Reflective writing : "The Love of Money, The Age of Risk"

If the 2008 crisis is a subject that has already been discussed very widely, I will now try to approach it from a different angle. After watching the documentary "The Love of Money, The Age of Risk" (2009), I asked myself about the "golden period" that preceded the crisis, and why the consideration of risk was strongly reconsidered over this period.

In this documentary, it seems that part of the reason for the crisis comes from excessive capitalism, deregulation and the disinterest of the state in the economy. First of all, I found it interesting to link the crisis with the political event at the end of the 20th century: the fall of the Berlin Wall and with it the fall of Soviet communism. However, this event was not only political, but had an unprecedented economic impact. With this triumph of capitalism, deregulation has intensified, and a real systemic risk has emerged (i. e. a risk that threatens the survival of the financial system). Indeed, the distrust of Western states and investors in the face of risk has been considerably reduced, probably in a period of "capitalist euphoria" (Wilfred I. Ukpere, 2008).

In addition, the 1990s was marked by the beginning of the globalization of economies. This has had a strong impact since globalizing an economy also means opening non-physical borders, and therefore accepting a "slightly" lesser regulation, called "light-touch regulation". However, the opportunity of an international capital market was far too important for the economy, savers and companies to miss. It is in this context that American and European banks have created new financial products that are both complex and profitable, such as credit default swaps, a type of investment insurance. Even if the regulator has tried to regulate these financial products, the political and economic context has associated regulation with a step backwards and many were in favour of deregulation (such as Alan Greenspan for example). This made me wonder a lot about the power of regulatory institutes created by the government versus the power of markets.

Then, I was also able to learn that one of the facets of the 2008 crisis was the interest rate. Due to the two factors of the twin tower attack in 2001 and China's rapid rise, which simultaneously threatened the US stock market, the FED decided to flood the market with liquidity by drastically lowering the interest rate (lowering it to around 1%). This action has boosted investor confidence while allowing American markets to recover. However, it seems that this practice has also had a negative effect on the market and we can therefore criticize this FED practice: by flooding the market with liquidity, Americans have started to buy low-cost products on the world market: Chinese products. China, taking advantage of these profits to build up savings, has therefore begun to invest massively in Western banks, particularly those in the United States. This created a virtuous circle in terms of liquidity, but also vicious because the markets no longer had the capacity to sell all this liquidity. I found this paradox interesting, and it can help explain the causes of the phenomenon of "overheating economies".

To conclude with one last argument, I would like to talk about risk management for the famous subprime loans. The fact is that customers were not informed about the products they were buying and banks did not have the minimum income required to lend. These products were therefore very risky, not only for households but also for banks and investors. This gave rise to a major principle, called "securitisation", operating according to a simple scheme: the major international banks lent to mortgage lenders and bought back household debts, enabling them to collect interest rates on these loans. As a result, I was particularly concerned by the practice of banks selling these financial products to each other without knowing what their content and original owners were. In fact, thinking they were diversifying the risk, these investor chains would buy it back the next moment from another bank or investor without being aware of it. I wanted to select this scheme because it proves how important information about a financial product can be. 

In conclusion, we can say that the performance and survival of financial markets depends largely on risk and information. In a current context of economic performance after the 2008 crisis, we can ask ourselves a number of questions: have we learned enough from our mistakes of the past decade not to cause another crisis in the economy? Are the supervisory institutions powerful enough to prevent another crisis? And, finally, are we responsible enough to be satisfied with a certain profitability without systematically provoking another crisis?