The Financial Meltdown Crisis : Luis A. Santiago Gaetan

On October 3, 2008 President George W. Bush signed the Emergency Economic Stabilization Act of 2008, otherwise known as the “bailout.” The Purpose of this act was defined as to, “Provide authority for the Federal Government to purchase and insure certain types of trouble assets for the purpose of providing stability to and preventing disruption in the economy and financial system and protecting taxpayers, to amend the Internal Revenue Code of 1986 to provide incentives for energy production and conservation, to extend certain expiring provisions, to provide individual income tax relief, and for other purposes” (Emergency Economic Stabilization Act). In my paper I will explain and show the relationship between the Emergency Economic Stabilization Act of 2008 and subprime lending, the collapse of the housing market, bundled mortgage securities, liquidity, and the Government 's efforts to bailout the nation 's banks.

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

The Great Recession inflicted abundant harm in the U.S. and global economy; 8.7 million jobs vanished (Center on Budget), 9.3 million Americans lost their homes (Kusisto), and the U.S. GDP fell below what the economy was capable to produce (Center on Budget). The financial crisis was unforeseen by millions and few predicted that the market would enter a recession. Due to the impact that the recession had, several studies have been conducted in order to determine what caused the recession and if it could have been prevented. Government intervention played a key role in the crisis by providing the bailout money that saved those “Too Big to Fail” institutions. Due to the amount of money invested in the bailout and the damage that the financial crisis had on the U.S. population, “Too Big to Fail Banks”, and financial regulation are two of the biggest focuses of the presidential candidates. Politicians might assure voters that change will occur, but is it to late for change to be efficient, are the financial institutions making the same mistakes that led to the financial crisis?

“The Fed did not bailout Bear at taxpayer expense, but enabled – as it is mandated – the financial markets to continue to function. History will call the Fed’s action the right move at the right time”, says Jeremy Siegel, Ph.D. The Bear Stearns Company began a financial meltdown in July 2007. By March 2008, it was ready to file Chapter 11 bankruptcy. Some people believe that the Federal Reserve should not have stepped in to bailout Bear Stearns because it was rewarding reckless business behavior and Bear should have been left to file bankruptcy. The deal of Bear Stearns was not a government bailout; it was rather a loan to preserve jobs, homes, savings, the economy, the shareholders of Bear, and the financial

History has shown us again, and again that when power is left unchecked it becomes corrupt and out of control, that is the iron law of oligarchy. In the US we saw this happen recently in the 2008 economic meltdown. The banks and corporations should never have been aloud to become "to big to fail," and once they did grow to a point when they were there should have been more government oversight to make sure things did not get out of hand. After the great depression laws were put in place to try to prevent something like that from ever happening again, but we undid those restrictions and ended up in a place eerily similar to somewhere we had been before. In this paper I will cover a brief history of the great depression, and show how the situation in 2008 was all too similar. I will also discuss and analyze the factors that brought us to the tipping point in our most recent economic scare. And finally I will explain why the actions taken by the FED were necessary and kept us from an even more

Swagel, Phillip. " Legal, Political, And Institutional Constraints On The Financial Crisis Policy Response†." Journal Of Economic Perspectives 29.2 (2015): 107-122. America: History and Life with Full Text. Web. 8 April.

In order to better the financial crisis, financial experts must first understand where the problem originated. In Too Big to Save, Robert Pozen develops principles for evaluating the government bailout efforts on a financial crisis. Pozen explains why the taxpayers will take most of the fall if the banks fail and we go into a recession. He confirms that financial officials will use prefer stocks compared to common stocks because they wanted to not nationalize the banks and to keep capitalism. Pozen presents an idea on how the United States financial regulation should be structured in the future. Since there are different proposals and perspectives, everyone will not agree on every proposal but this shows how we can evaluate our economy and how it should

The collapse of Lehman Brothers, a sprawling global bank, in September 2008 almost brought down the world’s financial system. Considered by many economists to have been the worst financial crisis since the Great depression of the 1930s. Economist Peter Morici coined the term the “The Great Recession” to describe the period. While the causes are still being debated, many ramifications are clear and include the failure of major corporations, large declines in asset values (some estimates put the drop in the trillions of dollars range), substantial government intervention across the globe, and a significant decline in economic activity. Both regulatory and market based solutions have been proposed or executed to attempt to combat the causes and effects of the crisis.

