The Crash of 2008
In the summer of 2008, the Bank for International Settlements (BIS) warned of the danger of another Great Depression rivaling the economic crash of the 1930s. The problem supposedly began with the US sub-prime mortgage crisis, whereby American banks increasingly granted mortgages on less stringent conditions to consumers who could not prove their ability to make repayments. This wasn’t an idle mistake due to insufficient regulation. Governments knew what was happening, and had ample opportunity to stop it. But financial institutions lobbied successfully for the power to lend at whatever multiples they wanted, without restriction. According to former Governor of New York Elliot Spitzer, when states realized the vast extent of corrupt lending practices by banks and tried to intervene to regulate them around 2003, the US Treasury Department unilaterally blocked their efforts.
On the basis of the proliferation of sub-prime mortgages, banks innovated new ‘financial products’ such as derivatives, valued against projected mortgage repayments. These are essentially contracts that gamble on the future prices of assets, thus deriving their value from primary assets, such as currency, commodities, stocks, and bonds. As more people with lower incomes obtained subprime mortgages, increasing volumes of bad debt were repackaged and re-sold globally, on the basis of which even larger amounts of credit and thus new loans were flooded into worldwide markets.
“Risk?... What Risk?”