The Financial Crisis Explained

In the 80s, countries in Asia, in particular China, chose to pursue an export driven development model, where goods manufactured were sent to the west and europe for consumption

This was successful, but instead of reinvesting this capital in higher wages for its workers, infrastructure or education, Asian governments let this capital accrue, developing massive reserves of foreign currency.

Asian banks then sold/lent this capital back to western banks, who now had a glut of resources available for lending both amongst themselves and to consumers.  Banks, especially those in the United States now found their own lending equations changed, and pursued ‘new markets’ and began ‘subprime’ lending, ie: lending money to new groups of people regardless of whether or not they could pay it back.

This new and evergrowing bad debt, continued to be treated like all other debt amongst banks – meaning it was chopped up and sold on and chopped up and sold on until banks around the world had little access to information about where exactly this bad debt was, or even whether or not they had any.

When people began defaulting on their loans, banks began realising the extent to which this bad debt existed, and stopped lending money to one another to cover their own daily operations.  This was vital to the stability of the banking sector, but based on the lack of information about who had what debt, or how big it was, what had become a giant house of cards fell down.

This lack of capital and access to credit led to the fall of Lehman Brothers, who appealed to the government for a bailout, and were not given one.  This created further rifts and fear throughout the sector, as it became clear that not only were the banks unable to cover their own daily operations, but the government was unwilling to help at that point.

This was felt most sharply in countris where banks had pursued aggressive investment strategies filled with risk.  Iceland, the Untied States and the United Kingdom have felt it most sharply, and the ripple on effects have led to recession and loss around the world.

The economic model advocating an unregulated market has been discredited, and it is becoming clear that liberalisation and lack of state regulation cannot continue.  What is unclear is exactly how the system should be rebuilt to prevent this from happening again.  While it maybe tempting to rebuild what we have, it would be unwise.

<Explained at a work seminar via representatives from ActionAid – I found it helpful!>

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