The Global Financial Crisis

The tenth anniversary of the global financial crisis is a good time to reflect on its place in history and the cause of such panics. The long line of such disasters can be traced back at least to the tulip mania in the 17th century, via the South Sea Bubble in the 18th century and the Wall Street Crash of 1929. In each case markets had come to believe something that was not true in relation to the value of assets that were then borrowed against. This made the structure of credit unstable and when selling started prices seemed to have no bottom.

In 2008 the false value was in the subprime mortgages, money that had been lent against poor security to people who could not repay, was then packaged as if it were Unites States Government debt and sold to gullible and greedy investors.

The banks joined in with glee, seeking to make a good, solid but routine business exciting. The basic ratios in relation to loans to deposits and of capital were ignored and dubious assets declared gilt-edged. As usual when the crunch came it was a disappearance of liquidity that triggered the collapse. Suddenly dodgy bonds could not raise overnight money.

Since then many regulations have been improved, banks have by and large gone back to their main business and such a crisis will not reoccur in the short-term. However, human nature is such that when a wild speculation breaks out no one wants to be excluded. Thus when memories of this crisis fade there will be another outbreak, remember that Sir Isaac Newton lost a fortune in the South Sea Bubble.

Promoted by Margaret Brewer on behalf of Jacob Rees-Mogg, both of Rear of 16 High Street, Keynsham, Bristol, BS31 1DQ.