Ten years ago on 15 September 2008, a 158-year-old global financial services firm, Lehman Brothers, declared bankruptcy which led to the worst global economic disaster since America’s Great Depression of 1929. In Australia, it was known as the 2018 Global Financial Crisis. So what factors unleashed the global financial crisis? Are we due for another credit freeze?
What caused the 2008 Global Financial Crisis?
The 2008 Global Financial Crisis was mainly caused by deregulation in the financial industry. When the government started to reduce or eliminate restrictions on financial industries, it permitted banks to engage in hedge fund trading with derivatives. Since these were so profitable, banks demanded more mortgages to support their sales. They created affordable interest-only loans that suited subprime borrowers.
In 2004, America’s central bank, the Federal Reserve, increased the fed funds rate just as the interest rates on these new mortgages reset. This led to housing prices falling since supply eclipsed demand. Therefore, homeowners were trapped because they could no longer afford their payments but the fall in housing prices prevented them from selling their homes. The banks stopped lending to each other as the values of the derivatives collapsed which led to the crisis.
Are we due for another financial crisis?
America is currently on a roll. It is having its longest bull market history. Jobs are aplenty and wages have shot up at a fast pace since the end of the crisis. However, economist Ann Pettifor, who predicted the financial crisis in 2006, says the global economy is in danger once again. The prospect of rising U.S. interest rates, massive corporate debt, and with global debt being more than triple the level of global gross domestic product, another crisis at some point is quite inevitable.
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