THE No1 question people ask about the crash and subsequent great recession from 2008. I will attempt to answer it.
People talk about the whole issue being about Greed, but its not its a story of pure ignorant stupidity from the very top in Government, central banks thru banks and financial institutions.academia right down to the voters and borrowers. Remember my golden rule? people do not always act rationally to their own needs.
Imagine a cargo ship that was licensed to carry 1000 tones of cargo, it did this day in day out. Then suddenly over a few years the ship that was only supposed to carry 1000 tones started carry a little bit more every time to clear the ever increasing amount of goods on the key side. One day with way too much cargo on board the ship is in a storm, the kind it had faced many times in the past and unsurprisingly sunk without a trace.
Remember those £20 DVD players in the supermarket? They came in the main from Asia and in particular China. When you handed over your £20 note for yet another player you did not need but was too cheap to pass by, some of the money made its way to the Chinese workers who worked in the factory. They saved a lot of it, they have too they don't get the state goods that we get in education and health care or pensions. That money thru the interconnectedness of the global banking network arrived in the West looking for a home to grow. Remember the 6 times earnings mortgages, the endless credit card offers? The source of the money was the rise of the East.
Traditionally banks would take your money and turn that money into loans, this is called fractional reserve banking. Those loans are then turned when paid back into future money creation. (I borrow you a grand you pay me back £1200 in a year, we have created £200 of new future money) But seeing as the banks now had a new source of credit thru other banks pumping money around the world from Asia they and we did not have to bother about saving and investment anymore.
So the banks took the new money and multiplied that thru the reserve banking system and multiplied it again thru mad mathematical models with whiz bang new financial instruments. In effect banks had created their own currency that they controlled and could skim tiny percentages off the top that added up to massive salaries and bonuses. But the problem was this new currency was not backed by equal valued assets it was backed by a property bubble. Don't for 1 minute think this was just an American thing or even a British thing, property bubbles appeared through out the Western world, the first banking collapse actually happened in Germany. The Europeans actually made the whole thing a lot worse with the Euro, we took the money and just sunk it into the ground, they sunk it into the ground as well but they also lent massive amount to each other mainly thru German banks financing other people buying their goods, and French banks creating billions to lend to "ultra safe" governments.
In most industries when work dries up, the industry gets smaller to remain efficient. Small returns in banking lead to stupid risks being taken and it this dearth of suitable investments that is the key to the crash. In simple terms the West got big, lazy and unproductive, nothing much to invest in, and a lot of money chasing nothing much.
Its easy to blame bankers and blame they deserve, but more of the blame goes to the politicians they are the ones who developed and legalised the system, and were supposed to police it. They were the ones who allowed the ship to sail. Banks paid hundreds of billions in tax revenue and supplied endless cheap credit to voters who gave the politicians their jobs. Not a very virtuous circle was it?
Tens of millions if not billions are spent analyzing the world economy by Governments and private institutions and pretty much everyone was a sucker. Money is the drug and we got hooked on it big time. Cold turkey is proving hard. Blaming Dave & Co for locking the sweety tin is a bit childish. The sweety can is not coming out for a long time to come.
So where did the money go? its owed on a balance sheet for goods at the bottom of the ocean.
