In 2008, the world had a big financial crisis. It was a crisis in the global scale that affected practically every countries in the world. But why did it happen? What were the causes?
There are several possible explanations, but one of them is people’s desire to make more and more money to the point where they no longer thought rationally. This was apparent in the subprime mortgage crisis.
Rationally, subprime mortgage is very risky and shouldn’t be done in the first place. So why did people do it? Because they could no longer get the growth they needed from conventional mortgage. They needed to grow their money (and that’s how many executives are given incentive to do), but they could no longer do it in the conventional way. As a result, they chose to move to something that’s normally would be considered too risky to do.
On the other hand, people were creating increasingly complex financial instruments using complicated mathematical models. Many technical people who usually went to work in the technology field went instead to the Wall Street. These are the people who created the complex models and subsequently created complex financial instruments based on that.
Many people then traded these complex instruments without understanding how they actually worked (which is expected due to the complex nature of the instruments). Since they didn’t really understand it, they could not predict any potential problems let alone taking actions to solve them.
There are still other explanations of why the global financial crisis happened, but I hope what I described above can already give you an idea.