financial crisis
9&s >RJ Many people like to compare the current financial crisis and the Great Depression in 1930s. However, what we are facing is a much different version from many aspects. In this severe crisis, what is definitely of great value is our deeper understanding on our past wrong conceptions.
)ib$*dmUP A brief review on the current crisis can be traced to the Greenspan’s age. After the fast development in the 1990s, financial institutions began to pursue higher profits by bearing higher risks. The risky desire located itself on the strategy to encourage people with imperfect credit history to purchase houses by taking mortgages with higher interests. As years of practice, with the help of the securitization, financial institutions discovered that it seemed quite safe to securitize those mortgages into Mortgages Backed Securities (MBS). Through this practice, financial institutions could get sufficient funds from MBS to support their loans towards the mortgage takers while using the cash flow from the interests of the mortgages to pay back the return for the MBS. However, the obvious mismatch between the asset and liability didn’t raise enough attention. The mortgages are long-term investment for financial institutions, while the MBS are usually short-term. If default rate of the mortgages becomes very high, financial institutions won’t be able to pay back the returns and principals of the MBS investors. Nonetheless, the seemingly prosperous world economy didn’t allow the elite to give the potential risk a second thought. This was even blessed by the deregulation of the financial sector under the reign of Alan Greenspan.
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