The global economy is heading towards another financial crunch as risky transactions continue in the financial industry.
These are the strong words coming from a Professor of Finance of the University of Missouri, Hung Gay.
It’s been a decade and over [in 2007] since the world faced a global financial crisis which triggered a series of disruptions to economies.
Analysts had blamed the financial industry especially banks for venturing into risky areas which affected their ability to recoup investments made.
Prof. Hung Gay warns of a recurrence if prevailing transactions by major banking companies continue unchecked.
He made the remarks in a build up to a presentation on “the Role of the Banking Sector in National Development: The Case of Africa and Asia.”
“I do not think that we have done enough especially as the act which tries to minimize the future risk is undermined given the current administration because we kind of roll back some of the laws. So when you compare the current total mortgage loans with 2007, they are almost at the same levels so I think that the risk is coming back,” he stressed.
Prof. Hung Gay added, “For example, JP Morgan and Goldman Sachs failed a stress test but they still allowed to pay dividends to shareholders so the laws is relaxing on the banks. So I think in all, the crisis will come back in other forms if we do not change our trajectory.”
The Global Financial Crisis
According to the Guardian, there have been five stages of the most serious crisis to hit the global economy since the Great Depression.
These include incidences on 9th August 2007, 15th September 2008, 2nd April 2009, 9th May 2010 and 5th August 2011.
Phase one on 9 August 2007 began with the seizure in the banking system precipitated by BNP Paribas announcing that it was ceasing activity in three hedge funds that specialised in US mortgage debt. This was the moment it became clear that there were tens of trillions of dollars worth of dodgy derivatives swilling round which were worth a lot less than the bankers had previously imagined.
Nobody knew how big the losses were or how great the exposure of individual banks actually was, so trust evaporated overnight and banks stopped doing business with each other.
It took a year for the financial crisis to come to a head but it did so on 15 September 2008 when the US government allowed the investment bank Lehman Brothers to go bankrupt. Up to that point, it had been assumed that governments would always step in to bail out any bank that got into serious trouble: the US had done so by finding a buyer for Bear Stearns while the UK had nationalised Northern Rock.
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By: Pius Amihere Eduku/citibusinessnews.com/Ghana