It was a tremendous shock to most in the financial world when the stock market came crashing down in August of 2008. Apart from the hand full of people who anticipated the disaster, most had lost tremendous amounts of money in the crash and even more in the aftermath.
The crash was caused by brokers selling collateralised debt obligations (CDO’s) with high ratings, given to them by the rating agencies (Standard and Poor, Moody’s etc.). But the CDO’s were actually filled with sub-prime mortgages and when investors eventually saw that AAA rated CDO’s were defaulting on their mortgages it was too late. Financial institutions were flooded with credit default swops that were taken out as insurance from a possible loss arising from …show more content…
Dodd-Frank act:
The Dodd-Frank act was one of the fiscal policies implemented by the US to prevent another Global Financial Crisis (GFC). When President Obama signed the Dodd-Frank Act into law in 2010, he told the American people that they “will never again be asked to foot the bill for Wall Street’s mistakes”. The act tightens up credit regulations, making it increasingly more difficult to get a lone. This is to prevent companies and citizens from making excess debt they cannot pay back.
The newly inaugurated president Trump however sees this act as a hurdle for growth and he has heavily critised it in the past. “On Friday afternoon he signed an executive order, which he said would dramatically scale back the Dodd Frank Act”. (Gara, 2017:1)
By loosening regulation President Trump is allowing the institutions responsible for the credit bubble in 2008 to blow it back up and possibly bigger than before. This will increase the demand for credit significantly and with no barrier the supply will meet the demand, increasing citizen and corporate …show more content…
Experts are speculating that a crisis is brewing in Asia, particularly China. Similar to 2008, China is currently in a bubble. “In emerging economies and especially China, the OECD was most worried about the rapid rise of private credit in recent years, fuelled by low interest rates, which were creating “significant global financial vulnerabilities”. (Giles, 2017)
The low interest rate creates an incentive for citizens and firms to take out debt; this is usually good because in most cases this leads to growth. But the moment interest rates go up, debt increases as well as people who default on their debt; this is exactly what happened in the US in 2008.
Figure 1: China’s banks overtake rivals (Sources: Wildau,