Who murdered the financial system?
Global recession? Where it started?? Who is the real culprit???
Is the government or people????
Answers (8)
Christopher W.
Information Security Project Consultant at Colt Technology Services
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People; the consumer and investors
Consumers have been spending cheap borrowed money that has been lent out by banks that have accepted high risk individuals and business ventures.
Investors demanding quick profit and have been accepting high risk investments for the potential of high returns,
Some may ague that goverments should legislate that banks can only accept a certain level of risk (debt owned v's liquid assets) but I believe that this should be decided by the market.
Yes, we are going through a period of re-adjustment at the momement and it may take sometime for confidence to return to the financial market.
This is going to be a hard lesson for both the consumer and investors.
Clarification added October 22, 2008:
Hi Vijay
This is something that we will have to wait out, although governments can try to stimulate growth it is going to take the return of confidence in the market for things to stabilise.
The world economy was over valued and needs to adjust to a more realistic figure.
Once the market (people) are confident that they will not loose their money they will start investing again. For this to happen, they will have to believe that the market has dropped as far as possible and that they are catching it on the rebound.
For example, people are not buying houses at the moment because house prices are going down and believe that they will go down further. Once house prices have got to a point that the consumer believes they will not go down any further, they will start buying property again and the prices will start to recover.
Belief or confidence in the market is not something that you can just fix, it is organic. Governments may try to stimulate growth by spending vast amounts of money but tax payers are never keen on this solution and I personally don't believe they can spend enough. We are already talking about vast amounts of money but this is just a token gesture to show voters that they are doing something
As in my post, this is a hard lesson that we will all have to learn, we have gone through a period of rapid growth and a bull market that over valued everything.
Dave M.
Professional trade show booth traffic builder and party entertainer. Corporate and private sector events.
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Greed...
That, or the butler did it...
Dave G.
"I Ensure People Can Find Your Business On The Internet, Compel People To Take Action, And Get Results."
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Nobody murdered the financial system...it committed suicide with our help. Think of us (humans) as the "Dr. Kevorkian" who kicked the chair out from under the system so it could hang itself. It's an inherently flawed system. While most were shocked and said, "The system seemed like a happy teenager, I never saw it coming," those closest to the system knew of its imminent demise.
Time to transition from a monetary-based system to a resource-based system.
Links:
Gene J. K.
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Lack of Risk Management. Period.
I am willing to bet a large sum of money that when asked, none of the CEO's of the failing institutions (Bear, AIG, Wamu, Lehman, etc.) knew what their firms risk was. Exposure to Falling house prices, Cash shortages.... etc.
Greed, definately is in the equation. Leverage was abused. Low interest rates made it easy for the BS interest only loans to be sold...... There are probably a lot of factors that can be debated, some of which I bet we will not learn about for some time. I personally believe that there are going to be a lot more skeletons to come out of the Wall Street closet.
I am looking forward to reading an introspective book about this soon.
But for now, I will stick with Colonel Mustard, in the Billard Room, killed the cop with the rope.
Asad R.
(CEO-CMKA) Open to Opportunity
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Hi Vijay,
It is hard to single out a person and there are chains of factors that are responsible for the murder of financial system.
This is just the beginning of global financial crisis. Catastrophe cannot be prevented by taking actions just before it’s about to occur. Bailout could only help in delaying the catastrophe, it sends wrong message to the Wall Street and encourages in their wrongdoings. I do not think that the bailout would solve the market fundamentals. It only helps in injecting the liquidity into the financial sector.
I think USD 3 to 4 Trillion Cash Injection is required to calm the market. Most of the injection is against borrowed money, so how can borrowed money solve the problem. The cost of fund is also gradually going to rise and printing of money would see sharp surge of inflation. It will be tougher for capital market, assets will be required to have healthy balance sheet. Banks & Financial institutions are concentrating on quality lending. Globally lending standard has been tightened and lenders are unsure about the health of the borrower balance sheet and therefore, may not be willing to offer liquidity which would continue to cause credit crunch. Meltdown has fully exposed the regulators.
Toxic Financial flaws require to be quarantined, which in simple terms means “clear the mess”. Therefore, I think the SOP's, which is accounting procedure needs to be revisited. Strong regulatory measures are required to avoid future crisis. According to CEO of a large global bank “only half of the 8,500 US banks will survive”. So weaker banks are likley to suffer furthermore, as obtaining credit is the bigest challenge, though global Central Banks are there to help.
Imagine the size of US Economy is $ 14 Trillion. US Domestic debt already USD 9.5 Trillion, will jump to 11.2 Trillion. Out of which Mortgage a little over USD 12 Trillion, unregulated Credit Default Swaps USD 54 Trillion Greed is the real cause. The global economy has been intentionally inflated through borrowed money, which leads to Higher Global Growth, Higher Per Capita Income, Higher Consumer Demand, Higher Bank Deposit, Higher Lending, All was only possible due to Borrowed Money and when the Interest Rate moves either way or whenever the Limit of Two Counterparty are fully utilized. So nothing could have been done and the crisis is unavoidable.
Therefore, the bubble needs to be pricked so that the air can be passed off. I am expecting another big crack in the financial market sometime in the 1st quarter of 2009 due to year end balance sheet adjustment and large size maturities. So, 2009 will witness another difficult year and the crisis is unlikely be over until 2010.
My observation is that out of two countries i.e., China and India are less likely to suffer in a big way due to their prudent and visionary policies. Tough India has a liquidity issue, as hot money is flowing out of system. India’s fight is between inflation and maintaining growth and China may see slide in their exports due to global slow down.
Cheers
Asad
Lynn W.
