TEN YEARS ON: Learning from the financial crisis
The financial crisis was a devastating event which occured in 2008; it was the worst economic disaster that has happened since the Great Depression in 1929. It occurred despite the failed attempts of the Federal Reserve and the Trusty Department efforts to prevent it…
But why did they fail?
Why wasn’t the situation managed adequately to prevent it?
What did they need to do to prevent it that they didn’t do? Why did they not do it?
I chose to explain idea 2- ‘Safer lending’ to prevent another financial crisis. This is because if the banks did have stricter rules to do with lending money in the first place, the financial crisis would never have occurred. This leads me to question why the bank did not put in new, stricter rules when giving out loans, when the first signs that a financial crisis started appearing, as it isn’t something which happens over night. Therefore, why they didn’t do something about it straight away? Why didn’t they try to rectify the problems as soon as they started to occur? Why didn’t they attempt to prevent further problems?
I understand that the greater the risk, the greater the reward, but banks shouldn’t be risking people’s money, as the loss is so great that it brought the country to its knees. If the banks did implement rules for safer lending, there would be less of a chance for another financial crisis...and what would the loss be? The bank would simply make less profit. I do not believe this would cause an impact on the general public either, as it would just mean profit margins would be affected, not the economy.
‘Safer lending’ means that the banks/bankers will be restricted. They will be giving out less loans, and if they know that people will not be able to pay it back they will either not give them a loan or they will give them a smaller amount of money instead and then will not pay them any further money until they have started to pay back the original loan. I think this makes it safer because this means banks wouldn’t hand out big lumps of sums to people who might not be financially stable enough to repay them.
This idea should be enforced, because it makes sure that the bank is not giving out money to people that can not repay it, as well as being stricter with their loans. This results in the bank having more money, so the bank can then start to give out larger loans again in the future, once they have learnt to become more strict with their loans, especially with who they are giving them out to. This can help prevent another financial crisis from happening.
This idea can be challenged, as if banks are giving out less loans, then people will start to struggle with paying bills, buying houses, etc. This could mean that there would be an increase in poverty and less people would be able to afford a place to live, as the banks would not be lending them loans. This is where taking more risks would be used, as if the banks did give out more loans, then they would either be getting large amounts of profit, or they would be becoming poorer, because they would be losing money.
However, if bankers did decide to give out less loans, the public would miss out, because they would not be getting any help from the bank, so they would be constantly be getting in debt; especially poorer people, who would struggle to pay their bills. As well as, they would have less people that they can go to if they are struggling with money. Despite this, the bankers would be getting rewards, because the more money that the bank saves, the higher their pay would go up, because the banks would start to become richer with money, so they get more pay in return.
This idea, in my opinion, is not fair, because the financial crisis was not entirely the fault of the public (due to them taking out loans, that the bank knew they would not be able to repay, yet the bank still let them take out the loans). I think that the banks had the majority of the blame for the financial crisis. Therefore the public should not have to miss out from it and the bank should think of another rule that would not affect the public.
Where I have used the BNC skills:
Reasoning- I wrote why this idea should be enforced and I gave reasons for my answers.
Scepticism- I wrote about how this idea could be challenged.
Open-mindedness- I wrote who would benefit and who would miss out from this idea.
Curiosity- I have asked questions, as to why the financial crisis happened.
Storytelling- I used storytelling to communicate my answers across to people.