The Credit Crunch

Issue 64 January 2010

What caused the Greatest Economic Crisis in History?  

A year after the biggest financial crisis the world has ever faced, Dubai’s recent debt default is a reminder that the aftershocks still haven’t passed. Talha Ghannam investigates cause behind the greatest economic crash in history.

Unlike previous crises, the premise upon which the economy stands has been shaken with every institution and country affected either directly or indirectly. The cause; a financial system built upon risk, interest and greed, driving people to make the  decisions on investments driven by self gain in the short run. 

Over the last few decades, the world financial system has developed a series of complex financial tools; derivatives, CDIs (Credit Default Swaps) and short selling to name a few. The aim: to minimise investment risk, allow for easier trading and bring greater profits to investors. However, these have also had an adverse side effect, building a market of “speculation”, relying on the prices of shares rather than the quality of the companies that run them.

This has led to many “bubbles” over the last century as people became blinded by rising prices and failed to see the falling demand for the good. This occurred most famously in the Great Depression of the 1930s, but has repeated many times since then such as the Asian Financial crisis in 1998 and the “dot-com” bubble in 2000. These are described as “boom and bust” periods in the economy, something politicians and financier have long tried to eliminate. 

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