…or what will happen if another financial crisis strikes your bank. The 2008 crisis has been recorded to be the worst after the Great Depression in the 1930s. When the stock markets dropped worldwide, various parts of the global economy were heavily affected. For instance, the housing market suffered so much that resulted in people losing their homes. There has been an ongoing process of identifying the reasons behind the financial meltdown. Researchers present many issues in the global market which, if combined altogether, chances are very likely to result in a crisis. Incompetent regulation of finances, excessive borrowing, high risk taking, deregulation of the derivatives, failures of credit rating agencies and conflicts of interests are only some of the many factors that may contribute to the instability of the global economy.

‘Fractional Reserve Banking’ Hot Paper Money

In the aftermath of the devastating effects of the crisis, the Gross World Product is below its pre-crisis peak and its increase is currently highly unlikely. Does that mean that the issues, which caused the crisis, have not yet received the necessary attention and changes? Let us first take a look at the drivers of the crisis. There are several players in the blame game, but financiers have the biggest role, some of whom have illusions of economic security due to the steady growth and low inflation and therefore decide to risk in lending. Then, central bankers and other regulatory bodies are the ones who supported the process of risk-taking. On the other hand, credit check agencies might also have miscalculated the triple As status they have given to many borrowers, who happen to actually have a low chance of repaying, for example, their mortgages. Central banks role may also be considered key to the prospects of economic growth [The Economist 2013].

Central banks are able to broaden their responsibilities over the maintenance of financial stability e.g. deal with the lack of balance in current accounts. However, they remain lenders of last resort and the reason for this is purely political. Ravenhill [2014] says that legal authorities in the contemporary markets are resting on international treaties and constitutional plans. The future of the global economy has been questioned numerous times by researchers after 2008 and trends show that it is not going to be bright. Globally the current economic growth has been the slowest since the 1930s cutting off massive 3% [IMF Global Financial Stability Report 2015].

IMF Database

Since many emerging markets are currently driving at least 70% of the current output e.g. Brazil, they are more prone to be affected by a credit crunch and a new crisis. Latin American countries and other emerging markets are on a quest for economic growth [Chan 2015]. However, cutting the interest rate and a more responsible approach to mortgage lending are not enough. Massive investments and reforms need to be made in the state, in strategic infrastructure, regulatory bodies etc. Lasting growth could not be created through huge figures of debt.



Ekaterina Tsenkova Dragomirova


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