Manual Boom and Bust Banking: The Causes and Cures of the Great Recession

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More subprime lenders began closing due to how the mortgage-backed securities were becoming rated as higher-risk. Without those options, housing demand began to take a dive, and prices fell drastically. And, within a short time, government-backed Fannie Mae and Freddie Mac suffered enormous losses due to their outstanding loans allocated for mortgage-backed securities which they sold to investors as prime bundles.

Boom and bust banking : the causes and cures of the great recession

The federal government took them over in , and the number of home foreclosures and repossessions increased drastically. The bust of the housing market, brought on by the subprime mortgage crisis, majorly impacted the Great Recession, as it decreased construction, consumer spending, financial institutions' operations, and investment and securities markets, according to reports. So, the subprime mortgage crisis both collapsed the housing market, and created mistrust between banks not wanting to lend to each other , which majorly impacted the banking crisis and the Great Recession overall.

To combat the drastic dip in investment and loans, the Fed reduced the national target interest rate to zero percent for the first time ever from around 5. Additionally, President George W. Bush introduced the Economic Stimulus Act , which, among many things, doled out tax rebates, reduced taxes, provided businesses with incentives to invest capital, and increased loan limits for those like Fannie Mae and Freddie Mac to encourage taking out loans and bolster the economy.

Another major facet of the Great Recession was the "too big to fail" modus operandi regarding the banking system. When major investment banking player Bear Stearns called it quits after losing big on its investments in subprime mortgages, as well as assets obtained through fellow banking giant JPMorgan Chase JPM - Get Report. Following in Stearns' unfortunate footsteps, Lehman Brothers declared bankruptcy just a few months later, which was reportedly the largest bankruptcy filing in U.

But, the conundrum many faced was - were these companies "too big to fail," or was the government propping up already-failing companies pointlessly? With so many massive forces contributing so heavily, the results were devastating. Banks couldn't afford to pay back their losses, homeowners could no longer afford their mortgage payments, and the stock market collapsed.

Banks, mortgage lenders and the government all made avoidable mistakes - and it was American people, many of whom lost their jobs and their homes, who suffered for it. Still, the Great Recession was considered to be over in The latest EU data suggests that the German economy heavily dependent on manufacturing exports, which were hit by the Chinese slow down, is showing signs of a pick up. As Marx points out, and as a simple look at the facts over the last century shows, not only are asset prices, and so stock markets not determined by the state of the real economy, they tend to move in opposite directions, because the main determinant of asset prices — as capitalised revenues — is the rate of interest.

The rate of interest reaches its lowest point during periods of stagnation. Its to prevent the collapse of those asset prices, following the period of stagnation, as global growth rose, and interest rates began to rise along with it, that central banks have been trying to inflate asset prices via QE, and states have tried to limit growth via austerity measures to prevent interest rates rising on the back of it.

These are not the conditions of a new next recession, or of long depression, but of potential growth being held back for political reasons to protect the paper wealth of the top 0. A financial crash is inevitable, but it is inevitable because the continued rise in employment, and on the back of it aggregate demand will force its way through those constraints, causing interest rates to rise.

He believes that since capitalism has experienced an upswing comparable to that of the Post World War 2 Boom.

How anyone can take him seriously with that in mind is beyond me. However, most people in Brazil is unable to read English. Would you allow me to translate your texts to Portuguese? Alexandre Thank you for your support. Yes, it would be very good if you can translate the texts into Portuguese as i know there are several followers of my blog who are Portuguese or Brazilian. I am honoured to be included with Paul Cockshott. Please send me notifications when you publish so I can pass it onto my facebook site. Yes, you are right, capitalism today is in a phase of Long Depression.

The cause?.

The Fed and the Great Recession

I believe that the cause of the Long Depression has its origins a political. See Rosa Luxemburg and her definitions of revolutionary impulse 1. Therefore, the praise and its growth becomes private, becomes smaller, less powerful than the state economy. Yes, you are right, capitalism is today in a phase of Long Depression.

There is a lot of empirical evidence on this issue. Joseph Stigliz y many others confirm it. If I believe that the cause of the Long Depression has its origins in: a Political causes.

