Global Financial Crisis Explained
The global financial crisis in 2008 was a great event in the history of world economy. Rare is a crisis of such scale. It’s easily the worst financial crisis the world has ever seen since the Great Depression in 1930s. But what are the causes of the global financial crisis? How could such a crisis happen?
The answer to this question can be summarized in just one word: greed. Greed is the factor behind all the misbehavior that eventually led to the crisis. Greed made people no longer use common sense when it comes to their financial behavior.
This could be seen easily in the subprime mortgage crisis. In normal situation, subprime mortgage shouldn’t be done at all. You need to have enough collateral when lending a mortgage to protect yourself from any possible financial risks if the homeowner defaulted. But people wanted to make more money, and because the normal mortgage market didn’t have enough room for growth anymore, people expanded to the much riskier world of subprime mortgage. They no longer thought that it was a risky business that could easily go wrong. Instead, they saw that everybody did it and they didn’t want to miss the party.
On the other side, people were creating more and more complex financial instruments in order to make more money. No longer were they satisfied with conventional financial instruments. Instead, they created complex mathematical models upon which to create complex financial instruments like derivatives. Many people who traded them didn’t actually understand how the complex instrument worked. As such, they couldn’t take the appropriate actions when things went wrong nor could they anticipate one.
There was a certain degree of irresponsibility that made people do things that they knew shouldn’t be done. Their attitude was that they would no longer be around when the problem arose. They created a dangerous instrument, but when the problem came to the surface they would no longer be involved in