Explain why there was a 'crisis of capitalism' in the decade leading up to 2012.
There was crisis of capitalism due to following reasons:
- The deregularisation of banking industry in US in 1999-2000:
The banks acted as insurance companies. The derivative market was made global and dealing in foreign exchange increased. This created parallel economies. The derivative market was termed as time bomb.
- High rate of interest of houses and collapse of US housing market:
As the house prices increased the interest also increased by the end of 2005. Due to this too many houses were built, the demand as well as prices also came down. As the lenders used to sell the houses if the borrower was unable to pay the loan but when the prices fell many borrowers defaulted and the lenders experienced huge losses.
- Leverage, short-selling and short-termism was more common. Leverage, in which the borrowed money is used to increase the assets to be sold to gain profit later on. It was a gamble and resulted in crisis.
- Short-selling was the way in which shares are bought and then sold in the hope that after selling the shares the prices would fall and then the shares are bought back. This resulted in investors pulled out the money.
- Short-termism, the method of financing long term loans by short term loans. This dried out banks and depositors were unable to withdraw their money
- Regulators and credit rating agencies failed to do their job. Failure to identify risky assets led to the crisis.
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