In the GFC, the financial system locked up because banks stopped lending to each other, which is otherwise a primary activity in a working financial system.
They stopped because the collapse of Bear Sterns and Lehman Brothers made them realize that anyone could be next and they all had massive counterparty risk with each other. Why lend to someone who could be bankrupt literally the next day?
They all had taken on massive leverage, collateralized with mortgage-backed securities the ratings agencies said were high quality. But those MBO's weren't and began defaulting en-masse, correlated in ways both the ratings agencies and the banks either didn't understand or willfully ignored.
If central banks and governments hadn't stepped in to provide emergency liquidity support, interbank loans would have defaulted en-masse and the entire system gone bankrupt and collapsed. That's what it looks like when a financial system breaks - it literally stops working, activity ceases, like a core dump or blue screen of death.
Natural volatility happens all the time even when the financial system is not broken or breaking. It's just the price discovery process in action, where different buyers and sellers with different views on the future value of the things are trying to find the best deal. Price shocks can be part of it, abrupt movements in price due to some event, but as long as the underlying mechanics of the system continue working smoothly, it's not an example of the system breaking.
Maybe the banks should upgrade to trustless systems then? On the otherhand they just should face that they trusted the wrong parties and go bankrupt otherwise the incentive system gets rigged (thats where we ended up nowadays)
Yeah, the alternative was for the Feds to let them fail, then take them into receivership similar to the S&L crisis back in the 80s. But after decades of dismantling Glass Steagal and consolidating into megabanks, they had enough political power this time to orchestrate a bailout.
I'm not sure any technology can solve the fundamental problem, but the post-Great Depression regulatory regime did for decades until it was dismantled in the 80s and 90s. It's no surprise that less than a decade after Graham-Leach-Bliley dismantled the last bits of Glass-Steagal in 1999, that we get another financial crisis similar to the Great Depression. Glass-Steagal mostly worked, and served to decentralize the banking/investment banking/insurance industry.
They stopped because the collapse of Bear Sterns and Lehman Brothers made them realize that anyone could be next and they all had massive counterparty risk with each other. Why lend to someone who could be bankrupt literally the next day?
They all had taken on massive leverage, collateralized with mortgage-backed securities the ratings agencies said were high quality. But those MBO's weren't and began defaulting en-masse, correlated in ways both the ratings agencies and the banks either didn't understand or willfully ignored.
If central banks and governments hadn't stepped in to provide emergency liquidity support, interbank loans would have defaulted en-masse and the entire system gone bankrupt and collapsed. That's what it looks like when a financial system breaks - it literally stops working, activity ceases, like a core dump or blue screen of death.
Natural volatility happens all the time even when the financial system is not broken or breaking. It's just the price discovery process in action, where different buyers and sellers with different views on the future value of the things are trying to find the best deal. Price shocks can be part of it, abrupt movements in price due to some event, but as long as the underlying mechanics of the system continue working smoothly, it's not an example of the system breaking.