The Financial Crisis Of 2008

Before the advent of the Federal Deposit Insurance Corporation (FDIC) in 1933 and the general conception of government safety nets, the United States banking industry was quite different than it is today. Depositors assumed substantial default risk and even the slightest changes in consumer confidence could result in complete turmoil within the banking world. In addition, bank managers had almost complete discretion over operations. However, today the financial system is among the most heavily government- regulated sectors of the U.S. economy. This drastic change in public policy resulted directly from the industry’s numerous pre-regulatory failures and major disruptions that produced severe economic and social

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.

The financial crisis of 2007-2009 resulted from a variety of external factors and market incentives, in combination with the housing price bubble in the United States. When high levels of bank and consumer leverage appeared, rising consumption caused increasingly risky lending, shown in the laxity in the standard of securities ' screening and riskier mortgages. As a consequence, the high default rate of these risky subprime mortgages incurred the burst of the housing bubble and increased defaults. Finally, liquidity rapidly shrank in the United States, giving rise to the financial crisis which later spread worldwide (Thakor, 2015). However, in the beginning of the era in which this chain of events took place, deregulation was widely practiced, as the regulations and restrictions of the economic and business markets were regarded as barriers to further development (Orhangazi, 2014). Expanded deregulation primarily influenced the factors leading to the crisis. The aim of this paper is to discuss whether or not deregulation was the main underlying reason for the 2007/08 financial crisis. I will argue that deregulation was the underlying cause due to the fact that the most important origins of the crisis — the explosion of financial innovation, leverage, securitisation, shadow banking and human greed — were based on deregulation. My argument is presented in three stages. The first section examines deregulation policies which resulted in the expansion of financial innovation and

The Great Recession in 2008 led to a huge crisis in the United States economy. This recession almost led to the entire collapse of the United States economy due to the constant unstable changes in legislation, regulation, along with the changes in fiscal and monetary policies. Furthermore, many economists believe that the increase of excess monetary and government irresponsibility led to the overall crisis in the mid to late 2000’s. Some economists believe that the oversupply of monetary contributed to the 2008 crisis due to low interest rate targets that were substantially below the monetary requirement. In this paper I will discuss the effects of the changes in monetary and fiscal policies that altered the economy in 2008 as well as the current and desired gross domestic product for the future United States economy.

The financial crisis that happened during 2007-09 was considered the worst financial crisis in the world since the great depression in the 1930s. It leads to a series of banking failures and also prolonged recession, which have affected millions of Americans and paralyzed the whole financial system. Although it was happened a long time ago, the side effects are still having implications for the economy now. This has become an enormously common topic among economists, hence it plays an extremely important role in the economy. There are many questions that were asked about the financial crisis, one of the most common question that dragged attention was ’’How did the government (Federal Reserve) contributed to the financial crisis?’’

The Great Recession of 2008-9 was the deepest and longest capitalist economic slump since the Great Depression of 1929-32. The recent financial crisis is known as the “Great Recession” of 2008-9. Its downturn was sparked by the collapse of the US housing market. In 2006, the prices of home began to rise and the banks began to encourage potential homebuyers to take out larger loans. There were lower interest rates at the time, and this seemed like a good idea for most individuals who were searching for a new home. Then, in mid-2007, the interest rates began to rise. The values of the homes decreased and the amount of money a house was worth declined significantly. Many homeowners were stuck with large loans, increasingly high interest rates, and a decreased price of their home. Many homeowners went into foreclosure or were evicted. This eventually led to large financial institutions and banks to become bankrupt, which lead to an overall fall in the US economy. Stocks dropped, consumer spending declined significantly, and companies began to go out of business (Athanasiu, 43).

A recession is full-proof sign of declined activity within the economic environment. Many economists generally define the attributes of a recession are two consecutive quarters with declining GDP. Many factors contribute to an economy's fall into a recession, but the major cause argued is inflation. As individuals or even businesses try to cut costs and spending this causes GDP to decline, unemployment rate can rise due to less spending which can be one of the combined factors when an economy falls into a recession. Inflation is the general rise in prices of goods and services over a period of time. Inflation can happen for reasons such as higher energy and production costs and that includes governmental debt.

