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INSIDE JOB – FINANCIAL CRISIS KLARA KOMEN

According to Investopedia: “A financial crisis is a situation where the value of assets drops rapidly and is often triggered by a panic or a run on banks.” It’s hard to say that there was anyone who hasn’t been affected by financial crisis in the 2008, whether it was directly through lay-offs or indirectly through decrease in exports, wages, cash flows etc. We can say that the first crucial event started during The Reagan’s administration (1), when the 30-year period of financial deregulation begun. Ripping apart the Glass Steagall act which involved bank’s restriction to undertake risky business operations with depositors money, and replacing it with Gram-Leach-Bailey act which on contrary banned financial regulation of the market. A green light was given to a massive investment sector expansion and consolidation of industry into few gigantic firms (2), each of them so large that its failure could threaten the whole system. Due to protection from the government confidence of banks grew, and made their officials inclined to predatory loaning (3). The trend of predatory loaning was combined with a creation of CDOs by investment institutions and CDSs by insurance agencies (4). CDO is a financial product that merges several assets, in this case mortgage loans, while CDS is a derivative that promises buyer that investor will compensate for losses in case of a default, in this case a CDO. These securities were selling rapidly, who’s sale was intensified by the rise of bonuses and commissions that bankers, investors and insurance agency agents were receiving on the upturn of clients. Loans were given out without adequate screenings (5), while securities were given high ratings for something considered ‘crap’. The documentary starts with the example of Iceland, who’s prior small banks and their securities were given a AAA rating, which was a faulty security classification by ratings agencies and accounting firms (6). The financial crisis could have been avoided if the three main ratings agencies as well as accounting institutions, such as The Big Four, hadn't unfairly classified subprime securities. The vicious circle was created; the combination of predatory loaning and false classifications that laid in the self- interest of investors on the one hand, and wrongful ratings drawn by profits of rating agencies on the other. Investment banks such as Meryl Lynch then started buying CDSs while they were pooling CDOs at the same time. On top of that new regulators appointed were ex- bankers, who were put in an ideal spot to indulge in an immense level of corruption, money laundering, customer fraud, paper falsification, tax evasion…(7). This all evolved into a big bubble; banks giving mortgages to pretty much anyone, investment banks pooling assets together and creating CDOs, investors selling CDOs, betting against their clients with CDSs, and all of them getting so big that they knew FED wold bail them if something goes wrong. We must ask ourselves why did no one stop this? “Well, because banks liked monopoly power; because banks liked lobbying power; banks knew that when they're too big, they will be bailed,” (Inside Job) which later on happened. Even before 2008, FED increased the leverage limits for investment banks.(8) People stopped repaying their mortgages, CDOs became worthless, everyone wanted their share of CDSs, financial institutions weren’t able to repay them, they went bankrupt and in 2008 the bubble burst and created a world-wide financial market collapse or according to Guardian a near-death experience for global capitalism.

Being raised in a very left oriented environment, and spending most of my education abroad I found myself developing a pretty unpopular opinion for someone my age. I am a firm believer in regulation, and don’t think market will ever be able to work itself out. As seen in Inside Job by Ferguson, I believe that financial crisis would have been avoided if there was strict regulation by government. What I particularly enjoyed in Ferguson work, was the way he uncovered the personality study of Wall Street professionals, bankers, and investors. His emphasis on the drawing power of bonuses and commissions, combined with the spur towards the luxury lifestyle, corruption and drugs, caused a mess on the market hurting taxpayers and general public. Motivated after seeing the movie I proceeded to read articles and came across this quote in China Morning Post (D. Brown, 2018) “If the world needed proof that greed was indeed bad and excessive exuberance was the greatest threat to global stability, then we should have learned our lessons the hard way after 2008.” However, even though the reason for the collapse of 2008 was the result of failed economics, not the lifestyle of bankers, with current little or no changes made, the next financial crisis is a matter of when not a matter of if.

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