election to one side, and genuinely take on board the views of long-term thinkers from across the fields of finance and theoretical economics, there’s light at the end of the tunnel. But there has been a huge explosion of overly aggressive tactics in the City in recent years. It could be a long time before this cultural shift is fully reversed.