It has been a decade since the first signs of the financial crisis hit world markets. What does it tell us about today’s politics?by Jay Elwes / August 10, 2017 / Leave a comment
In the summer of 2007, several bank-run hedge funds trading in mortgage-backed securities announced to the startled financial world that they had gone bust. It turned out that the mortgages that backed up those securities weren’t worth what people thought.
The initial result was panic, as financiers confronted the unsettling possibility that other firms might also be holding rubbish, and because nobody could tell who was in trouble, lending dried up—after all, who wants to lend money if you don’t know whether you’re going to get it back again? This shut down the channels of cash that the banks and other financial institutions needed for their daily operations.
Banks couldn’t borrow. They hadn’t gone bust, but were instead being choked by a sudden drying up of liquidity. Liquidity—that odd word was suddenly everywhere. A way of thinking about it is to imagine a cab, licensed, fuelled and ready to go. The driver has money in the bank, so is not broke. But at the last moment the cabbie realises there’s no loose change in the tin under the seat. Cabbies can’t do business without those small amounts of on-hand cash to settle up after each transaction. So the cabbie is stuck because there’s no liquidity. It was the same with the banks.