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The financial crisis as a tsunami: from the real estate bubble to the wave
// By Martin Theyer

Although the media and politicians are very busy telling us something different, the financial crises do not come as a surprise. And we can arm ourselves against them.

Financial crisis: why it is emerging

The crisis of 2008 did not start with the real estate bubble in the USA, as is widely believed. Its origin is much, much further back, its destructive power is much greater than imaginable and previously assumed. Hardly anyone talks about that. I do it. On the occasion of my seven years of research on my book “Lost Trust - The Tsunami Model of the Financial Crisis”, I dealt intensively with a question that has never left me since: What really triggered this crisis?

My tsunami model is based on the fact that there must be a trigger that started this wave. A tsunami. Tsunami means “wave in the port. The term was coined by Japanese fishermen who returned from fishing and found everything in their port completely destroyed. Even though they hadn't seen or felt for a while on the open sea.

A small event causes the entire economy to collapse

Similar to a sea or earthquake, which can set a wave under the sea surface for the time being unseen, a small, locally limited event in a globally networked financial world can trigger far-reaching consequences up to breakdowns of whole economic systems.

And that's exactly what happened. Now I had understood how a financial crisis arises in principle. However, the trigger was not one step closer. I only knew one thing: Somewhere, something had happened that had caused this wave.

From the Fall of the Wall to the Financial Crisis

The wave had then spread underground for a long time, at first small, then expanding. Until, yes, until we could no longer overlook her because she was already overrunning us and causing a mess in the financial markets.

So I had grabbed and did not let go. After long and intensive research in the USA, London and Switzerland I came close to the core The same force that brought the Berlin Wall down, triggered the most severe financial crisis of our century!

Reaganomics

It is called Reagonomics. To be more precise, the neo-liberal economic course of the Reagan era and the belief in the market's self-sufficient market forces, The Reagan era forced the Soviet Union to its knees by the tremendous contest.

The communist system of planned economy was ultimately subject to the capitalist system of the free market economy and had to be defeated by 1989. This was the way to the reunification of Germany and thus to the fall of the Berlin Wall!

Ronald Reagan is guilty!

Recalculated on the financial market, this means that the officials of the Reagan era and their successors, led by Alan Greenspan, were firmly convinced that the dismantling of controls and barriers would not only stimulate the economy.

They also believed much more that this would lead to a fair distribution of capital and resources in a society. Ronald Reagan was a supporter of Neo-market liberalism, mentally supported by Nobel laureate Milton Friedman with his laissez-fair principle.

Lack of regulation of the capital markets

How horrendously wrong this assumption was and to what catastrophic consequences it led, turned out much later. Unknowingly, the Reagan era triggered so long ago a seaquake whose waves today threaten to tip the existing financial world off its hinges and which still keeps us breathless with its full destructive power.

Alan Greenspan, incidentally, admitted at a hearing in the Committee of the Parliament 2010 that it was a mistake not to regulate the capital markets more strongly! A late insight from which hopefully for the future was learned.

Because my tsunami model says that a possibly unnoticed event can often only cause a financial crisis over several countries or even continents years later, similar to how a tsunami is triggered by an earthquake in the sea. And how does it continue?

How is the impact force of the shaft?

In my first contribution, we have identified the neo-liberal economic course of the Reagan era as the original trigger, and the belief in the market's self-sufficient forces.

How is it from the moment of the release to this mighty, powerful wave, how does it spread? How does she achieve all her destructive power? There are essentially these four elements that contribute to the development of this tsunami-like financial crisis:

Too high speed due to global networking

In the early 60s, Stanley Milgram developed a theory. He hypothesized that everyone in the world is connected to everyone through six contacts. The theory entered social research as the “small world phenomenon”. In a world where everyone is already connected to everyone via a social network, this phenomenon applies even more to the financial world.

Instead of people, machines trade with each other there and are networked around the clock - 7 days a week, 24 hours a day. As a result of this strong networking, innovations in the financial sector can spread much faster than regulators ever have the opportunity to intervene. This fact very quickly leads to catastrophic aberrations.

Risky financial innovations

Innovation is closely linked to finance. By developing options, risks could be better hedged, for example. The development of credit default swaps has allowed bank limits to be extended.

The downside of all these innovative developments was that it opened the door for speculators. Similar to a pyramid game, a few very rich and many investors were very poor. Not otherwise, Warren Buffet described these instruments as weapons of mass destruction. These financial innovations finally found their way into the financial sector and caused enormous damage.

Greed is a vice

This is a driving force that is all too human. The immeasurable pursuit of wealth and power. In my book I describe how geniality (the human side of innovation) coupled with greed could unfold to a tremendous destructive force.

I had the opportunity in personal interviews, with people such as John Meriwether or Andy Krieger - both of which will be discussed later - to shed light on this dark side of finance.

The butterfly effect

That small causes can have great effects, Edward discovered. N. Lorenz in his modeling of the states in the earth's atmosphere for the purpose of long-term weather forecasts. This effect, also known as the butterfly effect, plays an important role in our financial systems today and explains, among other things, why bubbles can increase rapidly over the years by positive feedback.

A new, innovative business model or product can quickly spread through permanent adaptation and positive feedback. The risks and implications underlying the business model are often overlooked at the outset. In the course of time, however, they are clearly visible and enlarge, until finally they can hardly be managed. It is thus the initial underestimation of the consequences of a financial innovation, which later becomes a problem.

The builder of the financial crisis

As my research has shown, all four elements play an important role in the creation of a tsunami and are thus the builders of today's financial crisis. The prerequisite for this is the global networking of the trading systems, as well as the inexperienced practice of soliciting entire teams in the financial world and thus simply copying successful products and business models, regardless of the associated risks.

By means of financial innovations, one is usually one step ahead of the existing set of rules and can thus bring risky financial products to the people. In addition, the human weakness of overconfidence, coupled with the pursuit of even more wealth, plays a crucial role. Together, they ensure that the wave picks up more and more speed.