Wednesday 1 October 2008

Credit Crunch root causes in 2008



Model by Howard Smith. There are many theories about what caused the financial crisis of 2008. Here is one. Globalization and the connected world has led to intense competition and transparent markets, making it hard to make money via conventional means. Thus, esoteric business models and financial instruments are created. A focus on these, as well as service models and knowledge work far from the source of real value/work, lead to inflated virtual value bubbles. That's fine while confidence is high, but it hides systemic weaknesses in liquidity. But when the chips are down and a segment of the market collapses, the weakness of liquidity is clearly revealed, leading to a loss of confidence and a credit crunch.

The consequences could be a shift of economic power to those developing economies to whom real work has been "outsourced" by those companies in the developed economies that considered this step necessary in order to compete.

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