How to Avoid Another Financial Crisis

The worldwide financial meltdown of 2008 was caused by collapsing values in the US housing market. What should have been localised bad news became a global problem due to new financial instruments introduced by US banks. In the immediate aftermath of the collapse of Lehman Brothers – a relatively small financial services firm – the worldwide capital market froze. Private sources of money refused to lend to banks and corporations. Only massive subsidies and guarantees issued to banks, by various governments, averted complete chaos in financial markets. The economic situation was stabilised but that crisis left a deep mark. The recession that followed was characterised by significant drops in consumer demand, massive loss of jobs, forcible seizure of homes, and idle production capacities in factories. With no economic recovery in sight, most enterprises preferred to hoard cash rather than invest in the productive capacity that would have created new jobs.

In the years following the crash, people began analysing what caused it and how similar situations could be avoided in the future. Typically, experts use esoteric jargon to conduct this sort of debate, but, given the severe impact of this recession on people’s lives, intelligent laypersons became intensely curious about its causes and potential cures. Capitalism’s “free market” mantra was questioned and many argued for heavier regulation of financial markets. This, in turn, led to a political backlash. Political and financial elites united in an effort to fight the imposition of heavier regulations. They fought back ideologically, by rewriting the history of the causes of the crash and by saying that heavier regulation would lead to a loss of national competitiveness.