09 September 2013

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. 

Fascinating stuff. Read it here 

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