The Savings & Loans Crisis Of The 1980s

These actions led to the fall in prices of securities. Loans were liquidated and borrowing from banks and other lenders became difficult. Interest rates would rise rapidly and sharply. This type of financial hardship led to the liquidation of bank credit. Over a long enough span, this liquidation would lead to money crises (Federal Reserve System 5th ed pp. 10-11).

The financial collapse is a very complex issue rooted in multiple causes, making it hard to put into a single sentence. However at it’s core the reason for the collapse is that many investors and banks tried to get rich by taking on assumptions about the housing market and taking on huge risks that they didn’t realize the full extent of.

After the tragic Stock Market Crash of 1933, America had plunged into a deep depression. Over 9,000 banks nationwide were closing their doors. After the Stock Market Crash, President Herbert Hoover was in office working ceaselessly to fix what was left of the economy. However, his effort did not seem to be enough. In the election of 1933, Franklin D. Roosevelt won by a landslide. Roosevelt stated, “This nation asks for action and action now,” and he did just that.(Barbour, 82) He saved countless families from poverty that was spreading like wildfire across the U.S. Federal Deposit Insurance Corporation (FDIC) is a portion of the New Deal formulated by Franklin D. Roosevelt to help save America from poverty caused by bank failures. “Roosevelt’s New Deal preserved the American democratic capitalist system.” (Schlesinger 137)

Some background: In the wake of the 1929 stock market crash and the subsequent Great Depression, Congress was concerned that commercial banking operations and the payments system were incurring

Before Congress created the Federal Reserve System, periodic financial panics had plagued the nation. These panics had contributed to many bank failures, business bankruptcies, and general economic downturns. A severe crisis in 1907 prompted

These losses necessitated governmental action in the financial markets. Companies such as Lehman Brothers and Bear Stearns lost all of their stock’s value and were forced into bankruptcy. This risk spread throughout the American banks, forcing the American government to step in and buy all of the securitized, troubled assets from the balance sheets of

The people began to lose faith on capitalism and FDR restored some of that faith with his fireside chats, telling American citizens, his plan and explain how banks work. FDR focused on the banks that closed and to reopen them. The Emergency Banking Act Mach 9, 1933 attempted to stabilize the banking system. Also, Federal Reserve Board was created to regulate banking and it also established the Federal Deposit Insurance Corporation (FDIC) which insurance the money of depositors up to 2500 and in 1935 permanent agency. Because of FDR’s charm and the use of radio was able to restore some faith in banks and banks started to open. In 1934 the Securities Exchange Act which created the Securities and Exchange Commission (SEC) which would regulate Wall Street prevents misuse and insider information. Also, banks began offering credit low interest rate tried to encourage businesses to borrow and invest which in turn would create jobs. The Reconstruction Finance Corporation (RFC) provided financial support to state and local government loans went to bank, railroads, and other business to improve the economy. The RFC was implemented by President Hoover and later adopted by President Roosevelt. Roosevelt was able to restore the banking system earning him

On March 9th 1933, Congress signed and passed the Roosevelt Emergency Banking Act. This bill called for the banks who would not be able to recover and sustain to be shut down. For the others, a massive facelift in the terms of reorganization. In Theodore Roosevelt’s very first fireside chat, he told the American people that it was safe to use the banks again. In fact, he encouraged the public to put their money back into the banks. By the end of March 1933, more than 75% of the banks were back up and running, which speaks volumes about this individual reforms success. This was great for the future of the country, which made so many Americans happy, but it did absolutely nothing for the thousands of families who had already had their entire life savings robbed from them.

The bank investment programs helped stabilize the banking system by alleviating some of the liquidity pressure on large financial institutions whose failure would have had devastating impacts on the entire economy. The initial authorized TARP budget of $700 billion was later reduced to $475 billion as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, referred to as the Dodd-Frank Act and authority to make new financial commitments under TARP ended in 2010 (Department of Treasury, n.d.).

The financial crisis did not happen in a day or two, it was triggered by a variety of events that happened.in years ago. In year 1998, The Glass-Steagall legislation was repealed, it is a legislation that separated investments and commercial banking activities in the financial sector. This act then allowed banks in the US to act in both the commercial and investment fields, which allowed them to participate in highly risky business. This is somehow responsible for the mortgage-backed derivatives, which is a main cause of the

The banking industry as a whole after the stock market crashed was going bankrupt due to not being able to carry the “bad debt” that was created from using customer money to buy stock. Because the banks were out of money, they were unable to cover customer withdrawals from their bank, causing many bank customers to lose all of their savings. With the uncertainty of the future of the banking industry, many people withdrew all of their savings, which caused more than 9,000 banks to close their doors and go out of business (Kelly). Due to the effects of the Great Depression, and the collapse of the banking industry, the government created regulations to prevent similar failure in the future. For Example, the SEC, (or Securities Exchange Commission), which regulates the sell and trade of stocks, bonds and other investments was created as a result of The Great Depression. The FDIC (or Federal Deposit Insurance Corporation), was created to insure bank accounts so that that the consumer would be protected if the bank were to go out of business (Kelly). The Great Depression's effect on the banking industry led to many useful changes to the banking industry and helped restore confidence in banks in the American people.

One of the primary factors that can be attributed as to have led the recent financial crisis is the financial deregulation allowing financial institutions a lot of freedom in the way they operated. The manifestation of this was seen in the form of:

What caused the financial crisis to happen? The origin of the crisis, the film argues, can be traced back to the 1980s, when the process of deregulation was eagerly implemented under the Reagan Era. Prior to the emergence of Reaganomics, the financial industry was tightly regulated following the Great Depression. Most of the banks were local and were prohibited from speculating customers’ deposits (brought by the Glass-Steagall Act), while the investment banks were modest and private. However, everything changed after 1980, when Ronald Reagan became president and the U.S economy entered a thirty-year phase of deregulation. Financial institutions, which included commercial and investment banks then embarked on the process of maximizing profit by making risky investments with the depositors’ money. By the end of the decade, saving and loans companies went bankrupt, causing tax payers to lose more than one hundred billion dollars. However, the government did not implement any reform and deregulation continued to take place under the Clinton

There has been a debate for years on what caused the Financial Crisis in 2008 and if there was one main cause, or a series of unfortunate events that led to the crisis. The crisis began when the market was no longer funding many financial entities. The Federal Reserve then lowered the federal funds rate from 5.25% to almost zero percent in December 2008. The Federal Government realized that this was not enough and decided to bail out Bear Stearns, which inhibited JP Morgan Chase to buy Bear Stearns. Unfortunately Bear Stearns was not the only financial entity that needed saving, Lehman Brothers needed help as well. Lehman Brothers was twice the size of Bear Stearns and the government could not bail them out. Lehman Brothers declared bankruptcy on September 15, 2008. Lehman Brothers bankruptcy caused the market tensions to become disastrous. The Fed then had to bail out American International Group the day after Lehman Brothers failed (Poole, 2010). Some blame poor policy making and others blame the government. The main causes of the financial crisis are the deregulation of banks and bank corruption.

One of the first indications of the late 2000 financial crisis that led to downward spiral known as the “Recession” was the subprime mortgages; known as the “mortgage mess”. A few years earlier the substantial boom of the housing market led to the uprising of mortgage loans. Because interest rates were low, investors took advantage of the low rates to buy homes that they could in return ‘flip’ (reselling) and homeowners bought homes that they typically wouldn’t have been able to afford. High interest rates usually keep people from borrowing money because it limits the amount available to use for an investment. But the creation of the subprime mortgage