At the time after the stock market crash (1929), during the Great Depression, most of the people agreed that the main cause for the event was the “improper banking activity” which was mainly seen as the bank involvement in the stock market investment. Banks were taking high risks in hope for rewards, they were “accused of being too speculative in the pre-Depression era” (HEAKAL, 2010, pg.1). They were not only investing their assets, but they were also buying issues in order to resale them to the public. Nearly five thousand banks failed in the U.S. during the Great Depression. As a result of that most people wouldn’t trust the U.S. financial structure anymore. In order to rebuild the

Fiscal policy is the use of government revenue (taxes) and expenditure (spending) to influence the economy. (Weil, 2008) Fiscal policy is “used to stabilize the economy over the course of the business cycle.” (Fiscal policy, n.d.) Examples of both of these according to National fiscal policy response to the Great

The stock market is what one would know as a collective group of buyers/sellers that trade stocks, also known as shares on a stock exchange. These securities are listed on the exchange itself and trade freely each and every day. On the exchange, stocks move hands day in and day out. Companies are able to get their stock listed on the exchange at any time that they want. There are other stocks, too...known as OTC stocks or over the counter stocks that go through a specific dealer. Larger companies tend to have their stocks listed on exchanges all throughout the world. Participants in the market can be anyone from your grandma, to retail investors, day traders, institutional investors, and so forth. One notable exchange is the NYSE; also known as The New York Stock Exchange. Moving forward, a stock market crash is when a decline of stock prices takes place throughout the stock market that results in a catastrophic loss of wealth via paper. The crashes are driven strictly by panic 9 times out of 10 a crash takes place. As a crash is happening, panic occurs; the panic keeps evolving and ends up like the snowball effect before you know it. A crash occurs when economic events take place. These events are always bad news... The behavior of traders follows, which leads to a crash when panic ensues. Crashes normally occur of a seven day period and may extend even further. Crashes happen in bear markets as the market is already weak to begin with. Once traders see a drop in prices,

The Glass-Steagall Act of 1933 was a direct response to the Great Depression of the 1930s. The years before the Depression were marked by robust financial growth, led by an expansion of credit through the policies of the Federal Reserve and new financial innovation, such as investment trusts (Neal and White 2012). Though these trusts were similar to a savings bank, they differed in that trusts were not regulated in which securities they could invest in and had had little government supervision. The

The Glass-Steagall Act, which was implemented in 1933, was enacted in response to the abuses by the banks prior to the stock market crash of 1929. The law separated commercial banks and investment banks: the commercial banks would be allowed to take deposits and make loans and investment brokers were allowed to underwrite and sell securities. The law worked well for the most part from 1933-1999. Then in 1999, The Gramm-Leach-Bliley Act of 1999 allowed commercial and investment banks to merge. After GLB was passed, it did not take long for the deregulation to cause many banks and Wall Street to take advantage of the situation. The banks began to generate very risky and fraudulent loans and then bundled and sold them worldwide as solid mortgage backed securities on Wall Street. Inevitably, of course, these securities catostrophically changed our world economy for the worst. Subsequently, though, a silver lining emerged iin July of 2010, the Dodd-Frank regulatory reform bill was passed to reduce the chance of this happening again. Although the Dodd-Frank reform bill is a step in the right direction, the measure does not go far enough. Many believe that the only solution is to bring back Glass-Steagall.

The 1930s, the period of the Great Depression is perhaps the most unstable financial time in United States history. The decade where more than 40 percent of nation’s banks disappeared crippled the economy for years and caused the Senate to pass the Glass-Steagall Act (part of the U.S. Banking Act of 1933). The main purpose of the legislation was to separate commercial and investment banking, limiting commercial banks’ securities and activities within commercial banks and securities firms and to restore confidence in the U.S. banking system. For the next 30 or so years, there was a substantial government safety net and government played a huge role regulating the economy and maintaining the aggregate demand through fiscal and monetary policies. (Arthur MacEwan. “Inequality, Power, and Ideology: Understanding the Causes of the Current Economic Crisis.” Real World Macro, Economic Affairs Bureau, Inc. November 2012.)

The great recession of 2008 affected everyone around the world. The great Recession is considered the second worst economic crisis in American history, behind the Great Depression.

The investment banks, and subsequent stock brokerage firms, was regulated by the Security and Exchange Commission. The banking entities, in this portion of the financial sector, were used to dealing in high risk business that were structured on the business’ equity and debt capital, instead of the commercial banks’ deposits of customers. The activities in this sector of the financial system were underwriting stocks and bonds, insurance markets, the investments in subprime debt markets and mortgages.