This is part of a blog series Can Blockchain Save Our Financial System?
This blog covers the trade integration around the world, the impact that 2008 crisis had on global trade and how blockchain can tackle the problems in a new crisis.
To read the previous blog post about how Regulators Can Use Blockchain to Avoid another Crisis, click here.
To learn about how Bloxable is building the most advanced debt platform using blockchain and smart contracts, visit us here.
Globalization and greater integration between world economies have significantly changed our financial systems. Economists no longer discuss national interests and objectives of a sovereign nation. Modern economics deals with the questions and problems affecting the world economy as a whole.
Perhaps one reason why most economists tend to look at the bigger picture now is because of what happened nine years ago.
A Trip down the Memory Lane
The financial crisis of 2008 played a major role in the shift of perspective from national to international. The crisis started due to risky lending practices in the U.S. real estate and mortgage industry. It spread to the Wall Street through collateral backed securities that defaulted on their payments.
As more and more securities turned into bad debts, the situation spiraled out of control. Within an year, it culminated in the collapse of Lehman Brothers, a 150 year old institution and one of most influential investment banks in the U.S.
But the situation didn’t end there. The collapse of Lehman Brothers was only the beginning of the financial crisis. Uncertainty in the markets led to a severe case of credit crunch as every bank started calling back on its outstanding loans.
When access to easy credit dried up in the markets, the demand for consumer goods and products was also affected. The U.S. economy would not be much if not for the shopping and spending habits that most of us take for granted. It is the world’s marketplace after all. Producers and sellers from all around the globe come to sell their goods to U.S. consumers without much thought for how interconnected our economies have really become.
When access to easy credit froze in the U.S., the demand for consumer products and services also took a significant hit. The Asian and European producers were suddenly left with mass produced goods with no buyers for them.
An Integrated World Economy
Imagine taking a loan of a million dollars to produce the most advanced and beautiful luxury line of cars, only to find out that no one wants to buy them.
Few people realize that while the economic situation was bad in the U.S. during 2008 crisis, things had actually become much worse around the world.
Factories were locked out as owners did not have the money to pay the wages for their workers. Banks were attacked, ATMs were looted and factories were set ablaze. Workers kidnapped their company CEOs and demanded for wages to be paid.
We saw the whole thing unfold in front of our eyes like a bad movie that just kept getting worse with each sequel.
Why the Governments Did not Intervene
Rather than step in to control and mitigate the emerging disaster, the regulators chose to stay out of the mix for two main reasons.
First, capitalism. Businesses in general and bankers in particular have always been critical of government intervention in private businesses. Even in 2008, private businesses that had not been affected by the crisis were against any sort of intervention.
Second, lack of knowledge. Even if the regulators had wanted to intervene sooner and keep the situation from getting worse, they simply did not know what was going on or how to solve the problem without making things worse until it was too late.
How Blockchain Can Tackle the Problems in a New Crisis
Blockchain can solve both the problems that largely kept regulators out of the markets in 2008.
First, the platform would allow the regulators access that they need to monitor the stability of the financial system. This would help them set policies which regulate business practices that pose a risk to the markets.
Furthermore, blockchain networks are built and run by a distributed network. They are not under the control of a centralized authority, like the government, which would help keep the free market supporters happy.
A blockchain platform can be accessed online by users from anywhere around the world. The world economies are connected to one another. Producers from one part of the world are affected by economic downturn on the opposite side of the globe. It only makes sense to build the next financial system on a platform that lets the whole world connect to it equally.
To read the next blog post in our series, about Blockchain and the Power of Simplicity, click here.
