The Global Financial Crisis that occurred in 2008 and crippled every major economy was not an accident; it was caused by an unregulated and uncontrolled financial industry.
Decline of Real Estate Value
The financial crisis is considered to have its roots in the United States where there was an increase in loan losses for subprimes. Banks were lending money to people that did not have the capability to maintain a regular repayment schedule. Homeowners only had the ability to pay the interest on their mortgage and never pay the actual principle amount. When the interest rate began to increase, homeowners could no longer afford the interest payments required. Housing prices began to fall and debtors found that they could no longer afford to sell their homes to repay the bank for the mortgage.
With houses at lower value/prices, a person’s mortgage would not be as valuable for collateral as before. Nonetheless, the whole financial world plummeted in late 2008 due to decades of manipulation and deregulation that had resulted in the foundation of the worst financial disaster since 1930’s.
The Great Depression
After the Great Depression on the 29th of October 1929, also known as Black Tuesday, the United States had 40 years of economical growth without experiencing any kind of financial crisis. The stability of the economy was due to a combination of partial deposit insurance, together with a tight regulation of the banks behavior. Most regular banks at that time were local businesses and they were prohibited from speculating with depositors’ savings.
Investment banks, which handle all stocks and bonds trading, were small partnerships and did not in any case have the same influence or impact on the economy as banks today such as Morgan Stanley. In 1972 they only had 110 employed and based in one country, today they have 50 000 employed and located in several countries around the world.
The biggest issue since the Great Depression was to continue regulating the financial sector to avoid the same crisis that the United State had just suffered. However, for regulations to be implemented effectively, it was crucial that it was well designed; even then there was a possibility that it might not work.
Greed and vested interest are likely to hijack the politics of regulation design. In the 1980’s the financial industry exploded. Investment banks went public giving them the ability to get additional funds from stakeholders to spend. Investing companies began to become richer and more powerful than ever before.
When Ronald Reagan became President of the United States, a 30-year financial deregulation began with the support of economists and financial lobbyists. The Regan administration began to deregulate savings and loan companies, allowing them to make riskier investments with depositors’ money . Hundreds of saving and loan companies failed in their investments and in the end of the decade declared bankruptcy. The memories from...