“The 2008 Financial Crisis was a big deal. It could have resulted in a 1930s style global financial and economic meltdown with catastrophic implications. But what happened? Why did it happen? And why aren't we all huddled around burning trash cans forming a raiding party to go steal gas from other tribes in the wasteland? By the way, if you're actually doing that, you probably didn't hear we survived the financial crisis. Things got better. Seriously. Put down your crossbows. To explain what happened, first we have to do a quick explainer about mortgages. And you might already know this, but basically someone that wants to buy a house will often borrow hundreds of thousands of dollars from a bank. In return, the bank gets a piece of paper, …show more content…
It took steps to increase transparency and prevent banks from taking on so much risk. Dodd-Frank did a lot of things. It set up a consumer protection bureau to reduce predatory lending. It required that financial derivatives be traded in exchanges that all market participants can observe. And it put mechanisms in place for large banks to fail in a controlled predictable manor. But, there's no consensus on whether this regulation is enough to prevent future crises. So, what have we learned from all this? Well, one key factor that led to the 2008 financial crisis was perverse incentives. A perverse incentive is when a policy ends up having a negative effect, opposite of what was intended. Like, mortgages brokers got bonuses for lending out more money, but that encouraged them to make risky loans, which hurt profits in the …show more content…
economy. The government failed to regulate and supervise the financial system. To quote the bi-partisan, financial crisis inquiry commission report, "the sentries were not at their posts, in no small part due to the widely accepted faith in the self-correcting nature of the markets, and the ability of financial institutions to effectively police themselves." The report placed some of the blame on the years of deregulation in the financial industry. And blamed regulators themselves for not doing more. The financial industry failed. Everyone in the system was borrowing too much money and taking too much risk, from the big financial institutions to individual borrowers. The institutions were taking on huge debt loads to invest in risky assets. And huge numbers of home owners were taking on mortgages they couldn't afford. But the thing to remember about this massive systemic failure, is that it happened in a system made up of humans, with human failing. Some didn't understand what was happening. Some willfully ignored the problems. And some were simply unethical, motivated by the massive amounts of money