The financial crisis that shook the US financial system 14 years ago made people wonder how the monitoring systems failed to detect it in time. The crash revealed failings of the rating agencies, government departments and big banks. Mortgages are again dominating the news. The housing prices are skyrocketing and the interest rates are quite high. It is time to ask what caused the 2008 recession and if better detection systems are in place to monitor the markets. More importantly, can the latest fintech technologies like blockchain prevent such a crisis?
Bahaa Abdul Hussien lists out the causes for the 2008 crash based on his real time experience. The reasons for this crash were both human and technical deficiencies. Trusted rating agencies failed to do their job. They provided a shield that prevented the failings to become known. These institutions wanted to maintain their market share, gain higher profits, and keep their financial backers from knowing the truth. The ratings were artificially inflated, making the inquiry committee claim how these agencies became the enabler of the financial crisis.
A major factor behind this crash was the ineffective underlying technology. It was incapable of handling the securitization structures. Due to this, the faults of the system did not come to the fore. It prevented sub-prime mortgages from moving to the foreclosure stage. Instead, defaulting mortgages remained in limbo but valid through legal contracts. The true condition of the debt market was not known until the total collapse.
Using Blockchain Technology to Prevent Such a Crisis
Many regulatory mechanisms have been put in place to prevent hiding of such financial irregularities. However, the market continues to depend on the old technologies, making it vulnerable to the same risks that led to the 2008 market crash. The transparent risk assessment feature is still missing from the system. The monitoring systems to issue warnings about the upcoming threats are still not reliable.
Why Use Blockchain for the Mortgage Industry?
Bahaa Abdul Hussein puts forward the point that the main innovation of this technology lies in its smart contracts – the transparent code bits that cannot be altered. A market system that uses smart contracts is superior to the existing monitoring technologies. The secure contracts not only allow transparent financial transactions but also offer faster data processing. Financial institutions can no longer hide the reality. Even when a top rating agency gives AAA rating to a bond, investors can go through the underlying components and evaluate the bond’s real value.
Before blockchain can be used to improve the security of the mortgage industry, it is important to improve the blockchain infrastructure itself. At present, multiple blockchains operate in their own ways. It is important to first have a single interoperable blockchain system that offers higher efficiency and security.
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