The aim of this essay is to try to examine who was responsible for the financial crisis of the recent years, which hit the whole world’s economy. It is reasonable to blame both the government and the banks, which together contributed to create a speculative financial system, but also the mortgage holders, who asked for loans they were not able to pay. The government lacked enough control and regulation, while the banks focused on making the biggest short-term profits they could, taking excessive risks and keeping it hidden from the investors.
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The other main characters of the financial system-Mathematicians, Central Banks, Regulators and Rating Agencies-contributed to the crisis too, directly or indirectly, but to a smaller extent. Many words will be spent especially on the subprime crisis of 2007, which started in the US, the first of a series of successive and related crises throughout the world, which all together culminated in the so called “Credit Crunch”. Each country worldwide tried to find a solution to the problems created by the crisis, sustaining the economy, in order to avoid recession. A particular focus will be on the United Kingdom, one of the countries which suffered most the bad consequences of the crisis. This recently pushed the British government to introduce a package of austerity, one of the most severe plans of the last 30 years.
Most people around the world have lost their trust in bankers, and they are considered guilty by the majority. People should also think about what the governments did and what the governments did not do, during that period. US government lost control over the regulation of the banking system, trying to stimulate the economy and the overall consumption. During the boom of the housing market it focused on liquidity rather than on risk. It encouraged bankers to grant loans to almost everyone, even to people with low income and poor credit, without any security for banks to regain the money. The government prolonged the crisis by increasing the interest rate on borrowing, due to the increasing inflation of 2007. People who were finishing their introductory period of mortgage faced an even higher interest rate, being unable to pay their debt towards the bankers. It made the situation worse by providing support to certain financial institutions and their creditors but not for others in an ad hoc fashion, acting too late, without a clear framework. This increased uncertainty and panic in the market. Furthermore government permitted financial firms to pick their preferred regulators in what became a race to the weakest supervisor. Regulators had ample power in many arenas and they chose not to use it. The Securities and Exchange Commission (SEC) for instance could have required more capital and stopped risky practices at the big investment banks,
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