The 2008 Financial Crisis: A Techie's View

The month of October this year was truly eventful especially for the world-wide financial sector. We all witnessed the collapse of several U.S. financial institutions and the panic selling in the stock markets all over the world.

But what really caused the financial crisis? Many said it was the sub-prime credit market in the U.S. Others said it was the legislation that allowed banks to package mortgages as securities that can be bought by investors all over the world. Main Street claimed it was the greed of Wall Street. Wall Street claimed it was the dishonesty of Main Street in declaring their financial capacity when securing bank loans. Whatever the cause may be, one thing is for sure: investors lost billions of dollars in a very short span of time.

From my point of view, all of these factors contributed to the crisis. Another factor that I believe played a key role in the dramatic market collapse is information technology. IT essentially caused the "flattening" and "widening" of the trading structure in financial markets especially stock markets. The flattening effect allowed people all over the world with access to Internet to easily trade without intermediaries or traditional brokers. This lead to unprecedented levels in buying and selling. As an analogy, the flattening allowed more people to go "in" and "out" of the door with ease.

The widening effect of IT enabled the trading of unprecedented volumes of shares in a very short span of time. Computers handle buy or sell orders with amazing speed and efficiency not possible with manual trading. As such, traders were able trade huge volumes in a very short span of time. As an analogy, the widening made the doors very big.

In a panic situation such as what happened, the flattening and widening of stock market trading allowed tremendous number of people to rush out of the very big doors in a very short span of time. It magnified panic selling as it became very efficient and quick to sell (without thinking) causing markets to tumble in a jiffy.

Of course, IT that was also one of the factors that made the stock markets to rise to record levels several months ago. In other words, information technology magnified both the greed and fear of human beings.