On the one hand many people are concernedthat those responsible for the financial problems are the ones being bailed out, while on the other hand, a global financial meltdown will affect the livelihoods of almost everyone in an increasingly inter-connected world. The problem could have been avoided, if ideologues supporting the current economics models weren’t so vocal, influential and inconsiderate of others’ viewpoints and concerns.This article provides an overview of the crisis with links for further, more detailed, coverage at the end.
ollowing a period of economic boom, a financial bubble—global in scope—has now burst.
A collapse of the US sub-prime mortgage market and the reversal of the housing boom in other industrialized economies have had a ripple effect around the world. Furthermore, other weaknesses in theglobal financial system have surfaced. Some financial products and instruments have become so complex and twisted, that as things start to unravel, trust in the whole system started to fail.
While there are many technical explanations of how the sub-prime mortgage crisis came about, the mainstream British comedians, John Bird and John Fortune, describe the mind set of the investment bankingcommunity in this satirical interview, explaining it in a way that sometimes only comedians can.
Together with impressionist Rory Bremner, derivatives (securities derived from other securities) are also explained:
The betting of practically anything helped create enormous sums of money out of almost nothing. However, as former US Presidential speech writer, Mark Lange, notes, “because[derivatives are] entirely unregulated and trade on no public exchanges, their originators can deliberately hide their vulnerabilities.”
1 Securitization And The Subprime Crisis
The subprime crisis came about in large part because of financial instruments such as securitization where banks would pool their various loans into sellable assets, thus off-loading risky loans onto others. (For banks,millions can be made in money-earning loans, but they are tied up for decades. So they were turned into securities. The security buyer gets regular payments from all those mortgages; the banker off loads the risk. Securitization was seen as perhaps the greatest financial innovation in the 20th century.)
As BBC’s former economic editor and presenter, Evan Davies noted in a documentary called The CityUncovered with Evan Davis: Banks and How to Break Them (January 14, 2008), rating agencies were paid to rate these products (risking a conflict of interest) and invariably got good ratings, encouraging people to take them up.
Starting in Wall Street, others followed quickly. With soaring profits, all wanted in, even if it went beyond their area of expertise. For example,
Banks borrowed even moremoney to lend out so they could create more securitization. Some banks didn’t need to rely on savers as much then, as long as they could borrow from other banks and sell those loans on as securities; bad loans would be the problem of whoever bought the securities.
Some investment banks like Lehman Brothers got into mortgages, buying them in order to securitize them and then sell them on.
Somebanks loaned even more to have an excuse to securitize those loans.
Running out of who to loan to, banks turned to the poor; the subprime, the riskier loans. Rising house prices led lenders to think it wasn’t too risky; bad loans meant repossessing high-valued property. Subprime and “self-certified” loans (sometimes dubbed “liar’s loans”) became popular, especially in the US.
Some banks evens...