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In real time, congressional hearings are putting the blame on credit rating agencies.
long-winded, decade old post discussing some of the current problems ... including needing (accurate) visability into CDO-like instruments
http://www.garlic.com/~lynn/aepay3.html#riskm
Toxic CDOs were used two decades ago during the S&L crisis to obfuscate underlying value and unload.
Sumprime mortgages were supposedly targeted at low-income home buyers. However, mortgage originators found that when they were able to get triple-A ratings on toxic CDOs ... they basically could unload all the mortgages they could possibly right at a very nice premium. The use of triple-A rated toxic CDOs significantly expanded the funding for writing subprime loans, far beyond the orignal intended markets. Speculators found that they could pick up (subprime) no-documentation, no-down payment, 1-2percent interest rate ARM with interest only payments .... and treat the home owner market like the unregulated 1920s stock market.
The claim is that the subprime mortgage orginators would never have been able to write all those subprime mortgages w/o nearly unlimited funding by getting triple-A rating on those toxic CDOs.
Say a speculator picks up a $500k home with one of those loans and plans on flipping it in a year for $600k. The carrying cost with a 1% subprime is $5, possibly get a real estate agent to handle the flip for 3% total ... total out of pocket is around $20k for $100k return ... 500 percent ROI. The speculation and the huge inflation is bad ... but it wouldn't have been possible w/o the unregulated mortgage originators being able to fund the subpime mortgage mill with triple-A rated toxic CDOs.
A few weeks ago, one of the TV business shows had on a guest from one of the rating agencies to talk about down rating of some companies. The host spent much of the show trying to get the guest to admit to being responsible for the current crisis.
On the other side (speculators buying all the subprime loans), there was the financial methods all the investment banks (and/or intestment banking arms of regulated financial i institutions) buying up all these triple-A rated toxic CDOs ... recent comment:
Best practice transfer pricing calculations would have made it clear that neither Bear Stearns nor Lehman Brothers had more than a marginal chance of survival when funding 30 year sub-prime mortgage loans with thirty day borrowings.
Links:
- http://www.garlic.com/~lynn/aepay3.htm#riskm
- http://www.linkedin.com/answers/finance-accounting/corporate-debt/FIN_CDT/3...
Clarification added October 23, 2008:
actually $5k mortgage payments over a year ... is more like $2.5k avg out-of-pocket for the period of the year. rather than treating the $15k real estate agent fee as part of investment ... treat as cost ... so only clears $85k after a year. So for an avg. investment of $2.5k for the year ... have a $85k ROI on the $2.5k investment.
For pathological speculation case, have the speculator even borrow the mortgage payments ... so there is only a the interest payments on the borrowing of mortgage interest payments. This is getting into "heavy leveraged" that the institutions were doing on the other side of the toxic CDOs and their triple-A ratings.
recent question/answer referencing the two sides with triple-A rating on toxic CDOs in the middle; unregulated mortgage originators and speculations treating home owner martket like the 1920s unregulated stock market on one side ... and the unregulated investment banks (and investment banking arms of regulated banking ... courtesy of the Glass-Steagall repeal) heavily leveraged and playing long/short game on the other side.
http://www.linkedin.com/answers/finance-accounting/corporate-debt/FIN_CDT/344064-28994563
Clarification added October 23, 2008:
One can claim that there are a variety of individual areas that all contributed to the current financial crisis. For decades/centuries, the individual areas have been understood to be their separate areas of greed and corruption (toxic CDOs, real estate speculation, heavy leveraged borrowing, long/short mismatch, etc).
The current issue is a combination of
* regulation relaxing (both repeal of regulations like Glass-Steagall and in other cases failing to enforce regulations)
* toxic CDOs getting triple-A ratings
the relaxing of regulations allowed all the individual (greed and corruption) brush fires to combine into one large fire (another analogy is eliminating bulkheads in ships). the triple-A ratings (for toxic CDOs) then provided huge amounts of accelerant to turn the blaze into an enormous firestorm (think Dresden ... but spanning the whole country).
there was a report about fires in cal. state mountain valleys. the claim was that policy of putting out all fires allowed excessive amounts of undergrowth to accumulate; to the point that it would fuel environmental disastrous fires. the claim was that there was evidence that prior to Europeans, the local inhabitants would purposefully start fires in these valleys every couple generations ... when the undergrowth became too thick (small fires wouldn't take out the trees, but letting too much undergrowth accumulate would result in fire that destroyed everything).
the somewhat loose corollary was that in the wake of the S&L crisis, the claim was made that strongly regulated financial industry became very vulnerable when regulations were relaxed. the issue supposedly was the strong regulation allows the financial industry to become populated by large number of (greedy) individuals that weren't required to know what they were doing ... they just did what the regulations told them to do. then when regulations were relaxed, they became fat prey for preditors (who did "understand").
relaxing of regulations enabled all the small greed & corruption fires to combine into single fire. however, that still wouldn't have resulted in a firestorm without the triple-A ratings on toxic CDOs.
The American Leverage (35/1) that some Market Makers or Hedge Funds have done on the Suprimes.
The problem is that only few ppl have considered that right now the problem is not only about suprime but there are also ARM's loan, loans and leasing.
Jonathan S.
Project Management Consultant at SAP
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Psychologically, causation is usually linked to something immediately preceding the event. Disregarding the supporting causes, such as the fiscal irresponsibility of borrowers and lenders, the root cause can actually be traced back to the beginning of the 1990s and the Clinton Administration. The promise of a home for every American set the initiatives to create the financial instruments that are self destructing today. An overly expansionary growth policy is now a cause of an economic recession. Irony.... Everything else was just fuel for the fire.
