Key messages for avoiding another financial crisis like 2007

Key messages for avoiding another financial crisis like 2007

Experts say that, although the last financial crisis ended in June 2009, the economy is still recovering and many pundits fear that the world could be facing a double-dip recession. So, what lessons can we learn from the big crash of 10 years ago? Financial regulation may have increased but have the core issues been addressed?

What lessons can be learned?

When levels of debt increased and loans and credit were being handed out like sweets, house prices suddenly started going into reverse. This has been a recurring pattern during past financial crises through history and one that should certainly be identifiable in the future. 

A key error in mortgage lending that contributed to the crash was the assumption that house prices wouldn't fall. In truth, bubbles can burst without warning and there appears to be no way of avoiding this, but whether the 2007 bubble burst was foreseeable is a key question. In future, markets must have increased skill and awareness for spotting potential bubbles and impending crashes before they actually happen.

Also, financial regulation at the time of the 2007 crash was somewhat inadequate and failed to take an overview of the general health of overall financial systems. Now, financial institutions must have tighter standards and be able to offset against bad debt and assets losing value. 

Prevention strategies for the future

To prevent a future crash, the Federal Reserve needs to keep inflation under control while boosting employment. It remains to be seen whether those responsible for creating bubbles and ensuring financial recovery have learned their lessons. Possibly the best strategy could be simply avoiding investments that have enjoyed huge gains over short periods. According to the old adage "If something sounds too good to be true, it probably is"!

Date: 24 August 2017, 9:53 am
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