A Tale of Two Crises. Will We Ever Learn?  

The global financial crisis that occurred in 2008 served as a wake-up call, showing us that no economy is impervious to catastrophic economic events!

Prior to the financial crisis, the majority of economists held the opinion that the financial systems in developed nations were too advanced to fail. They believed that markets could self-regulate because policymakers had controlled the business cycle. But the crisis disproved their claims. Many banks, mortgage lenders, and insurers went out of business in 2008, lending dried up, and the contagion spread far quicker than almost anyone anticipated. By 2009, 75% of the world’s economies were contracting.

Ten years earlier Asia experienced a similar economic shock that should have been a wake-up call to the entire finance industry. The World bank and the International Monetary Fund, as well as a plethora of Western financial experts all agreed that Asian financial institutions had been over burdened with debt and under-funded. They were told to build up much greater economic buffers against the headwinds of possible dramatic market corrections in the future. Asia got a slap on the wrists but financial institutions in the West went ahead without scrutiny till it was all too late. The party ended abruptly in 2008 when they had pretty much wrecked the world economy, in large part for being underfunded and overleveraged, just like their Asian peers a decade earlier.

Reading recommendation: The Noah Principle is a gripping novel that deftly interweaves a chilling tale of South-East Asian ethnic conflict, murder, and corruption against the backdrop of the 1997–1998 Asian Financial Crisis. Cain and Charlie, two young foreigners employed by Temple-Speer Financial Advisory in Jakarta, unknowingly become embroiled in a deadly power struggle between their bosses, which severely strains their friendship. Their relationship is put to the test as they attempt to survive the chaos and violence that are erupting in Jakarta. Through the expert blending of fiction and reality, the author creates a world that is both recognizable and engaging, with relatable characters that touch your heart. The Noah Principle is a masterfully written, compelling, and realistic literary thriller that will offer you a much-anticipated thrill and lessons as you read it to the end.

The 2008 financial crisis quickly destroyed a colossal amount of wealth, but was branded as “the Great Recession” rather than “the second Great Depression.” Between 2008 and 2011, governments in the 11 countries hardest hit by the crisis spent an average of 25% of GDP on economic stimulus. However, they all could have done better; the United States spent heavily but needed to be more efficient. In Europe, too much stimulus money was used to repair bankrupt financial institutions, which did not give the economy the immediate boost that measures like raising unemployment benefits or the long-term advantages that infrastructure development would have brought.

Having now received its own slap on the wrists, the globally regulated banking industry had to become more resilient.  Governments who had used taxpayer money to bail out the banks, listened to their furious electorates and demanded greater financial stress tests for banks. The Dodd-Frank Act of 2010 gave American regulators the authority to compel the biggest banks to significantly raise the amount of capital they held, increasing their capacity to withstand future losses. In addition, banks were persuaded to cut back on their reliance on short-term financing, giving them more breathing room in case their access to short-term markets becomes restricted, as it was in 2008. Regulators are now more closely monitoring banks to ensure they abide by the rules. Regular stress tests are conducted on large banks; the results are financially significant. Regulatory authorities may forbid a bank from expanding its balance sheet, repurchasing its shares, or paying dividends to shareholders if it fails the test.

The crisis has taught us that inflation can sometimes be too low. Before 2007, inflation was stable and roughly in line with the targets set by central banks, typically two percent in most advanced economies (with the notable exception of Japan). This determined how far central bankers from every continent had come in the previous three decades. The stability of central bank-maintained prices had become a market expectation. That progress turned into a poisoned chalice after the crash, which caused the real interest rate, which is the nominal interest rate less the expected inflation rate. Central banks cut it to almost zero but only reached negative two percent, which was insufficient to stimulate economies suffering from severe losses in wealth and confidence.

In conclusion, the 2008 financial crisis served as a painful reminder of the wider consequences of the harm caused by painful economic shocks, as well as the longer recovery times associated with them. The shock of 1997-8 and even more so 2008, serve to lay bare just how arrogant politicians, policymakers, and bankers had become, and how much they had forgotten in the years leading up to the crisis. They contend that crucial human characteristics such as greed, fear, and the propensity to forget the past are to blame for financial meltdowns. Despite how dramatic it was, the most recent crisis will not be the last. We must remain vigilant, reflect on our past errors, and take the necessary steps to avert another financial collapse if we are to avoid the next crisis. For more motivation and inspiration, read The Noah Principle.

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