Professor William Badley
1 May 2013
The US Economic Crisis
In the course of my research I have found that there are vastly different views of the crisis, its causes, and the solutions. The starting point of the financial crisis began when brokers from the firm J.P. Morgan met at the Boca Raton Resort in Florida to discuss ways that they could increase their capital and reduce risks. In so doing enabling them to avoid the federal laws that limited the amount of money they could invest by forcing them to keeping millions of dollars of funds in reserve in case the debts turned bad. They came up with the idea of inventing a device ...view middle of the document...
The housing market boomed when banks started granting loans on subprime mortgages (risky investments that previously would not have been supported, due to the high risk of defaulting borrowers.) This allowed people who would previously have been turned down, to qualify for a 100% mortgage with no deposit. House prices became over inflated due to easy sales and an economic boom. This created a situation where once the interest rate increased; people could no longer afford the payments, and had a negative equity with homes that were worth less than what they owed. Homeowners, having no down payment on their homes or personal money tied up in their property had no qualms defaulting and walking away from their debts.
When Bear Stern was forced to declare bankruptcy due to the amounts of defaults, the President of the Federal Reserve, Ben Bernanke, opted to bail them out for 30 billion dollars. He was worried that this collapse would bring down the banking system. This started a domino effect that ended in the Reserve Bank issuing 180 billion dollars to bailout all the major banks. This resulted in a further government bill being passed called TARP- Troubled Asset Relief Program issuing a further 700 billion dollars. This was supposedly done for the good of the country and the system, and for this cash injection the government would take part ownership of the banks. The strange thing was that in handing out these huge amounts of cash the government put no limits on mortgages, bonuses, salaries or any new regulatory measures to control the banks. Instead, they issued “free cash” with no strings attached. At the same time, the government has been offering incentives to buyers to spend money and increase their debts in the belief that an increase in spending will boost the economy
The PBS presentation “Money, Power and Wall street” shows a retrospective view of how the crisis unfolded, told mainly by the investment bankers, government officials and economists. Although the presentation gives numerous data and details about the crash, it fails to explain convincingly how hundreds of economic experts around the globe plainly saw the immense profits and greed created by Credit default swops, yet all failed to understand or perceive that the immense wealth created had to come from somewhere. If they were reselling bad debts repeatedly, surely that was multiplying the risk and the inevitable...