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THE FINANCIAL CRASH - WHO WAS TO BLAME?
There was once a widely held belief that people who were in debt, but who could not afford to pay back that debt, should be punished severely. At the end of the 19th century, those unable to repay what they owed were sent to 'debtors' prisons', locked away until they had worked off what they owed. To be in debt, in the eyes of society, was unacceptable. And yet, by the time we reached the first years of the 21st century, the idea that owning debt was something positive, even productive, had become commonplace in many parts of the world. So much so, that the global financial crash of 2008, in the eyes of many observers, was entirely inevitable.
At the end of the 20th century, the general financial climate was stable and healthy. Commercial banks and investment banks for a number of years had mostly functioned separately from one another. When people put their income or savings into an investment, it was often done without a great deal of risk, and they tended not to make an astonishing amount of money. But this was soon to change in a disastrous way. In the early 2000s, investment bankers devised an opportunity to make huge profits by buying mortgage loans from commercial banks and mortgage lenders. They then created 'packages' of these loans and sold them to individual investors.
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Huge numbers of investors brought their money to the table. They were given confidence by the fact that these packages had apparently been assessed and passed by the credit rating agencies. The main purpose of these organisations is to evaluate in a neutral way the amount of risk an individual or company might face in a potential investment. The fundamental problem was that these credit rating agencies were actually paid by the investment banks themselves, and the agencies were happy to provide the first class 'AAA' ratings which did so much to convince potential investors to part with their money. This is actually very far from being neutral.
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The investment banks, now free to offer home loans to anyone, regardless of how much that person earned or was even likely to earn, began offering mortgages to new borrowers: people who were in low-paid employment, and who had no savings at all. Huge levels of debt were provided to those who, within two or three years, would have no way of meeting the monthly repayments. At this point, insurance companies saw the potential for profit and greedily stepped in. Normally, these businesses offer protection against personal debt. However, in the early part of the 21st century, people suddenly became able to buy insurance for properties they did not even own. In other words, when a family could no longer afford the repayments on their home and had to leave, another person could claim a huge amount of money from the insurance company, simply because they had bought a policy for that particular property. Eventually, in
2008, the system did indeed collapse, on a devastating scale.
However, some researchers avoid placing the entire blame at the feet of either the banks, the insurance companies, or their governments and regulators. They maintain that, in the western
world, the attitude towards debt is careless. Chinese people, for example, often put 30% of their income into saving: this sensible attitude to money is commonly seen in Asian countries. In comparison, in Europe and the US, we rarely see anyone putting aside more than 5% of their earnings, which is extremely unwise.
Whatever the root causes of this highly devastating period in our history, the one thing that experts seem to agree on is that our shared financial wellbeing is unlikely to return to full health at any point soon. Perhaps it is even time to reconsider some 19th-century notions of how we are supposed to feel about debt.
1) What is the main idea of the first paragraph?
A. discussing the punishment for people in debt during the 19th century B. presenting the historical shift in attitudes towards debt
C. introducing the concept of debtors' prisons in the 19th century D. describing the societal perception of debt in the 21st century
2) According to the text, which statement is true about the situation before the 2000s?
A. Credit rating agencies were mostly funded by the government.
R Parennal loans wara not as popular as in the following narind
