In 2008, the global financial crisis took place. It had started with the financial meltdown in the US financial markets. It is considered that the crisis’s emergence is caused by multiple factors: the overall cyclic recurrence of the economy, the overload of the credit and the stock markets, the high commodity costs, etc. By fall 2008, the US government faced significant problems and had to make many tough decisions to save the economy. The contradictory consequences of these decisions indicate that the government wasn’t fully aware of the situation on the financial markets and neglected some issues that had led the economy to instability and collapse.
The meltdown started when one of the biggest US investment banks, the Bear Stearn, cracked down. The bank had multiple debts and was interconnected with the organizations worldwide. Thus, the bank’s bankruptcy could provoke a wave of collapses. One of the primary reasons for the Bear’s financial crack was instability in the subprime mortgage market, which was caused by the excess liquidity and the careless attitude towards the lenders.
The financial markets had a lack of transparency and regulation. The market was overabundant with lucrative financial products, which had a short lifespan. These factors led to the point where the stocks plunged.
To avoid the evolvement of the Bear Stearn difficult situation and to prevent “the dragging down the rest of the financial sector with it,” the federal officials made a tough decision to bail out the bank with 30 billion dollars from of Federal Reserve (Money, Power & Wall Street 2012). The bailout induced the emergence of the moral hazard, about which the Treasury Secretary, Hank Paulson, reminded Wall Street in his interviews. He considered that the Bear’s bailout might cause the other banks’ officials to avoid responsibility for the mistakes they had made.
The actions towards the financial problems resolving were decided by the government case by case. The organizations that faced the threads of the financial collapse were numerous. The Lehman Brothers bank was one of the most powerful financial institutions in the USA. Nevertheless, it wasn’t bailed out by the government. The Lehman Brothers bank went bankrupt, and it was the biggest bankruptcy case in US history. The consequence of this bankruptcy was the stock market freezing.
The “injections of capitals” were a frequently used solution during the crisis period (Breaking the bank 2009). The government invested the capital in the banks obtaining the ownership stakes or merging with the organization. For instance, the Bank of America-Merrill Merger. The merger prevented the Merrill bank from financial failure. All the bank’s affiliates and the vast number of employees were saved.
The 2008 financial meltdowns created a significant threat to the global economy. The officials, Hank Paulson, Ben Bernake, and Timothy Geithner, are those who were in charge of the decision making during this tough period. They regarded the meltdowns as the “systemic risk” to the economy (Inside the Meltdown 2009). The crisis indicated that the economy has a very subtle and complex structure, and it showed the interdependence of the financial institutions not only within the country but also beyond the borders. The importance of the government’s control over the situation on the stock markets was recognized by Barack Obama in his public speeches (Money, Power & Wall Street 2012). Since the crisis took place mainly because of the lack of transparency in the banks’ financial transactions and the absence of the government’s involvement in the financial markets, the further regulations of Wall Street are a necessity for the prevention of future economic disasters on the global scale.
References
Breaking the bank [Video file]. (2009).
Inside the Meltdown [Video file]. (2009).
Money, power & Wall Street [Video file]. (2012). Web.