Thinking Money | Free Financial Advice and Tips

Alan Greenspan who had predicted the recent financial crisis believes the financial crisis occurs after a long period of prosperity. This is because people get comfortable and complacent and dare to take unwise risks. This he believes is typical of human nature.

There are usually triggers to financial crisis such as the trading in home credit to people with poor credit histories which caused the housing and financial bust in 2008.

Greenspan believes the US economy will recover and prosperity will once again return to America and Europe. There in lies the recipe for yet another financial crisis. Banks will again revel in the financial boom until it goes bust again.

Prosperity and risk

Usually, financial institutions should see the impending crisis and do something quickly to avoid the worse. But the joy of economic boom makes them forget and think that the triggers can be dealt with easily as soon as they rear their ugly heads. For instance, the banks were very much aware that they were taking a big risk in under-pricing credit and knew that at some point the financial system will correct itself of the anomaly.

The road to recovery and stability

Though recovery is happening gradually in the US and other countries, it will take much longer for some countries to come out. Britain is an example, because of her globally integrated economy, the short fall in exports and trade globally has hit her economy hardest.

To avoid a future crisis, investors and governments must check financial fraud.

Governments should constantly raise the capital requirements of banks. The regulation on capital requirements should ensure that banks have adequate funds to meet normal operations and be able to pay customers at all times.

Greenspan however warned that protectionism policies should be avoided as they have the potential to offset global trade.

Yet a financial crisis will occur

It is just human nature, unless human beings change, there will be more crises and each crisis will be different from the other.

On a more positive note, the next financial crisis is not expected soon, maybe in another century but if human beings learn from their mistakes it could take longer.