More on a decade following the most devastating financial crisis since the Great Depression. The effects of a crisis are experienced today. Its outbreak occurred on September 15, 2008, when the investment bank Lehman Brothers filed for bankruptcy. As of that moment, the United States collapsed and then the rest of the developed economies followed.
One thinks it was clear, financial liberalization or innovation has a dark side: if managed improperly, it can lead financial institutions to take on excessive risk. Before 2000, only the most creditworthy (prime) borrowers were able to obtain residential mortgages. Technological progress and data mining, however, led to enhanced, quantitative evaluation of the credit risk for a new class of riskier residential mortgages. Then. subprime mortgages were created, mortgages for borrowers with less-than-stellar credit records.
The development of new sophisticated financial instruments led to structured credit products that were to distribute the riskiness to investors with pro-risk preferences. This gave the origination of the so-called originate-to-distribute business model and led to a credit boom.
The ease of obtaining a mortgage loan had two effects. The first was that the families devoted themselves to speculating widely with the prices of real estate, and especially with the costs of mortgages. Speculation led to the development of a housing bubble, which significantly inflated prices.
In the end, the model could not hold and the bubble burst.
But beyond the risks posed to financial activity, the post-2008 world also bodes ill for the maintenance of the old international world order, challenging the power differentials between the West and major emerging economies such as China, as well as shifting the interpretative discourse on how we should govern global markets.
During the chaos, globally integrated financial markets suffered from a complex fissure, political and geopolitical tensions upsurged. The world economic system is reeling prove that the impacts of the 2008 financial shock are still in the present. Worse, they may yet cause even greater splinters within the liberal international order.
On May 10th, Room For Discussion will be the honour to have Professor Adam Tooze to discuss his latest work and deepen under the hysteresis of the 2008 financial crisis.
Adam Tooze is a British economic historian who is Professor at the University of Columbia and serves as Director of the European Institute. He received his bachelor in Economics from King’s College Cambridge and his PhD from the London School of Economics. Professor Tooze imparts and is immersed on investigations in the fields of the twentieth century and modern history. The history of economics and economic history are his focal interests. Further, his interests have expanded towards into different range of areas such as political, intellectual and military history from Europe to the Atlantic.
Among his many publications, we have the awarded economic study named as The Wages of Destruction, and his extended work The Deluge. Adam’s books have been translated into eleven languages.
His most recent book is a new global history of the Great Financial Crisis of 2007 and after. Published in 2018, Crashed: How a Decade of Financial Crises Changed the World is the winner of the 2019 Lionel Gelber Prize.