A Decade after the Financial Crisis
By: Nazim Humayoon
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 impacts 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 subprime lending was a cause to it. (Lending to those who are incapable to pay back the loan). 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 world economy too. 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 said that the there was a flaw in their 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 when banks are concerned. The banker-customer relationship is a social contract based on trust and is not only a number or algorithm based contract. The culture of finance and markets have changed since the great credit crisis. It has changed a lot of peoples’ views. The crash came as a surprise to many including central bankers around the world and very less was done to avert the crisis.
It was of such an extent that when you compare 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 done by the banks in the US.
Working culture of some of the financial institutions was to be blamed as the people working there were doing whatever they were told by the top management. They were deliberately looking at the things the other way and ignoring the bad fore comings, without concern for the economy and the people. 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 and a small disturbance can lead to such a big happening. Resilient Monitoring and control of happenings by regulators in banks should have been done 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.
Economists say 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.
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 and many are not. So a decade after the financial crisis, many have not really learned a lesson which unfortunately can again prove disastrous for us.
The writer is pursuing MBA-Financial Management at The Business School-University of Kashmir and can be reached at [email protected]