Causing The 2008 Crisis

In Frontline’s The Meltdown, the causes of the stock market crash of 2008 came into discussion. The topics regarding Bear Stearns, the Lehman Brothers’ and their collapse, and the huge bailout made in results to the market crash. There were great points being made on the mistakes Henry Paulson and Ben Bernanke did not view from their perspective, which in turns were the problems that made up the crash.

Thus, the New Deal was implemented in order to provide relief and recovery as well as reform the US economy. One of these economic reforms involved the sale of securities which were previously not regulated at the federal level leading to a number of abuses. In response, FDR signed the Securities Act of 1933 to regulate the offer and sale of securities. In addition, the supporters of the New Deal also criticized the banking industry for its lack of transparency and control which was one the contributing factors to the Great Depression. Therefore, as part of the New Deal, the Banking Act of 1933 was passed in order to limit commercial bank securities activities, restrict speculative bank activities, and promote a federal system of bank deposit insurance.

Many people today would consider the 2008, United States financial crisis a simple “malfunction” or “mistake”, but it was nothing close to that. Contrary to what many believe, renowned economists and financial advisors regarded the financial crisis of 2007 and 2008 to be the most devastating crisis since the Great Depression of the 1930’s. To make matters worse, the decline in the economy expanded nationwide, resulting in the recession of 2007 to 2009 (Brue). David Einhorn, CEO of GreenHorn Capital, even goes as far as to say "What strikes me the most about the recent credit market crisis is how fast the world is trying to go back to business as usual. In my view, the crisis wasn't an accident. We didn't get unlucky. The crisis came

During the 1930s, the most prominent reason for U.S. banking regulation was to prevent bank panics and more economic disaster like those that had been experienced during the Great Depression. Later deregulation and financial innovation in industrialized countries during the 1980s eroded banks monopoly power, thus weakening their banking systems and seeming to embody the fears of post-Depression policy makers who instituted regulation in the first place. Fear that individual bank failures could spread across international borders creates pressure to harmonize bank regulation worldwide. One advocate suggests that universal banking, at least for industrialized countries with internationally active banks, would “level the playing field” by eliminating competitive advantages created by government subsidies. Although this is a valid point, one of the major driving forces behind the globalization of the banking world is the ability of banks to take

The Glass-Steagall Act came into existence largely due to the stock market crash of 1929 and the Great Depression. The crash and its aftermath caused Americans to lose faith in the banking system. Glass-Steagall attempted to restore the public’s faith in banks by separating commercial banking from investment banking and providing insurance on bank deposits. The Act worked as intended but its effects slowly diminished over the next 67 years and deregulation in the banking industry culminated with the enactment of the Gramm-Leach-Bliley Act in 1999 by then President Bill Clinton.1 The GLBA gutted Glass-Steagall and ended restrictions on intermingling between commercial and investment banking.1 Many believe the GLBA was a major cause of the financial crisis that erupted in 2008.

Along with the greater profitability restrictions imposed on banks from the Dodd Frank comes the banks will for greater cost management, meaning job cuts. Already the Banks have begun laying employees off from burdening restrictions leading to this brutal method of retaining necessary capital needed for operations ("Wall Street Journal"). The bigger the bank, the greater resentment they have over this act. Their financial statements will have to retain a greater amount of compliance and transparency as well. Because of the large prominence of “shadow banking” and the concealed balance sheet elements that came along with this practice, the banks now are imposed with greater regulation to prevent these stealthy tactics of borrowing and investing. These restrictions, in my belief, will provide greater protection to the consumer but will also provoke institutions to begin innovating financial instruments to get around barriers, just as they did in the past with interstate banking and early consolidated services even before Glass-Steagalls act. The bankers oppose the act due to their cut in profits. Reduced outlets in revenue from specific revenue generating activities have been capped and larger expenses in order to comply with the new rules have also greatly cut profitability. The same notion is held with brokers. Because of the greater compliance costs served

By December 23, 1913, when President Woodrow Wilson signed the Federal Reserve Act into law, it stood as a classic example of compromise a decentralized central bank that balanced the competing intrigues of private banks and populist sentiment. Afore the incipient central bank could commence operations, the Reserve Bank Operating Committee, comprised of Treasury Secretary William McAdoo, Secretary of Agriculture David Houston, and Comptroller of the Currency John Skelton Williams, had the arduous task of building a working institution around the bare bones of the incipient law. In reaction to the Great Despondence, Congress passed the Banking Act of 1933, better kenned as the Glass-Steagall Act, calling for the disseverment of commercial and

By allowing banks to become “too big to fail”, the failure of one leads to massive repercussions for the entire economy. In a contrasting environment where many small institutions exist, the implosion of one bank will not have this far-reaching, catastrophic impact. In recent years, reforms have taken place that limit a company’s ability to be “too big to fail”. In the aftermath of the financial crisis of 2008, measures to revitalize the financial system included the Dodd-Frank Wall Street Reform and Consumer Protect Act of 2010, named after U.S Senator Christopher J. Dodd and U.S Representative Barney Frank. The Act aimed to increase regulation and transparency in an industry that had so clearly lacked them and minimize future risk in the

The Great Recession of 2008 was the most devastating recession since the Great Depression itself. To further investigate what caused this, we interviewed our mother Marianne Massinger. She has worked in the finance industry for many years now, and she was able to witness and experience the effects of the recession personally. Overall, the information found through our research on the Recession of 2008 closely lined up with the accounts given by our mother.

The Glass-Steagall Act of 1933 that defined the roles for commercial banks, investments banks and insurance firms was over ridden by the Gramm-Leach-Bliley Act (1999) which repealed the provisions that restricted affiliations in financial institutions. Hence one solution is to overcome the incentive problem and the conflict of interests that arise when financial institutions simultaneously undertake financial activities of varied nature.

Levin, Carl, and Tom Coburn. United States. United States Senate. Wall Street and the Financial Crisis: Anatomy of a Financial Collapse. Washington: Committee on Homeland Security and Governmental Affairs, 2010.

which enabled different types of companies operating in the U.S. financial services industry at that time to merge.[2]

During the 2008 Great Recession, the financial crisis happened because banks were able to create too much money, way too quickly, and they used it to push up house prices and speculate on financial markets. This was the biggest financial crisis since the Great Depression in the 1930s. The bank was giving out money to the people who couldn't pay it back. There were a lot of subprime loans to those people with poor credit history. Subprime mortgages were often sold to families who didn't even qualify for ordinary home loans. They would sell them to the people who couldn't even get loans and then turn around and sell them to the banks. The banks said that "anyone qualifies for loans". These banks often created a lot of fake inflation.

The finance industry is primarily a service industry and therefore is there to serve people. The power taken and given to this industry does not represent a democracy. In 1982, even though it goes against the Glass-Steagall Act of 1933 (passed after the Great Depression in order to control banks and prohibit commercial banks from using depositor’s savings to invest in speculative instruments), the Reagan administration enabled the deregulation of the American financial market.

In this essay, we are trying to look at the factors responsible for the global financial crisis in 2008-09 which started in US and later spread across the world. By now, a lot of studies have been done on the global financial crisis of 2008. We explain briefly the role of the financial engineering which leads to combination of various financial securities, the actual risk of which is not clearly assessed and hence leading to the financial crisis. There were also some serious lapses in regulation and failure of the rating agencies in assessing the risks assumed by the financial products which accentuated the crisis.