Global Financial Crisis: Lessons Learnt?
Its been five years since the Global Financial
Crisis began. It has since turned into Global Economic Crisis, dragging several
developed nations, including the U.S. and Western European nations, into
recession. The crisis has singed even China and India. Prolonged
contraction in economic activity led to decline in economic activity, great
increase in unemployment and
engendered social, economic and political crisis.
While the U.S., after several rounds of economic stimulus, backed by the
Federal Reserve and the U.S. Government, is back on its feet, several other
developed nations, like Great Britain and France are still not yet out of the
woods.
As for the PIIGS—Portugal, Italy, Ireland, Greece and Spain—they are
still mired in economic morass. Greece has seen six years of contracted
economic activity; its GDP is down almost 22% over what it was before
2008.
So, what lessons have been learnt from the Global Financial Crisis? The
Economist is running a five article series on the lessons learnt (or have they
have been?).
An excerpt from the first article:
Start with the folly of the financiers. The
years before the crisis saw a flood of irresponsible mortgage lending in
America. Loans were doled out to “subprime” borrowers with poor credit
histories who struggled to repay them. These risky mortgages were passed on to
financial engineers at the big banks, who turned them into supposedly low-risk
securities by putting large numbers of them together in pools. Pooling works
when the risks of each loan are uncorrelated. The big banks argued that the
property markets in different American cities would rise and fall independently
of one another. But this proved wrong. Starting in 2006, America suffered a
nationwide house-price slump.