In order to get this to declare that Crowdfunding can actually prevent a future GFC, one must first understand what exactly happened within the last few GFC. The origin of what Australians call whilst the Global Financial Crisis (GFC) is based on the US housing market. The basics of any financial problem are once you peel it to its very core and simple. People buy things, that they cannot afford to fund, for a time the "make believe" world holds up. Then the music eventually stops bringing everything crashing down.
Spurred by low-interest rates and loose financial regulations lenders in the US started encouraging individuals to borrow and choose home. And what can be safer than buying a house? After all, it is the truly amazing American dream to own a home. House prices historically had generally never fallen. The populace keeps increasing, land stays the same, price of a property will always rise, and which was the typical theory. It did seem to put on up.
The way to obtain money for lending for a safe asset like a home just was boundless and the government was in on it. In order to promote the dream of home ownership, the US federal government essentially backed the house loan applications of men and women have been considered not worthy to buy and support a big home loan. Once the entire might and splendour of the state was behind these applications suddenly, these so-called "sub-prime" mortgages were rich pickings.
They offered strong interest rates, and were backed by a safe asset and a government guarantee. Most ratings agencies gave them great ratings. People who did not risk losing their clients whilst the financiers threatened to keep from utilizing their services. Interesting how that works, an analogy could be if your test scores in college were low you can threaten to avoid going to college thus reducing tuition fee intake for the college and threatening the professors pay Wefunder. The professor ends up giving everyone an A.
I wish I were this smart within my college.
What followed was even more fun. Bundlers started pooling together these mortgages and then chopping them into small units that could be traded and on sold to help financiers. And then people like AIG got on the game. They basically said if it is sufficient for the government, it is sufficient for us. They insured these contracts against a threat of failure. It was easy money and a big game of pass the parcel, the parcel here being the seemingly safe and always rising in value houses. They certainly were the now infamous sub prime mortgage-backed securities.
At one time things got so out of hand that folks could easily get a residence with no money down, defer paying mortgage for a few months and then sell-out and pocket the increased value of the home. In Economics 101 there is a saying, "There's no such thing as a totally free lunch" ;.This for individuals who were in on the game was as near getting a free lunch.
People with no possibility or hope to be ever in a position to repay a loan were getting loans to buy homes, of solution of the league. The great free market had concocted a method where bits of garbage were chopped, and then bundled together and repackaged and then sold to others who then on sold it to others. The parcel kept changing hands, the only question was when would someone open the whole thing up and find that behind all of this great packaging, all which was in there clearly was bits of rotten garbage.
Till then the carousel kept spinning.
But little by little the merry go-round was slowing. Mortgage payments were being missed by people who did not deserve to have the loan in the first place and the economy was slowing down. As more people started groing through the edge the weight of the bad contracts started becoming excessive for a number of the major Wall Street institutions. Lehman Brothers was the first Domino to fall.
The crash had begun.
It was 1929 all over again. Giants like Citibank, AIG were in the firing line. Each and every day brought new horror stories about how precisely seemingly solid institutions were hollowed out by over leverage. Eventually the Government stepped directly into stem the blood loss. The remainder is history. I was a lowly fin tech guy in Boston around this time doing work for Grantham Mayo Otterloo. Jeremy Grantham is a respected industry voice and steered our company quite well through the storm. But that which was evident in my experience was that an excessive amount of intermediation, a lot of middlemen had led to belittling risk.
Nobody cared that the parcel these were pushing was filled with garbage as long as they found a willing buyer. The customer consequently was only thinking about chopping it down and repackaging it and selling it to the next guy. Who consequently punted it to the next guy? Provided that you were not left carrying the parcel once the music stopped, you were fine. This is the fundamental flaw within our modern financial system. While free markets are great, a lot of middlemen are only thinking about pushing their product to the next guy without looking after the other party. If you are separated by a lot of layers from the risk, you tend to ignore it, but it generally does not go away.
Real Estate is a great asset, however, you need to find out exactly which property you are investing in. Not some amorphous bundle of Mortgage Backed Securities or REITs. Real Estate Equity Crowdfunding platforms have this huge advantage over other financial vehicles. People get to pick and choose the precise property they are investing in. All data is presented in a transparent manner. The danger can there be, but you realize exactly that which you are becoming into. And we cut fully out the middlemen, reducing the fees as well as letting you call the shots on where and how your hard earned money goes.
People make more informed decisions about their hard-earned money than brokers who're out to make a quick buck. The whole web that today's financial system spawns causes it to be impossible for the lay man to comprehend where his money is going and what risks he's exposed to. And the so-called safe guardians of his money, the fund managers, they receives a commission no matter what.