2008 Financial Crisis

You that trample on the needy, and bring ruin to the poor of the land, saying... We will make the ephah[1] small and the shekel great, and practice deceit with false balances. Amos 8, verses 4-5 (Bible Tools)

It seem very possible, even likely, that 2008 may be the 21st century's equivalent of 1929. Indeed, it may be even worse, as in 1929 there was little currency risk involved because most currencies, including the then reserve currency, the UK Pound, were convertible into gold. The causes are similar in that they both resulted from irresponsible credit expansion and were triggered by the securities markets. The most obvious difference is that the sector of the securities markets that acted as triggers were stocks in 1929 and credit instruments in 2008.

In 1929, the credit vehicle was largely margin extension on common stock. With the greatly increased financial and technical capabilities developed in the half century following 1929, far more creative problems were created using complex financial engineering and pricing the output of this creative engineering using the CAPM. The effects of the problem in 2008 were magnified using sophisticated computer model trading systems. These did what they are supposed to do, and "dumped" portfolio positions not only in stock but in commodities and financial derivatives as well. With the assistance of modern technology, creative financial products, and deregulation that forgot the lessons of the 1930'

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or possible decreased the value of the dollar), which allowed homeowners to borrow large amount of money, which they happily spent creating several more years of economic strength. Part of this expansion was the so-called sub-prime mortgage market, the early part of which was at least partially masked by a last gasp commodity bubble. (Coy, et al.) The Problems with asset quality that resulted from the excess liquidity in the banking system were exacerbated by a lack of regulatory control the elimination of historic regulatory legislation like the Glass-Steagall Act of 1933 that prohibited commercial and investment banking and insurance to exist simultaneously in the same organization. Even SEC rules were modified to make it easier to sell short. The historic up-tick rule that short sales could only be executed on up-ticks was suspended. (Investopedia) The rules that were enacted, like Sarbanes-Oxley, affected corporations but had little effect on banks. (Harris) Where bank rules were modified they contributed to the problems of the banks like the "mark-to-market" requirements that resulted in the write down of assets and thus directly reduced the equity of the underlying bank. In the long run, "mark-to-market" is probab

Category: Economics - 2