Fault Lines summary

You’re probably well aware that your cell phone was made in China, your car in Japan and your shirt in India. Yet did you know that global manufacturing was another fault line in the 2008 financial crisis?

In the years before 2008, there existed a huge imbalance in the number of import and export nations, meaning countries that produce more or less than they consume, exporting or importing the difference. The problem at the time was that there were too many exporters.

Prior to the crisis, the world’s economies relied on the United States to stimulate growth, so U.S. citizens had to keep consuming and buying.

Of course to keep buying, they needed income from jobs, but at the time there weren’t any.

While one financial fault line is a potential threat, the convergence of many can cause a full-on crisis, as we experienced in 2008.

So what brought these fault lines together, to such disastrous effect?

The gears of the global economy were running smoothly before the crisis, and it seemed as if there was nothing to worry about.

If there was an issue, warning signs such as price changes would have popped up. If a financial product or service is risky and the probability of a loss is high, the price for that product should fall.

So aside from prices changes and computer models, what are the other alarm bells that should sound if the economy is drifting sideways?

Rating agencies are also tasked with assessing the risks of financial products. So why didn’t these agencies see the crash coming?

We all want a scapegoat for the crisis. Weren’t the greedy bankers to blame? Well, yes and no.

In a sense the crisis was the fault of the banks, because of the enormous investment risks bankers took. The crisis took place in the financial sector, after all.

Since 2008, very little has been done to eliminate the systemic problems that caused the crash in the first place. Everything is now “back to normal,” which unfortunately means a crisis could easily happen again!

The financial sector needs reforming. We shouldn’t forget, however, that a healthy financial sector is absolutely vital to a well-functioning economy. It allocates resources and stimulates growth.

You'll remember that all of this trouble started because median income in the United States wasn’t rising and job recovery was slow.

Politicians gave people cheap loans and subprime mortgages to appease them. What they didn’t do, however, was address the actual roots of the problem: the lack of education and social safety nets.