The Great Depression: Crash Course US History #33

See Rosa Luxemburg and her definitions of revolutionary impulse. The last revolutionary impulse revolution of class struggle has: 1. And b Private monopolies and their effects. They attack and privatize all public companies.

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For this reason, the economy and its growth becomes private, becomes smaller, of less power than the state economy. You are commenting using your WordPress. The situation has prevented engagement on the issues and enabled flawed claims to prevail, starting with an insidious confusion about jargon and continuing with subtly misleading claims or assertions based on inappropriate assumptions. This confusion immediately raises imaginary tradeoffs between lending and equity capital, allowing lobbyists to get away with nonsensical claims e.

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In fact, with more equity banks are better able to make worthy loans at appropriate prices and do so more consistently. Admati and Hellwig list 31 distinct flawed claims made in the discussion and provide a brief debunking. Admati , a describes the actions and the incentives of the many enablers of this situation and thus the dangerous system, including individuals in the private sector, policy, media and academia. Banking scholars are among the enablers when they build models based on the presumption that markets create efficient outcomes while ignoring critical governance issues and market failures e.

Among the misleading narratives about financial crises is that they are akin to natural disasters and thus unpreventable. This narrative directs discussion to disaster preparation, akin to sending ambulances to the scene of an accident, rather than to prevention. Enablers also misleadingly use the past failure of regulation that resulted in the growth of the so-called shadow banking system as an argument against regulations. Worse, where simple and cost-effective regulations can help counter distorted incentives, regulators have instead devised extremely complex regulations some of which may not bring enough benefit to justify the costs but which allow the pretense of action.

Just as we should not allow pollution even if another nation foolishly tolerates it, subsidizing recklessness in banking to help banks succeed while endangering our citizens and others is bad policy. Moreover, financial institutions compete with other sectors in the economy, including for scarce human capital. Their ability to attract bright individuals whose talents might be better used elsewhere creates additional and often invisible market distortions and harm, likely exacerbating inequality.

Laws and regulations should be designed to reduce the conflict between individuals in the financial sector and what is good for society more broadly. Despite the efforts of some politicians, regulators, public-interest groups, commentators, and academics, new regulations do not fully reflect the lessons of the crisis. A financial system meant to allocate risk and resources efficiently instead continues to distort the economy and endanger the public. Confusion and the politics of banking regulations remain obstacles to change.

Politicians tend to see financial institutions as a source of funding for their favored causes, including political campaigns or other projects that appear to appeal to voters. Turning a blind eye to risk in banking is convenient. Implicit guarantees appear free, and policymakers who tolerate recklessness in banking rarely face political consequences. The public may be confused by the many flawed claims made by the industry and its many enablers and fall prey to short-sighted promises of cheap credit. In summary, despite a massive financial crisis and regulatory reform, the financial system remains too fragile.

Powerful individuals benefit from the fragility, and from the excessive complexity of the regulation, and they get away with maintaining it. Change will not come easily given the entrenched interests of those involved, and the inertia of the system. Appropriate public understanding of the root cause of the problems beyond awareness of some of the obvious symptoms, such as the persistence of too-big-to-fail institutions and many misconduct scandals, and of the true tradeoffs of different policy choices is essential.

The financial sector is an extreme example of deep and broad problems in the nexus of corporate governance and political economy.

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Of course, a truly debt averse Wells Fargo Bank could reduce its indebtedness by retaining its profits or selling new shares. These statements illustrate that despite their extreme indebtedness, banks do not experience the burdens and the market forces that affect other corporations. Under safe harbor provisions in the U. The authors assess these exposures to be larger than in just ahead of the financial crisis. See also Partnoy and Skeel and Jackson and Skeel , which also describe the similar bankruptcy treatment of derivatives.

See also Jost on system justification. Pfleiderer discusses the misuse of models in economics and finance. Admati, Anat R. Brunnermeier, Arnoud Boot, John H. Cochrane, Peter M.

Who to blame for the Great Recession? So many big names are in the frame | Business | The Guardian

DeMarzo, Eugene F. Hellwig, Hayne Leland, Stewart C.

Ross, William F.