The Causes of the Economic Financial Crisis of 2008 - Coursework Example

ECON In looking at the financial crisis of 2008-9, which started in the US and then spread out to affect the UK and other regions globally, one can make many cases for blame. Some blame the mortgage industry; others point towards Wall Street; still others blame the US Federal Reserve and their policies. However, a case can also be made that it was the lack of regulation of the banking sector that led to the financial crisis of 2008-9. Regulation today, both in the US and UK, is dedicated towards preventing such an occurrence in the future, and in many cases, this regulation is based on increasing transparency and accountability in the banking sector. In other words, today, the causes of the economic crisis are being examined closely, and governments worldwide are working towards averting future disasters, by analyzing exactly what went wrong. There were many reasons for the financial disaster of 2008-09, and a lack of proper regulation may have been one of them. In looking at the original causes of the crisis, one has to look not just at the banking industry, but also its relationship as an industry to housing and mortgage concerns, especially in the US, but also in the UK. The banking system has had its critics, but current regulation in the US under Obama and UK under Brown, has also made significant progress in averting a continuance of worldwide chaos, by increasing regulation and legislative power. The mortgage industry is still currently affecting the consumer and banks in complicated ways, and was one of the main scapegoats of the 2008 financial crisis and recession. In the US, president Barack Obama focused less on blame, and more on recovery, when he saved AIG and other companies, along with several major banks, from disaster. There was a lot of media coverage about it and there was at times the atmosphere of panic, with economists have over-valued the impact of the mortgage industry and also seeing this sector through a sort of blinder effect, due to its proximity to financial sectors. The same situation played out in the UK under Brown. As one source states, “Shock waves from the collapse of the subprime mortgage market have been shuddering through segments of the economy for months. But this month, with the announcement of as many as 12,000 layoffs at the nation’s largest home mortgage lender, an unemployment report that showed net job losses for the first time in four years, and some economists are predicting a recession” (Larsen, 2007). From a consumer perspective, the recession meant less spending, higher inflation rates, and a more difficult loan situation, as well as a loss of trust. Generally, from a banking perspective that takes the UK into account as well as the US, the situation also means a difficult loan situation (especially for small businesses), often leads to freezes in hiring and pay raises, and results in less income for the bank in question. A recession is denoted by six months’ continuous drop in GDP, which definitely happened in 2007-08 in the US (it was later in the UK), sparking the crisis: the impact of the banking industry in these terms can be seen to be relative, and the future holds the answers to whether or not new policy was able to wake the country form the recession. “Mortgage brokers, acting only as middle men, determined who got loans, then passed on the responsibility for those loans on to others in the form of mortgage backed assets (after taking a fee for themselves originating the loan). Exotic and risky mortgages became commonplace and the brokers who approved these loans absolved themselves of responsibility by packaging these bad mortgages with other mortgages and reselling them as “investments” (Larsen, 2007). However, the impact on the consumer may be over-valued. The mortgage industry currently also affects other zones of enterprise other than the consumer, such as financial intermediaries including commercial banks. Looking at the US and UK in particular, one must also consider the formation and repeal of the Glass-Steagall Act as a major factor in banking and the international crisis of 2008-9. This act, when it was passed in the early 20th century, “forced commercial and investment banks to separate. Commercial banks were not allowed to underwrite the sales of stocks and bonds, while investment banks could not take in deposits from customers” (Glass, 2010). This act remained in place for most of the 20th century, but conspicuously, after it was repealed in 1999 due to the Financial Services Modernisation Act (Gramm, Leach and Bliley), and totally dismantled, the drive towards deregulation was increased. In the US, similar circumstances were felt when the SEC seemed to be more and more a bureaucracy without any ability to enforce its own mandates, due to political pressure to deregulate markets. This dismanlting and de-toothing of the Glass Steagall Act and the SEC, respectively, led to the creation on and environment in which excessive risk became the normal mode of operation. Corporate and consumer debt, which is still mounting today, is another issue that many people blame the