Introduction
The crisis of 2008-2009 constitutes a major turning point in the dynamics of the US and global economies at the beginning of the twenty-first century. The PBS (2009) film “Frontline: Inside the meltdown” explores this turbulent time, examining the key causes and effects at play, and the response of the US government. The film looks at the Bear Stearns incident, the collapse of Lehman Brothers, the liquidity crisis of the American International Group (AIG) insurance and finance corporation, and the resonant governmental actions in this context. Among the key figures of the “Frontline” are the Federal Reserve Chairman Ben Bernanke and the Treasure Secretary Henry Paulson, whose actions to a certain extent reflected the respective governmental stance in 2008-2009. The largest Wall Street crisis since the Great Depression, it eventually spread to a global scale causing painful and lasting economic damage and leaving a persistent aftertaste in the form of prevailing distrust in government and big institutions, specifically among the US public.
Analysis
The observations and comments presented in the film inspire the viewers to pose critical questions. Could the economic crisis have been avoided? What alternative strategies and behaviors of governmental and corporate actors could have been instrumental in handling the crisis? The film also sheds light on such thought-provoking topics as the influence of media on the stock market dynamics and stability of the financial system, or the significance of agile management and timely comprehensive risk assessment in the fields of economy and finance.
Recognizing the 2008-2009 crisis as a complex event that evolved from multiple sources of systemic risks and weakness in the US economy, some of which are discussed in the “Frontline”, this paper analyzes a few chosen points of interest. These include the effects of the undue assumptions of the financial institutions regarding their capacities for sustainable operations, incomprehensive risk assessment, and the overall insufficient supervision of the financial market. Additional insights include the role of media as one of the final triggers in the face of market meltdown, and the lasting effects of economic crisis, such as general fall in confidence in financial and government institutions.
Concepts and Theories Tied to the Movie’s Themes
In 2008, the housing bubble burst as a result of the reckless gambling on the housing mortgages on Wall Street. According to Duffie (2019), a better-supervised financial system with more perceptive risk assessment practices in place would have been more resilient to similar disturbances. However, in the context of the US economy of 2008-2009, the very core of the country’s financial system channeled the losses of the housing market onto the larger economic scale affecting the liquidity of major financial institutions and eventually freezing the credit market, manifesting the key elements of a financial crisis.
The immediate ensuing consequences of the housing market collapse included an accumulation of significant bank investments in the subprime mortgages, also known as “toxic assets”. The latter are loans issued to clients with poor credit histories that, due to an increased risk to the lender, entail higher interest rates and closing costs. William Dudley, the President of the New York Federal Reserve Bank, described the unreasonable assumption that the necessary amounts of short-term funding would be readily available for financial institutions at all times as one of the key weak points in the US economy during the crisis (Duffie, 2019). As the key sources for this short-term funding included clients’ prime brokerage accounts and the repurchase agreements, one of the banks that capitalized on bundling the home loans it issued and selling them as mortgage-related securities to investors was Bear Stearns. Another major risk factor for Bear Stearns included the bank’s involvement with credit default swaps – financial agreements where the seller undertakes to compensate the buyer in the case of a debt default or other credit event.
Bear Stearns quickly became vulnerable as rumors spread about the rapid decline of the bank’s cash reserves and the overall decrease of its liquidity, leading to one of its most important trading partners, Goldman Sachs, withdrawing from further cooperation. The key actors in the dissemination of this information were the media – CNBC, The New York Times, The Wall Street Journal, Vanity Fair, Planet Money. The extent to which the media influences the reputation and the very operations of financial and market institutions is profound – Schiffrin (2015) points to the scholarly debate regarding peculiarities of the financial and business press where the character of the chosen information and its presentation directly affect the audience’s perceptions. In the case of Bear Stearns, the media exposure and engagement has had a devastating impact on the level of public trust. Despite all attempts to refute the liquidity rumors and restore the company confidence, the value of the bank’s stock dropped drastically, and Bear Stearns appeared on the verge of bankruptcy.
The incident analyzed above constitutes an apt illustration to the general weaknesses of the UA financial system that allowed for the 2008-2009 crisis to occur. Considering its complex transactions and interconnectedness with many other actors on the market, Bearn Stearns constituted a key systemic element in the US economy. With a view to this, the Federal Reserve Bank of New York, as the leading actor in the US financial supervision and monetary policy, took the decision to bail out Bear Stearns to avoid the possible future systemic effects of its failure – the bank was heavily indebted to other corporations, and its inability to repay them was likely to cause domino effect causing even more problems and losses for the financial system as a whole.
Lessons Learned
The free-market capitalist system commands that markets generate efficient solutions, and businesses that collapse should be left to collapse. However, the scenario that played out for Bear Stearns, as well as the subsequent nationalization of Fannie Mae and Freddie Mac, the largest mortgage lenders in the world, and the unprecedented bailout of American International Group – the largest insurance company in the world – point to a weakness in the system. It might prove reasonable to have additional reassurance in place – for instance, regulations restricting the value of houses and the amount of leverage used to purchase them. In free market conditions, however, this would, present a challenge due to direct effect on the demand and supply of the housing market.
As to the critical implications of sensible risk assessment in the context of a free market economy, building on the analysis of the “Frontline”, they evidently trace back to the period that preceded the meltdown. This period is described as the “housing bubble”, in which the real estate prices increased significantly. It was the result of growing demand, financial speculations, excessive spending, and growth in mortgage lending against the background of overlooked and underestimated future implications for economy.
Conclusion
In conclusion, it is important to recognize the complexity of the effects of the financial crisis of 2008-2009 that went beyond the US economy and onto the global market. The role of media in the context of economy crisis is not to be overlooked – the press can act both as a critical trigger and as a channel for general knowledge, source of informed predictions, and potential solutions. In terms of predictions and solutions, an essential component of a functional and efficient economy includes proactive and ongoing risk assessment and agile approach to financial supervision. Despite its many painful and lasting effects, the financial crisis of 2008-2009 has been a critical lesson for the future of the global economy.
References
Duffie, D. (2019). Prone to fail: The pre-crisis financial system. The Journal of Economic Perspectives, 33(1), 81-106.
PBS. (2009). Frontline: Inside the meltdown. Web.
Schiffrin, A. (2015) The press and the financial crisis: A review of the literature. Sociology Compass 9(8), 639-653.