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Globalisation: financial crises - Coggle Diagram
Globalisation: financial crises
international credit crisis of 2008
decreased market regulation from 2000-2008 under Bush presidential session.
this meant deregulation of financial institutions in the US
this deregulation led to the build up of "toxic assets". toxic assets are sub-prime mortgages that are basically
mortgages with little to zero regulation, and had no downpayment, low interests, and long amortization.
higher risk of defaulting- caused large numbers of default. people didnt have money to pay back their financial commitments)
mortgage securities (mortgages that are bundled together by investment banks and sold as securities) deemed as secure but were not
credit default swaps another form of toxic asset
factors leading to financial crises
enormous market growth in 80s and 90s
interconnected nature of global economy => contagion/ systemic risk
neo-liberalism, lack of market regulation
new kinds of financial instruments and media (not well known and thus less regulated, more prone to problems). eg) sub-prime mortgages and credit default swaps
political repercussions following the credit crisis: polarised the left and right, parties fighting about power of state and power of free market
3 key financial institutions involved in credit crises: bear stearns, AIG insurance, Lehman brothers
key players in international credit crisis
Ben Bernanke. chair of federal reserve board. believed in systemic risk, believes that the state should bail out private sector
Henry Paulson. neo-liberal, neo-conservative. former ceo of goldman sach's. believes in moral hazard, against public bail out
phase 1: bear stearns makes mass investment in mortgage securities and credit default swaps. sudden loss of confidence in market saw their shares plumment, causing people to take out their investments out of the bank. they did not have the reserves to cover their financial obligations.
phase 1: bear stearns appeals to the federal reserve board. they realise that there are billions of dollars in toxic assets. this is concerning as they are deeply connected to other banks as well. systemic risk is huge and trumps moral hazard.
phase 2: lehman brothers invest in mortgage market. price share falls and paulson tells them they need to find a purchaser. share value officially plunges and paulson refuses to bail them out. they file for bankruptcy.
phase 3: AIG (largest insurance company in the world) owns trillions in credit default swaps. looking for money to cover debt. as they are in trouble, entire financial system is in trouble. US federal board has to bail out AIG
phase 4: bailing out system. whole market crashes. bankruptcies, devaluation of retirement funds. introduction of stimulus programs, little accountability on wall street, increased polarisation in political world, rise of populism
mercatilism: based off economic system from 1500's and 1700's which asserts that the worlds wealth is static, and that in order to build wealth and national power state must regulate it.