During the spring of 2008, rumors were circulating that the investment bank Bear Stearns would fail due to their massive investments in subprime mortgages, or “toxic assets.” These rumors were able to decline the companyʻs stock from $171 to $57 dollars a share, and bankruptcy was imminent. Ben Bernanke, the chairman of the Federal Reserve, realized that Bear Stearns could not be allowed to go bankrupt because they were deeply connected to many other firms, which would result in major economic failure. In response to the crisis, Bernanke lent money to JP Morgan, which then lent the money to Bear Stearns, as the Federal Reserve could not directly lend money to Bear Stearns as it is an unregulated investment bank. After this process, Henry Paulson, the Treasury Secretary, relied on the principle of moral hazard and notified the other banks that

The banking crisis of the late 2000s, often called the Great Recession, is labelled by many economists as the worst financial crisis since the Great Depression. Its effect on the markets around the world can still be felt. Many countries suffered a drop in GDP, small or even negative growth, bankrupting businesses and rise in unemployment. The welfare cost that society had to paid lead to an obvious question: ‘Who’s to blame?’ The fingers are pointed to the United States of America, as it is obvious that this is where the crisis began, but who exactly is responsible? Many people believe that the banks are the only ones that are guilty, but this is just not true. The crisis was really a systematic failure, in which many problems in the

“Many people still attribute the financial crisis of 2008 to greed, Wall Street, and free-market capitalism, even though the real-cause has yet to be acknowledged, let alone curbed or removed was government intervention in markets” (www.forbes.com). This included the Federal Reserve’s disruptive manipulations of interest rates, plus massive subsidies and regulations in housing, banking, and mortgages. For years government policy promoted reckless financial practices and then made things worse by bailing out the worst miscreants. Policy priority and favoritism went to those most in need of homes they could not afford and in need of loans they could not repay. This act seems noble, but in reality it was not. Many families were destroyed and homeless

During the largest recession the United States has seen since the great depression, the Treasury Department sprung into action to stave off another depression. Within a short period of time after the housing bubble burst, financial institutions started to fail. Credit and liquidity virtually vanished within days. The government was forced to react quickly to thwart a complete financial collapse. An estimate from the public interest group Better Markets has calculated the cost of the recession close to $12.8 trillion (Puzzanghera, 2012). This number is criticized since it includes losses in economic output, GDP, and bail-outs, while home equity losses and consumer net wealth are not. This figure does give a good idea of the magnitude of the Treasury Department’s actions. A multitude of industries, and companies received direct financial aid. The government identified key economic areas where policies were needed, and provided credit and liquidity for growth in those areas. The quick response of the Treasury Department helped in reducing the negative effects of the financial crisis. The three economic theories that I identified in this financial crisis consist of classical economics, Keynesian economics, and aggregate market (AS-AD) analysis. There was also a fear of monetarism which has not come to fruition at this time.

Most people, when asked, would easily refer to the Great Depression as the most significant financial crisis to hit the U.S. economy. Even though in 2008, a financial crisis occurred that spread from the U.S. to capital markets and countries around the world. The lack of knowledge about this catastrophe is mainly due to the fact that there is no clear cause behind the crisis. The blame has been placed on many different causes, but there is no clear consensus on one definite reason for everyone to point their fingers. Many books have been written with different perspectives of the financial crisis of 2008, the purpose of this assignment was to choose one and summarize its view of the crisis. I chose to read and evaluate The Big Short: Inside the Doomsday Machine written by financial journalist Michael Lewis.

America’s most resent crisis was the global financial crisis that started in 2008. It began with the bankruptcy of Lehman Brothers on September 14, 2008 and it spread like a flood through financial markets. At first the U.S banking sector had a great fall in liquidity, with this contraction in commercial lending banks could not pay their expenses. Around the world stock markets have fallen, large financial institutions have collapsed or been bought out, and governments in even the wealthiest nations have had to come up with rescue packages to bail out their financial systems. This crisis was further compounded because the majority of the banking industry in the united states was is managed by four banks. These banks are referred to as the “Big Four” them being: Bank of America, Welles Fargo, CitiGroup and JPMorgan Chase. These four banks managed 39% of the entire banking market in the U.S., because they manage such a large amount they have been deemed “Too big to fail”. The 2008 global financial crisis is essentially three interrelated financial crises; subprime lending crisis, housing crisis and the contraction of commercial lending within the banking industry.

In the years since the 2008/2009 financial crisis, mistrust of the banking and financing industry remains high (Erman, 2013). This provides a unique challenge across the financial sector, including the relevant interior industries of investment banking and venture capital. Once the market crashed and the mechanics behind it came to light, a large portion of the American populace dramatically shifted their opinions in regards to the financial sector. This sentiment came to a head two years after the collapse with the creation of the Occupy Wall Street movement (Erman, 2013). While not the sole cause, pressure from the American public played a part in the increased regulation that the financial sector sees today including the Dodd Frank Act. A large part of this negative backlash was due to an inherent misunderstanding of the inner workings of the financial system (Erman, 2013). However, a lack financial knowledge did not mean the backlash was any less successful.