The 2008 financial crisis is known to be the worst economic disaster since the Great Depression of 1929. It is a world wide financial ‘fiasco’ involving terms everyone is familiar too, like subprime mortgages, collateralised debt obligations, frozen credit markets and credit default swaps. Most homeowners were affected due to this.
The financial crisis is bringing two groups of people together - homeowners and investors. With homeowners representing their mortgages which would be houses; and investors represent their money which would be huge institutions like pension funds. These two groups are brought together by the financial system - banks etc. Years backs, investors wanted to invest in something that will make them more money. This was usually done by going to the US Federal Reserve, where they buy treasury bills - safest kind of investment (AAA rating). After ‘9/11’, federal reserve chairman Alan Greenspan lowers interest rates to only 1% in order to keep the economy strong. This was bad news to investors as their returns were not very high resulting in not much profit. However this means banks can borrow money for only 1%, this causes an abundance of cheap credit, which the bank took advantage of. Banks can easily make money with this - charging borrowers more interest. Investors seeing how banks make huge profits want to do the same, and this is where it begun.
Firstly the banks started by connecting homeowners to investors, through mortgages. To put into perspective this cycle, we begin with a family wanting a house. They set a down payment and contact the mortgage broker which then connects the family to a lender who gives them a mortgage. The broker receives a commission and the family become homeowner - which is pretty advantageous as housing prices are increasing. After this the lender sells the mortgage to an investment banker, making profit. The investments banker buys many mortgages, so this means they receive monthly payments from homeowners, making huge profits. After doing some ‘financial magic’ they turn it into a collateralised debt obligation (CDO). One way to imagine a CDO is a as box into which monthly payments from multiple mortgages. It is divided into three tray, each representing different risk levels. The ‘bottom tray’ being labelled as risky and middle being ‘okay’ and top being ‘safe’. This is labelled so because the money fills from the ‘top tray’ which means that it will fill more likely than the ‘bottom tray’ - like a cascade. To compensate for the higher risk the bottom tray will get a higher return than the top and middle trays. To make the top tray even safer the banks may insure it, a credit default swap.
So the investment banker sells the ‘safe’ tray to investors who only want save investments. And sells the ‘okay’ tray to other bankers. Lastly the ‘risky’ tray to hedge funds and other risk takers. Then investment banker makes millions from doing this and pay any loans off they might have borrowed to buy the mortgages. This makes the investors satisfied as they have good returns, higher than the 1% on treasury bills. Greed takes over and the investors want more CDO slices. But here is the problem - everyone who's qualified for a mortgage already has one. They resolve this problem by giving out mortgages to people ‘less responsible’ which are called subprime mortgages. These mortgages required no down payment and no proof of income - this is the turning point. The cycle is back in play. Due to the more ‘less responsible’ homeowners the frequency of defaults started increasing which means that the banker has many houses. So they put it up for sale, which means there are many houses for sale on the market. This creates more supply than there is demand and housing prices start decreasing. People who were paying back mortgages stopped paying as the value of their house decreased from what it was when they bought it. Default rates increased significantly throughout the country. This meant than investment banker couldn't sell his his CDO to anyone as they were worthless; the investors who already had purchased CDO’s wasn't making any money from it; the mortgage lender trying to sell the mortgage couldn't sell it to the investment banker and the mortgage broker was out of work. The whole financial system froze and all people in play become bankrupt.
The 2008 financial crisis was a very important event in the world’s history, greed playing a key role in this. Millions of people were left unemployed and more than 12 trillion US dollars was lost in America - ‘the cost of the crisis’.
‘BRICS’ is a grouping acronym that refers to the countries of Brazil, Russia, India, China and South Africa - also known as the association of five emerging economies. This association was originally referred to as ‘BRIC’, after the addition of South Africa in 2011 it changed to ‘BRICS’. All five countries are part of G-20. The G-20 is an international forum for the governments and central bank governors from 20 major economies. They hold annual meetings which are more commonly referred to as summit. The first summit was held in Russia and the latest in India.
