The Unlearned Lessons from 2008 Global Financial Crisis

Over a decade back, in 2008, the world was struck by a severe financial crisis. A great many people suffered and the world is still recuperating from its chaos. Against the convention belief, the situation is far from contained. To solve any problem and to ensure that the situation will never re-emerge, it is important we learn from such disasters. But have we learned from them? In this long but engaging essay, U. Mahesh Prabhu provides in-depth insights and credible perspectives for anyone to understand the 2008 Global Financial Crisis and realize why it is far from over. A must read.

Phil Angelides was appointed as the Chairman of Financial Crisis Inquiry Commission (or FCIC) to investigate the 2008 financial meltdown in the United States. His report confirms that the meltdown had occurred primarily due to easy (or reckless?) lending of home loans to anyone including those without any viable repayment capacities – whatsoever. These loans were termed as “Subprime Loans”.

It all began when mortgage companies, in a rush to book profits, overlooked every safeguard and made loans available to virtually anyone who applied without adequate scrutiny under the unwise assumption that “the property prices would go up anyways!” Not many knew that this was a perfect recipe for doom.

Bubble mortgages were created in which lenders would not have to pay their primary mortgages for several years. The idea was that by the time the bigger payment requirements arose a few years in the future, rising house values would allow a way out through selling the house at a profit if necessary. Unfortunately, the opposite occurred and house prices radically declined, making such bubble mortgages lead to default.

The only person who could have assessed the gravity of the situation and, therefore, should have stopped such malpractice was Alan Greenspan – America’s “most feared and revered banker” – even by Presidents – for over 40 years. But that he did nothing is the truth. When the FCIC Chairman asked Mr. Greenspan as to why he failed to intervene, then, his casual sounding response was “I was right 70% and wrong 30%…”

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June 19, 2019

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