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The Unanswered Questions of the Financial Crisis

EconomicsPosted by Ian Blackwell Sat, November 14, 2015 23:12:43

The financial crisis of 2007-2008 has changed the world forever. Things are more difficult for many of us than ever before. It is important to remember that it was all caused by filthy greed. It was caused by bank employees gambling with money that was not theirs, seeking higher yields with no regard given to the risks involved.

In the years leading up to the crisis, banks were freely giving mortgages to people they knew might find it difficult to pay back. It is my opinion that the banks thought that if borrowers defaulted on their mortgage repayments then they could repossess their homes and sell them on. Because of the ease with which people were able to obtain mortgages house prices rose to ridiculous levels, and were rising faster than household incomes. This eventually caused the housing bubble to burst as it led to many people defaulting on their mortgage repayments at a much higher rate than the banks cared to anticipate. The problem for the banks was that they lent heavily to financial institutions around the world against the strength of the profit that they expected to generate from these mortgages. The fall in profit from mortgage lending for the banks meant they were quickly finding it more difficult to meet their other lending obligations, and therefore they found it harder to borrow money from each other. They were all fast running out of money and on the verge of collapse.

To prevent the banks from collapsing, governments bailed them out with taxpayers’ money. I think we in the UK all remember when it was revealed that the Northern Rock bank asked the government for financial support. This caused a mass panic among their customers and sent them all rushing to queue at their nearest branch to withdraw their savings. The end of the world was near. The fall in confidence in the financial system led to people spending less money and the level of investing fell dramatically. And as a result of bailing out the banks, governments had less money and so have had to make severe cuts to tax-funded public services in order to balance the books.

So what effect has all of this had on our society?

Unemployment rose as public institutions made people redundant in order to make savings. Private businesses did the same to try and offset the losses from the fall in consumer spending. Profits must be maintained. When the line on the graph moves downwards the shareholders believe that they are going to die. The result for the remaining employees is that they now must work harder for their wages in order to make up for the shortfall in staff. The unemployed have to scrap for any new jobs that become available. The power is with the employers: if you don’t take the not-so-great job offer, someone else will. Fact. Wages have also fallen in real terms. A rising population doesn’t help the jobseeker either.

In order to offset the losses, businesses have also focused on reducing wastage. We find that many high street stores do not keep much stock compared to what they used to. It simply isn’t cost-effective for a business to have a stockroom full of valuable products; it’s cheaper to only order things in as needed. Households have followed a similar trait: they’re buying less but are shopping more often. Households have also developed a keener eye for spotting the best deals. Cobbler businesses boomed as people sought to repair their shoes rather than throw them out and buy new ones. We have all learned to be smarter with our money.

Banks and financial institutions have, unsurprisingly, learned to be smarter as well. Even though a lot of those in the banking sector escaped prosecution for their part in the financial crisis, it seems it is the normal taxpayer who has come under more scrutiny, even though it was the taxpayer’s money that saved the banks from going bust. Never has there been such a focus on the individual’s credit score. Never has it been harder to get a mortgage.

In short, there isn’t as much money around as there used to be. But how can that be so? Think of it this way: if all of the money is stored in a pot, then the money has to be taken out of that pot for there to be no money left. Money cannot disappear. So where did it go? Which financial institutions were the receivers of the money the banks effectively gave away in the first place? One person’s loss is someone else’s gain, so who is the someone else we never see? As the saying goes: the Devil’s greatest trick is convincing the world he doesn’t exist.

I am no expert in economics by any means. But one thing I do find extremely unusual is the fact that neither the government nor the press have told us who has benefitted from the harder existence most of us find ourselves in. That is highly suspicious: surely it’s in the public interest for us to know? Who or what are they hiding? This is something I would like you to think about the next time your government announces new financial pressures on public services. If there’s something you would like to add or if you feel that there’s something I’ve missed then please let me know in the comments below.

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