People question the importance of BRICS without knowing they play a significant role in the world. BRICS represent 3 billion people, this number put into perspective is 40% of the world population. The five countries combined GDP is a staggering Amount of US$16.039 trillion, again which is 20% of the gross world product (GWP). GWP is the combined gross national product of all the countries in the world. They also have a sum of US$4 trillion in combined foreign reserves. Foreign reserves is money or other assess held by a central bank or other monetary authority so that it can pay if need be its liabilities.
What similarities do they have? Well all five countries are developing which gives them all the same ground. All these nations belong to the ‘south block’ also known as the developing block. The main objective is they act as one to promote legitimate international system, to give an example reform of the UN Security Council. They also act as ‘bridge’ between developed and developing countries. An example of this can be identified on the liberalisation of agricultural subsidies in developed countries. One of the main objective they all share is the assistance of developing countries in trade and climate change negotiations, as well as on issues related to the export of manufacturing products. They five emerging countries also establish the BRICS Business Council. On top of all this they challenge institutions like International Monetary Fund and the World Bank.
There are many disparities with BRICS. China is the dominating country in this association. China’s political aspiration creates challenges and increases difficulty to make consensus. To boost exports china manipulates its currency, devaluation of yuan. There are many concerns about the security issues as they maintain a low profile about it. With Brazil, India and South Africa being democratic countries while Russia and China are authoritarian regimes. Also Russia, Brazil and South Africa export different commodities, while China exports manufactured goods and India exports services.
BRICS face many challenges. After the US election 2016, currency depreciation affects these countries. Due to the Chinese stock exchange crash, which data showed that China’s economy was slowing down, which triggered fear among investors and prompted sell offs. Also in recent years there has been a slowdown in global demand which has slowed down the growth of the countries. Two main initiatives taken by the BRICS is the New Development Bank (NDB) and the BRICS currency reserve arrangement (CRA). The NDB is set up for infrastructure lending and focuses on renewable energy. It has made an initial set of project loans in all five members countries. The CRA consists of $100 billion, this for members to short term liquidity to ride over external crises.
To conclude BRICS play an important role in the economy. Like Jim O’Neill’s point that the world is changing. Experts believe they will be the world’s superpower by 2050.
Banking started out in Britain with the medieval goldsmiths: wealthy people needed a safe place to put the gold. So they stored it with goldsmiths who had safe vaults. Banking comes into place when the goldsmiths realised they could make loans to people who wanted to trade or get involved in big construction projects. The goldsmith worked safely on the basis of one key point - not everyone would need to get their gold back once. Which is what banks of the modern era rely heavily on. The idea of banking was really popular in Northern Italy's. By the late 1600s the idea of banking had been developed in Britain. Many were set up by quakers, who were ought to be trustworthy due to the high reputation in society. After a gradual process banks began to grow and acquired similar names we see today - Barclays,Lloyds etc. All these banks offer very similar services being distinguished only by offering different interest rates
Modern day banking has very slight change to what the goldsmiths did. Banks take deposits from people and businesses that wish to save and lend to people, businesses and lend to people, businesses and governments that wish to borrow. They operate on a large scale and rely on the fact that not all of their customers will want to withdraw their deposits at once. This process encourages economic growth and helps to raise standard of living.
There are three mains ways banks make money: by charging interest on money that they lend, by charging fees for services they provide and by trading financial instruments in the financial markets. To encourage people to keep their money in a bank, the bank will pay the deposited interest. The banks lend money to customers at a higher rate than they pay to depositors. This is where banks make most of their money. ‘Lending’ can take form in forms of overdraft, bank loans and mortgages. Interest rates can be fixed or variable depending on the terms on the agreement, a variable rate depend on financial crisis. Loans and mortgages aren't given out to everyone, credit checks and various other methods are used to check if the borrower is able to pay the money back. After the financial crisis in 2008, banks were warned to be more careful about lending that they used to be and to avoid lending to too many risky borrowers.
Banks also create an efficient payment system. The uses of cash has declined in recent years as the popularity of cards and cheques increased - to top off the use of ‘contactless’ really starting to change the way we pay for our purchases. With ATM’s, debit cards and online bank transfer, the situation changed completely from what it was. Many high street banks are starting to close due to an increase in people using online banking and telephone banking. Even though companies such as Apple and Google are changing the way we purchase things, the use of traditional cards will be continue to be widely used and the concept of ‘paper money’ will not disappear for some time.