C/ Was the Financial Crisis avoidable ?

financial-crisis-dave-sim-008Was the Financial Crisis of 2008 avoidable ?

As the AIG Trial has officially been launched with the Ex US Treasury Timmy Geithner summoned earlier 2 weeks ago my attention is was once again headed toward this Financial Crisis 2008.
Ignorance on such an major event pushed me to investigate the underlying causes and the events actions of the Crisis. Most of my motivation was fueled by the term being used so broadly and easily in so many contexts and being unable to fully understand the mechanisms behind it.

As one further investigates the Financial Crisis the more one realizes that it is too much of an simplistic approach to put all the blame on the Banks. As anybody who has any insight into Economics knows, we are talking more of an economical system than anything else. This system used by a diverse number of players was clearly sustained by a number of unregulated practices legally held and of ideological views of de-regulation which peaked in the mid-80s.
It would have been extremely difficult to have prevented the Crisis as a deregulated market enabled an growth prone environments and led to the popularization of new financial instruments such as the CDS (Credit Default Swaps) and new forms of financial securitization in the early 2000’s.
Especially at the dawn of the millennium this led to the rise to more attractive loans as a below average volatile market and low interest rates encouraged the search of higher yields and excessive leveraging. This in return broaden an increasingly broader audience of loans as they were continuously extended to the people with poorer credit rating peaking with sub-prime loans.

What is less known is that the sub-prime lending crisis was more a trigger than the full reaching cause of the Financial Crisis of 2008 as most of the loss came from excessive leveraging. As mortgages started to default, this forced banks to hoard cash and avoid lending which led to a credit crunch. Banks held to such bonds as they accounted roughly to 1/3 of all US bonds and credit rating agencies overvalued the safety of these securities. If anything credit rating are strongly to blame for the crisis, incompetence, inability to fully interpret theses complex financial products or a the use of a business model that is prone to conflict of interest led to reduce the due diligence of investors.
Loans emitted before the crisis were also created with reduced diligence as the use of credit swaps (such as CDS) loosened the accountability of those emitting as the responsibility was now outsourced.

This is only a bird-eye view on some of the main elements of that lead to the Crisis. Other available analysis have been infinitely more complex and insightful than this summary. Nevertheless this overview pushes us to reflect that most of decisions of deregulation from the Regan-era to the reversal of the Glass-Steagall Act in late 90’s led to the foundations of the Crisis we saw 6 years ago.
Works Cited
Associated Press . (2014, October 8). Geithner grilled in court over AIG bailout. Récupéré sur dailymail.co.uk: http://www.dailymail.co.uk/wires/ap/article-2784558/Geithner-grilled-court-AIG-bailout.html
Cable, V. (2009). The Storm, The world economic crisis & what it means. Atlantic Books.
Perry, B. (2014). Credit Crisis. Investopedia.
Xinzi, Z. (2013). AIG, Credit Default Swaps and the Financial Crisis. NTU- Risk Manangement Society – Research Department.

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