Life isn't so boring

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You can easily find the term “financial crisis” every day in the newspaper or TV. Most experts agree that it’s the worst financial catastrophe since the Great Depression of 1930s. Some of you might have lost money in the stock market or your company could have been damaged by economic downturn. US stock market has plunged by 14.5% since January 2008 which has been rapidly spreading throughout the world like a virus. Even rapidly growing countries like China and Russia are suffering from economic fallout. Large financial institution, like Bear Sterns, Merrill Lynch, and Leman Brothers were sold or filed for bankruptcy.

This crisis didn’t happen just because of bad luck but it is largely due to underlying structural problems of the economy.

First, “Policy failure” The easy money policy caused the housing bubble. The US central bank had kept interest rate low for long time. 30 year mortgage rate had been dramatically declining since 2000 while housing price index had sky located. Low interest rate provided more leeway to US banks to lend money to people who want to buy houses. People were willing to borrow money to take advantage of cheap interests. However, problem arose when banks lend money to people who can’t afford to repay debts, what we call, sub-prime mortgages. And finally the bubble burst.

Second, “Market Failure” Market failed to penalize bad loans. There was lack of regulation on financial industry relying heavily on free market. Banks became more aggressive made loans to borrowers without qualification. They created innovative financial products like mortgage backed securities, which made regulation more difficult.

Finally, "Human Failure" There was greedy people like bank executives, employees and investors behind the scene. They took hundreds of millions of compensation for profits that were illusory. In contrast, when their companies suffer, they don’t need to give them back.

Now, because they are too big to fail, their companies are saved by US government with innocent tax payer money.

So, what we can learn from this crisis?
First, , government should make balanced policies to manage risks. They should protect themselves from any politics or interest groups. Instead, they should pay more attention on risk management when they implement economic policy. Especially, we should be careful when the growth is robust, which may create bubbles and destroy all that have been accomplished.     
Second, we shouldn’t rely too much on market economy. There has been strong belief that markets correct themselves, and government should keep hands off. But this crisis taught us the importance of government control of the financial system and government should actively step in and cushion the economy from shocks if necessary.

Finally, we should make an effort to build strong business ethics in the economy. If not, economic growth would belong to only limited rich people, and mean nothing to all of us. In addition, investors of failed firms should take the responsibility for their bad decision. Without those disciplines, it could encourage their opportunistic, bad behavior relying on government bailout.

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