Causes of the 2008 Financial Meltdown
The documentary, “The Inside Job”, highlights some of the reasons why the 2008 financial meltdown happened. The film shows how bankers, regulators, and politicians all contributed to the crisis. One of the causes of the financial meltdown presented in the documentary is the high levels of lending that financial institutions in the country encouraged. The film starts with the reflection of Iceland’s worst monetary disaster where three of its largest banks borrowed more than the country’s GDP. This led to an increase in the country’s debt with very little money injected into the economy. The same was experienced in the US, albeit at a lower level. At the time, bankers and regulators were discussing the advantages and disadvantages of deregulation in the financial sector (Inside Job). The deregulation meant that the government would not have much power over the industry. In addition, it also meant that the state was not obligated to help the sector in the case of a crisis.
The second cause of the financial catastrophe stressed in the film is the interlinkage between financial institutions in the US. It is critical to note that the meltdown did not happen in a day but rather had been brewing for years due to the different strategies that the sector had used to become more profitable (Inside Job). For example, numerous banks had given out several mortgage contracts in 2006 in an attempt to get more clients. However, many of those given mortgages were unable to pay back their loans. This led to the foreclosure of a significant number of homes. This meant that the banks had a significant number of houses with no buyers. Since the financial institutions are linked, they were not able to borrow from each other to sustain the economy.
Thirdly, lack of accountability is also identified as one of the reasons why the crisis occurred (Inside Job). As mentioned previously, the meltdown began at least 2 years before the economy finally crashed. Apart from the banks, regulators and politicians were pushing for the deregulation of the sector. Additionally, banks were enticing their clients to take up different loan products in anticipation that the government would agree to the deregulation of the industry. However, when the economy started to crash in 2007, banks, politicandns, and regulators blamed each other and no one was accountable for their individual actions. This made the situation worse as all the parties that were involved did not start to put up mitigations early enough as they did not want to be accused of starting the crisis.
Irresponsible leadership also played a vital role in the 2007-2008 financial meltdown (Inside Job). Different types of leaders can be directly linked to the crisis. The first is political leadership that failed to fully regulate the sector two years before the crisis. As mentioned earlier, some politicians also pushed for the deregulation of the sector, which the public did not want. The second group is business leaders who managed the failed institutions such as Lehman, Bear Stearns, Freddie Mac, and Washington Mutual. These institutions are a few of many that closed and sent many employees home during the crisis. Interestingly, since they are all in the financial sector, they can be blamed for the meltdown as well.
Impact on the US Economy and Beyond
One of the impacts of the 2007-2008 financial crisis was job loss. Many employees of the companies that had to shut down were laid off or their income was reduced. The loss of jobs was severe and greatly increased the unemployment rate in the US. It is critical to point out that apart from the direct redundancy of job posts – for people working in the banks and other financial institutions, the lack of income also led to the massive loss of employment (indirectly) of other job groups. Casual laborers working in the buildings that were closed down became unemployed as well as people directly employed by the affected business leaders in other sectors due to loss of investments. The impact of the meltdown lasted for months after the crash, and thus, continued to contribute to unemployment in the US.
The documentary also shows that losing income for both the businesses and their staff led to lower tax collections by the government. This, coupled with the fact that the government had to inject cash into the economy to mitigate the impact of the crash led to a deficit in the national coffers (Inside Job). Indeed, after the crash, the economy had a slower growth rate (compared to before the crash) and this led to the reduction of income by the government. There was alsa o significant loss of assets in the fa orm of real estate due to the crisis. Mortgages and the value of homes dropped significantly. Despite this, a majority of Americans were rendered homeless as they could not afford the new housing prices due to unemployment. The stock market also suffered losses as both local and foreign investors lost billions of dollars. Foreign investors also pulled their remaining shares out of the stock market to shield themselves further.
According to the documentary, one of the global impacts of the 2007-2008 financial crisis in the US was the liquidity crisis (Inside Job). As stated previously, the meltdown forced investors to pull out of the stock market in order to have liquid cash so as to cushion themselves further from the crisis. This meant that many investors had cash but were unwilling to re-invest it in the US markets soon after the crash. It is also important to note that the money was not saved in the US banks, meaning these banks still did not have funds to support the US economy. The realization of the liquidity crisis which occurred due to the 2008 meltdown forced ally governments to inject money into the US economy to stabilize the meltdown. Currently, investors have returned to the US markets but caution is still observed as some of the impacts of the crisis are still being felt.
Secondly, the crisis affected the distribution of wealth by the world’s multinationals and individuals (Inside Job). Dollar billionaires were mainly people who had invested heavily in the US. After the crisis, however, people sought to diversify their portfolios by reaching out to markets in other regions. The money market funds were considered effective in creating wealth but people also took their money to new markets such as China. Again, this impacted negatively on the US economy as it did not have enough liquid cash flowing. One can argue that this impact caused the slow growth of the US economy after the meltdown.
References
Inside Job. Directed by Charles Ferguson, narrated by Matt Damon, Sony Pictures, 2010.