Yes, the World will repeat 2008 Financial Holocaust

So have we learned the important lessons from the western financial crises in 2008. Or are we still likely to repeat the same mistakes in the future. In all possibility, the world will repeat 2008 and here’s why…

Its been told to death through documentaries, articles, experts, research papers etc. But I have been anxious too, to tell my version of it. A bit late in the day but never too late, I guess.

We are all aware of the sub prime crises that shook the financial world. It was one of the biggest financial crises of all times which took with it, organizations like Lehman brothers. Lehman Brothers which the fourth largest multi billion investment bank in US, with total assets worth $643 billion and debts of $613 billion, when it filed for bankruptcy in 2008. But this was not the end, only the beginning- Bank of America, Northern Rock of England, Fannie Mae and Freddie Mac of US are just a few list of companies which either went bust or had to be rescued by their governments. We all know the consequences of what happened after that. The Global economy crashed and still hasn’t recovered fully.

So, how did the financial system and the banking system which is supposed to be the backbone of any economy ended up breaking that very backbone. How did something like a banking system which is built on trust and trust alone lose its core values. And why do I think that this will happen all over again.

The history of it.

During the crisis of 2008 some of the economics were affected more than the others. China for example was unscathed and continued on its growth path. India also escaped unharmed and largely unaffected, although the economy slowed downed considerably. Lets step back a bit a and see why that happened. All economies work differently with different ideologies. There are three major types of economic systems which are followed by most of the countries. First, a mixed economy where the state government and the private sector participation is mixed, example India. This is also the most common economic system. Secondly, Command and control, where in largely the key sectors and investments are driven and controlled by the state, example China and Cuba. Thirdly, free market where the state intervention is the least and private sector participation is maximum. These markets are also the least regulated and business decisions are largely driven by desire for profit and pleasing the shareholders, eg. America, UK. 

So if the markets are less regulated and desire for profit drives the biggest of corporations including the banks, greed and vested interest are bound to take over the general well being of consumers. Example,  the financial crises itself. The boom in the real estate industry after the 1970’s in US and the changing socio-economic equation was the real opportunity for the banks in the US. Nuclear families and growing incomes led to the desire of owning their own homes. Many did and the ones who could not afford due their low incomes were left out but still felt the need to buy their own homes. 

Sub prime loans were given to consumers from late 1990’s till 2008 who had negative credit ratings, low incomes and instable jobs. Banks pushed home loans at higher interest rates to people who just couldn’t afford to re-pay them back. Big profits were made by the banks by lending money at higher interest rates to these sub-prime borrowers. These loans were further packaged as derivatives by very clever bankers and sold as CDOs to financials institutions, which were further sold to end users. So where did all this actually go horribly wrong.  Simple, sub prime borrowers started defaulting as their already instable jobs started to give away and they were no longer able to borrow because of their fragile credit ratings. Defaults starting happening in large numbers and it all fell down like a pack of cards. 

It is an open secret (well now its not even a secret) that the bankers knew exactly what they were doing and they colluded with the statesmen to keep this going for years. Ofcourse, the congressmen were paid huge sums to keep the liquidity tap open. Its also no secret that the politians are auctioned like the IPL players and big corportes houses bet on the most electable Politian on the condition that they have to pay back the corporates when the time is right.

Over the last 10-15 yrs bankers and top executives have been paid huge bonuses to push complicated financial products to consumers who did not understand much about them or were not explained much of it. Not surprisingly, many of the bankers became millionaires overnight from the huge bonuses they received by selling these derivates to naïve customers. The greed game consisting of politicians and bankers went on till it went all out of control. It was a game similar to the one in a big casino, where, one sometimes starts the game with winning big money and ends up losing everything by the end of it, e.g. lehman brothers.

So the question which really bothers me is that what has really changed in the last 5-6 yrs which will make us less greedy. What has really changed which will stop us from betraying people’s trust and play recklessly with their hard earned money. What regulations have been put in place by the governments to cap the bonuses of the bankers and top executives, Infact immediately after the US government bail out in 2009,the banks which were rescued doled out $33 billions in bonuses. Has there been a change in the way the Politian’s are elected and the elections are funded. Yes, maybe the banks have tightened their grip on credit and they are being more selective about giving credit to their customers but is that enough?

In next 5-10 yrs when the global economy will be in a much better shape, all will be forgotten and our sins will come to haunt us back, yet again. Mr Michael Douglas….GREED IS NOT GOOD. As the Mahatama said- There is a sufficiency in the world for man's need but not for man's greed.