Global Financial Crisis
2007 ... Who benefited?
Considered by many economists the worst financial crisis since the Great Depression of the 1930s.
Over the last two decades financial crises have tended to occur increasingly frequent.
Suddenly, without warning, in August 2007, three men who had never been elected to public office found themselves the most powerful people in the world. They were the leaders of the world's three most important central banks: Ben Bernanke of the U.S. Federal Reserve, Mervyn King of the Bank of England, and Jean-Claude Trichet of the European Central Bank.
It is clear the crisis had multiple causes. The most obvious is the financiers themselves—especially the irrationally exuberant Anglo-Saxon sort, who claimed to have found a way to banish risk when in fact they had simply lost track of it. Central bankers and other regulators also bear blame, for it was they who tolerated this folly.
Moral hazard as a result of implicit or explicit government guarantees encouraged overborrowing and excessive exposure to foreign exchange by financial institutions (see McKinnon and Pill (1996) and Krugman (1998)). The essence of moral hazard is that, if things went wrong, agents "rationally expect the government to step in and modify its course of action in order to bail out troubled private firms" (Corsetti, et al. (1999a)).
The financial crisis happened because banks were able to create too much money, too quickly, and used it to push up house prices and speculate on financial markets.
Intense competition between mortgage lenders for revenue and market share, and the limited supply of creditworthy borrowers, caused mortgage lenders to relax underwriting standards and originate riskier mortgages to less creditworthy borrowers.
Too big to fail?
If we don't do this, we may not have an economy on Monday.
Most people think that the big bank bailout was the $700 billion that the treasury department used to save the banks during the financial crash in September of 2008. But this is a long way from the truth because the bailout is still ongoing. The Special Inspector General for TARP summary of the bailout says that the total commitment of government is $16.8 trillion dollars with the $4.6 trillion already paid out. Yes, it was trillions not billions and the banks are now larger and still too big to fail. But it isn't just the government bailout money that tells the story of the bailout. This is a story about lies, cheating, and a multi-faceted corruption which was often criminal.
... cycles in which deregulation accompanied by rapid financial innovation stimulates powerful financial booms that end in crises. Governments respond to crises with bailouts that allow new expansions to begin. As a result, financial markets have become ever larger and financial crises have become more threatening to society, which forces governments to enact ever larger bailouts. This process culminated in the current global financial crisis, which is so deeply rooted that even unprecedented interventions by affected governments have, thus far, failed to contain it.
Financial crooks brought down the world's economy — but the feds are doing more to protect them than to prosecute them.
Since the global turn to austerity in 2010, every country that introduced significant austerity has seen its economy suffer, with the depth of the suffering closely related to the harshness of the austerity.
What makes all this so absurd is that the European experience has shown yet again why joining the austerity club is exactly the wrong thing for a struggling economy to do. ... The results of the experiment are now in, and they are equally consistent: austerity doesn't work. ... every country that had embraced austerity had significantly more debt than when it started.
Crisis of confidence
Obviously, sending criminals to prison would not cause people to lose confidence in the U.S. financial system. What has already caused much of the world to lose confidence in the American financial system is the refusal to send the criminals to prison.
After four years of financial crisis, this balance between democracy and the market has been destroyed. On the one hand, governments' massive intervention to rescue the banks and markets has only exacerbated the fundamental problem of legitimization that haunts governments in a democracy. The usual accusation is that the rich are protected while the poor are bled dry. Rarely has it been as roundly confirmed as during the first phase of the financial crisis, when homeowners deeply in debt lost the roof over their heads, while banks, which had gambled with their mortgages, remained in business thanks to taxpayer money.
Recent data from Eurobarometer show a significant fall in confidence on the part of European citizens in the EU's institutions.