The global economy has experienced numerous financial shocks, but some have easily slipped out of everyone’s mind, and they have just as many lessons to offer. One such event has been the Savings and Loan Crisis from the 1980s which was a banking crisis in the 80s showing the banks’ risky lending, the lack of oversight and an increasing amount of debt. Although the event occurred decades ago, many economists believe that today’s financial landscape bears a resemblance to the one in the past.
Risky Lending
This crisis only intensified, with banks approving loans “at the discretion of the bank,” with little risk mitigation. The “easy money” made it easy to borrow and so the system became unnatural and fragile, and burst in one way or another.
Cheap Money
With low interest rates, aggressive investments and speculations were encouraged. Despite those conditions, there were similar situations during the past several years that raised property and stock prices beyond expectations.
Rising Debt
Imported into the business world and households was a lot of debt as people assumed growth was perpetual. Debt has been one of the foremost worries regarding the economies of today.
Weak Oversight
The lack of regulations came back to haunt financial institutions which took larger risks. Is today’s model good enough to stop something like this happening again is an issue that continues to be discussed.
Property Bubble
The real estate boom rose very quickly and then fell, resulting in massive losses for the lender and borrower as well. In a number of areas, similar concerns are prevalent in the housing market today.
Investor Confidence
In markets, sometimes it’s more about hope than anything else. As soon as people lose faith in the sale, they lose faith quickly in other areas, and the stresses hit the economy quickly.
Government Rescue
The authorities responded to the problems with billions of dollars to stabilize collapsing institutions. Government measures in times of economic crisis have also been adopted by modern governments.
Hidden Losses
Numerous financial issues stayed hidden until financial institutions began going downhill. Even complex investments can pose risk that is only revealed in crisis situations.
Public Impact
Most families suffered the impacts by losing their jobs, curbing their savings and stifling growth. Incidents of a financial crisis are unlikely to remain restricted to banks.
Lessons Ignored
History has proved that over-optimism, credit, and lax rules can lead to hazardous situations. The forgotten crisis is a reminder that a few things about human behaviour like financial misdeeds, remain unchanged over time and are surprisingly relevant to the economy of today.
