The new semester has me studying International Macroeconomics. Those who know me, understand how the study of Economics has captured me throughout this program.
We have been assigned to write a paper on the Global Credit Crisis of 2008/2009 or The Great Recession as it as been called. I will not take full credit for the paper as I worked with a great team, however; I will not mention thier names as I do not have thier permission. What I did want to share was our conclusions on who is to blame for the recession:
The Global Credit Crisis of 2008-2009 is the worst recession the U.S. has experienced since the Great Depression. There could be argument could made it was the worst global recession in history. Even with many of the leading indicators showing the crisis may be over and the economies of the world are beginning to recover, the effects of this recession will continue to be felt for many years. The important thing is to stay vigilant to ensure that actions do not lead to a double dip in the recession.
With such a wide spread collapse, the bigger problem would be if no lessons could be learned and applied to prevent a collapse of this magnitude from happening again. In order to determine the lessons which need to be learned, it is important to understand the causes of the collapse and where, if any, mistakes were made. The government eased the credit requirements to increase the opportunities for the citizens of the U.S. to achieve home ownership.
While this was politically popular, it proved not to be very fiscally responsible since one of the apparent outcomes would be riskier mortgage securities on the secondary market. The Fed became complacent and thought it could effectively control the ebb and flow of the business cycle through the prudent use of monetary policy. It can be argued it was not the failure of the government to regulate, but the “reliance on government regulation itself as a substitute for market-based banking virtues now minimized by regulation has brought us to this financial crisis. The resulting mentality (if it is not regulated, anything goes) has permeated the private markets”. (Holloway)
So, Wall Street, with its increasing greed, exploited institutions within the shadow banking industry by leveraging financial instruments beyond reasonable levels. In their zeal to create short term shareholder wealth, Wall Street looked only at the bottom line and was less concerned with sustainability or transparency.
The primary blame for this Global Credit Crisis may be viewed to rest on Congress, who under political pressure eased the regulations that gave Wall Street the tools to exploit shadow banking and the mortgage securitization. Although, Congress also applied similar pressure on the Fed in allowing shadow banking to operate, thinking the market would balance itself out. Each had a significant role in the credit crisis and each must share the blame. Had Congress, the Fed or Wall Street acted purely according to their given roles and resisted outside influence, this crisis might have been averted or at the very least minimized. It still holds true: what is popular is not always right and what is right is not always popular.
