ANALYSING THE LEADING FACTORS TO THE FINANCIAL CRISIS OF 2008

Abstract

This study deals with the leading factors to the financial crisis of 2008, which came surprisingly for many people. If we look closely, we see that there were signs warning us. Understanding the leading factors to the financial crisis of 2008 is highly essential to avoid crises in the future. The financial markets have changed enormously since the last decades, not always for the best. It took almost 70 years since the Great Depression to drive the world to the chaos like the crisis of 2008 did. What did we do wrong to make this happen or is it only a cyclical phenomenon?

I am analysing in my research the factors that influenced why the crisis arrived. We go through every factor in details to explain its role. We take a comparative look in the Great Depression, Latin American crisis and Asian crisis. We need a historical perspective for the complexity of things. Every crisis is different but we can notice similarities in each one of them. After that, the dominant economic theories explaining the crises are introduced. There are two dominant schools: the supporters of the efficient market hypothesis and the supporters of the financial instability hypothesis. Furthermore, the discussion concerning the legitimacy of the theories was raised by the financial crisis of 2008.

Highly deregulated financial markets gave many opportunities to make profit never seen before, but at the same time the risk was often forgotten. Central Banks encouraged this lunatic behaviour, and did nothing to stop it. Credit became the tool to finance everyday living, and it was considered that everybody had a right to be a home-owner despite being credit-worth. After analysing the crises we can conclude that the government’s role has been essential to overcome each crisis despite the monetary mistakes that have been made previously. Regulating the financial markets is essential to avoid creating a financial bubble in the future.