Understanding the 2008 Financial Crisis: Causes and Restructuring

The Period Leading Up to the 2008 North Atlantic Crisis

The 2008 crisis started in the US and then spread to the rest of the world. This was because there was an intense relationship between the US’s shadow banking and the European banks – European banks were financing the American private sector.

The European Union

A crucial factor was the massive expansion of the European banking system (1985-2002).

Megabanks contributed significantly to housing price bubbles and financial bubbles.

The Maastricht Treaty decided to keep responsibility for supervising and rescuing banks at the level of individual member countries rather than centralizing it at the union level.

The United States of America

The Vietnam War and the oil price shocks led to rising inflation rates and interest rates, causing a liquidity problem.

Deregulation allowed commercial banks and savings banks to pay interest rates they needed to keep their depositors and attract new ones. Many savings banks had hidden solvency problems, creating a gap between interest payments. Consequently, banks were insolvent in the early 1980s.

Securitization

Basically, it consists of creating bonds and shares from loans, mortgages, etc.

Savings Banks needed to transfer risk to other investors through securitization: a procedure that allows commercial banks and savings banks to sell their loans and mortgages to other investors. This led to the rise of “Shadow banking” (credit and money creation outside regulation).

An investment bank acquires a large number of mortgages, puts them into a package, and sells them.

Thanks to securitization, banks put illiquid loans (risky loans that clients likely couldn't pay) on the market and sold them as securities (acciones).

• SPV
• ABS
• CDO

These financial innovations made the risk much higher, and their impact was the 2008 financial crisis.

Restructuring of the Financial System from 2007

New laws and measures to fix the financial markets include:

• Basel III
• G-20 established the FSB (Financial Stability Board)
• FATCA in the USA
• Banking union in the European Union

However, policies and measures against global imbalances and economic inequality are also needed.

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