financial crisis of 2008-09 on. Many wonder when thinking about the US or UK national debt as well, which can be added to these fields or categories of debt, “Who pays for it? (In the case of the US,) The U.S. government does, by issuing IOUs, which is to say government bonds. At 5% interest rate, we, the taxpayers, have to pay every year $ 150 billion in interest to mostly foreign bondholders. The continuous increase in foreign debt may force the Federal Reserve Bank to keep increasing interest rates in order to entice foreign borrowers to buy bonds in order to finance the deficit” (Baumann, 2007). Many advocate doing away with mortgage interest payments and state and local tax deductions. These changes would automatically affect many economic systems and there may be a period of change and instability in the system while the changes are taking effect. Many people believe that ultimately the situation created by a new, more regulated banking system would stimulate the economy much more than the current system, and would also create more economic opportunities. Especially for consumers, though, the recession just seems to drag on and on. Although some point towards the new system’s success, others argue that the situation created by a new system, designed to lessen some of the effects and panic of the impact of corporate and consumer debt, would undermine the entire economic system and cause irreversible changes that could even lead to the extreme case of economic collapse. Of course, people also said this about the various bailouts. “Hard times—even a deep recession—can be an opportunity to win the loyalty of more customers, increase productivity, and strengthen market position. retail executives can respond to a downturn in their business and emerge from it even stronger than before” (Understanding, 2010). Understanding the causes of the recession from an employee perspective is important, because, “Though recessions differ in their causes, depth, and duration, its possible to anticipate the way consumers will act by understanding their behavior and motivation in previous recessions and analyzing current trends.” (Five, 2004). Analyzing these trends can be very important, not just from a consumer angle, but also from the angle of business management. In terms of what the US and UK should do about the situation, there are potential changes in macroeconomic behavior that might result from the imposition of a new overall system that broadens the tax base, lowers tax rates, and does away with both deregulation and state and local tax deductions. These changes would automatically affect many economic systems and there may be a period of change and instability in the system while the changes are taking effect. In terms of economic effects, no one knows for sure what will happen in the future, because most of the exercises that people take in risk avoidance are hypothetical and based on what might happen if the current system changes. This allows sources a lot of leeway in terms of how they can present this economic future under a new plan in terms of costs and opportunities. Some sources are hopeful about the macroeconomic status of the US and UK economy, and other sources see still more bad times on the horizon. The consumer is in a position of caveat emptor when it comes to the media in cases like these, and will likely follow what they believe to be the most accurate portrayal. In any case, government bureaucracy is notoriously slow to move, and it is hoped in the US and UK that the current Obama and Brown administrations can do something about the problem in a way that does not just reflect a short term solution, but rather, a permanent fix. “The concept of buying now and paying later was quickly adopted and by 1929, 60% of all cars and 80% of all radios were bought on installment credit. By 1929, 80% of Americans had no savings at all. Between 1925 and 1929 the total amount of outstanding installment credit increased from $1.38 billion to over $3 billion” (Shepherd, 2003). However, it is fairly safe to say that people have learned from the mistakes of this time period. At the very least, one would hope that the proximity of this event to the present, and its popularity in the public imagination, would save it from being repeated, at least for the time being. REFERENCE Baumann, H (2007). Why trade deficit matters. InTech. Coy, P (2008). The Fed may have more cutting to do. Businessweek. Larsen, M (2007). As the mortgage industry tumbles, employers feel effects. Workforce. Shepherd, Jim (2003). 1929 Stock Market Crash and Great Depression. The Shepherd Investment Strategist. http://www.jasmts.com/shepherd.php?page=depression&popup=1. Glass-Steagall Act (2010)/ http://www.guardian.co.uk/business/2010/jan/28/glass-steagall-act-glossary Financial causes and effects (2009). http://cashmoneylife.com/2008/09/29/economic-financial-crisis-2008-causes/ Obama is having the best first year (2009). http://www.slate.com/id/2236708/ Up and Down Wall St (2008). Barron’s. http://hbr.org/2009/04/five-rules-for-retailing-in-a-recession/ar/1 http://hbr.org/product/understanding-the-post-recession-consumer/an/R0907P-PDF- Read More