Balance sheet and 2008 Financial Crisis - How does balance sheet mismanagement cause the financial crisis?



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Hi sir,

Mismanaging of balance sheet results in financial crisis right.
Then How to manage balance sheet? since we don't know what happens in future.

Thank you!

1 Answer(s)


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Ramu,

Not all financial crisis are caused due to balance sheet mismanagement. The current one is.

Financial analysts regularly predict the future - but most of the assumptions in such predictive models are based on historical data. Historical data said that real estate prices could never crash. But it happened in 2007.

The current crisis could have been prevented, if the market regulator in the US - Securities and Exchange Commission and FDIC - took a more active role in clearing what kind of customers should get loans and how banks should categorize such risk. In the absence of such regulation, the banks optimized for short term profitability which lead to this recession.

Hope this was helpful.