Ten years ago the world witnessed a huge financial crisis and it shocked and enfeebled the world economy. The financial crisis that occurred in the year 2008, also known as the global financial crisis , is considered by many economists as the worst financial crisis since the Great Depression of the 1930’s.
It started in the year 2007 with a crisis in the subprime mortgage market in the United States and later developed into a full-blown international banking crisis starting with the collapse of the investment bank Lehman Brothers in the USA on September 15, 2008.
Excessive risk-taking by banks such as Lehman Brothers helped to magnify the financial impact globally. Massive bail-outs of financial institutions and other palliative monetary and fiscal policies were employed to prevent a possible collapse of the world financial system. The crisis was nonetheless followed by a global economic downturn, the Great Recession.
In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted in the US following the crisis to “promote the financial stability of the United States”. The Basel III capital and liquidity standards for banks were adopted by countries around the world.
In the last decade, there have been numerous debates that how and why the crisis happened. Primarily, the subprime lending was a cause of the crisis. ( This phenomenon meant lending to those who were incapable to pay back loans). It was a massive explosion of risk aversion. It was primarily a human flaw that led to such a severe crisis that shook not only the American economy but the world economy as well. The biggest credit crisis in 2008 is believed to be the inside job as many economists argue. Many were aware of such a disaster bound to happen but acted as mute spectators. (Some held that the there was a flaw in bankers’ thinking about the self-healing markets).
The word credit comes from a Latin root word ‘’cred’’ meaning “believe.” When we deposit our money in a bank or invest in the stock market, we believe it is with safe hands. The banker-customer relationship is a social contract based on trust and is not only a number or algorithm based contract.
The crisis was of such an extent that a “small” subprime market like the US, brought down the whole of global finance. Bankers acted greedily and the central banks must have taken or kept control of that to avoid such a great crisis. The extreme risk-taking culture of some of the banks in US was blamed for such crisis especially when lending is taken into consideration. Giving loans to people they knew will not be able to pay them back was a blunder perpetrated by banks in the US.
Working culture of some of the financial institutions was also to be blamed as the people working there were doing whatever they were told by the top management. It was a culture of greed and fear. People were getting trapped in the system and were frightened to sound the alarm and as such the crisis deepened and deepened.
Banks always float on a thin layer of ice: a small disturbance can lead to such a big happening. Resilient Monitoring and control of happenings by regulators in banks should have been taken recourse to to avoid the crisis and must be followed in order to prevent such a crisis to happen again. How banks run and how people inside them do things needs to be watched and monitored for a safer and sounder financial system.
Some economists state that the bad is past and it is time to move on, but can we still trust the financial intuitions with our hard earned money? Are we safer now? Are banks safer now after 9 years of economic recovery after the darkest recession? If another shock hits, is the system resilient enough? No one knows when the crisis will occur again but is the system prepared for the shock which could lead to massive collapse with social, cultural, political, and constitutional consequences.
However, many economists firmly believe that there will be a financial crisis again because same half-truths, empty promises, and outright lies are being told by executives of banks and financial services companies. Parts of the financial system are healthier but many are not. So, a decade after the financial crisis, many have not really learnt that lesson which , unfortunately, can again prove disastrous for us.
The author holds an MBA (Financial Management) from the University of Kashmir. He can be reached at: email@example.com