The Basics of the ‘Financial Tsunami’

Abstract

The US subprime crisis was rooted in a combination of financial deregulation and monetary policy oversight amid two decades of financial liberalisation in the 1980s and 1990s. Financial deregulation backfired and was manifest in twenty years of risky practices in lending and borrowing, securitisation of home loans and regulatory oversight. The bursting of the US housing bubble triggered the subprime crisis and spread it across the world. Securitisation on the back of loose regulations allowed banks to broadly distribute risks to investors, including banks, individuals, financial firms and hedge funds, who eventually suffered significant losses when mortgage payment defaults soared.