Keep your promise! Act responsibly! (Lesson from Financial Crises)

Promise is about commitment. Financial Services are collection of promises. When you save your money in the bank, the bank promises that they will give you interest and will make the funds available whenever you need it. When you borrow money, you give your house/car/anything as collateral and you promise that you will pay back the loan sometimes in the future. When you buy stocks, the company promises to pay dividend (if any) to you, promise to give you company ownership. When you buy options, you buy a right (not obligation) to buy or to sell particular stocks in the future at a specified price (again it is a promise). When you buy an insurance coverage, you pay a certain amount of premium and the insurance company promise to provide certain amount of funds if something bad happen (fire accident, death, sickness, etc). And so on. Financial service is simply a promise.

When a promise is not honored, what is the value of the promise? Promise is valuable only when it is honored.

Basically, one of the roots of current financial problem is the lack of commitment to honor the promises. It was believed that the current financial crises was triggered by US house subprime mortgage back in 2007. Subprimers are borrowers with low credit ratings (hence higher level of risk is involved). Banks started to lend money to this class of borrowers, which then the fund was used to buy houses, cars, etc. Seeing the rising in house prices, free money are just out there. When you perceive that house prices will keep rising, you just feel that you become richer and richer by having more and more houses. Hence, demand for loan for house purchasing keep increasing. Banks were more than happy to lend money to them. They also believed that the collateral they hold was rising in value, besides the higher agreed interest rate. Hence, they did not worry about it. Until one day, when suddenly the price of the house start falling (bubble = demand is not supported by actual demand), the bubble burst. Excess supply takes the price down. Housing prices are falling, borrowers could not pay back the loan, declined in value houses are taken over by banks, banks start to have problem with their cashflows. A lot of banking products are insured. Insurance companies also have another financial services. Basically it was like domino effect. A promises to pay B, B promises to pay C, and so on. When A did not fulfill the promise, B could not fulfill the promise too, and so on. The current financial crises is systemic and highly epidemic.That was why government intervention is needed. Imagining Racoon City which was contaminated with T-Virus (in Resident Evil) and everyone is becoming a walking dead in the street, there must be someone who must come and stop the spread (Leon and Clara). Government is acting like Leon & Clara this time. It tried to come and inject cures (funds, bail-outs) to the walking dead banks. Just imagine if Leon and Clara did not come to the Racoon City, the virus will spread uncontrolled. There will be more walking deads (=sick financial institutions). Total destruction will be unavoidable. As you see, financial markets have played a major role and become too important for this era. Just imagine if more and more financial institutions collapsed, unemployment level will increase significantly, less credit available in the market (which leads to less investment), and lead to less growth, and the worst might come (global poverty). People were complaining why government used their money to help irresponsible banks. But if the government did not help them at the moment, the worse situation might prevail. Now another issue, why this sense of irresponsibility arises in this complicated and sophisticated market? It was the fruit of becoming too sophisticated. These days, it seems that people believe that when the risks are spread evenly, it is good and everything will be just fine. This might be true. Diversify!!! Diversify!!! That is what all investors said (if they really understand it). Do not put all your eggs in a basket. But now, there is another problem arises with it. Financial Players lost the sense of responsibility. They merely believed that 'it is well diversified, then it is fine', why should I take more responsibility of it? People became reckless. Financiers only cares about their commissions. Loans are approved easily, they feel happy (without considering the risks behind it - again it was diversified right?).

It was also due to greediness. People are greedy of materials. They do something out of their capabilities. They buy more houses than they actually need by borrowing money. And so on.

The current problem is a problem for all of us. Maybe some of you might not feel it. But considers few things below :
1. Government used your money to help institutions instead of improving public services.
2. Less money available for higher return investment.
3. Some governments devalue their currency or let it depreciate to boost export (which also implies that it will cost you more if you stay overseas).
4. Less employment opportunities.
5. Salary Cut = Lower spending power.
6. Increased in mental health problems (which lead to suicides).
7. All of those points above might reduces your level of happiness.
8. People becomes more self-centered (homo politicus).
9. Many individual dreams (starting a venture, going to school, buy a car) are halted, probably even shattered.
10. Etc...

A reason to keep your promise! Act responsibly!