Aishwardeep Kaur Mann

AISHWARDEEP KAUR MANN A Closer Look at the 2008 Financial Meltdown Before the Financial Crisis hit, there were the boom years. Government regulations and interest rates were at an all-time low to encourage spending. Finance companies competed to pump up their mortgage business. Extremely complex loans were created and certain terms were even hidden from borrowers. These dodgy mortgages were then systematically sold to the least sophisticated buyers. The complexity of the situation intensifies as one discovers that these mortgages were never to stay on the finance companies’ books but rather bundled together with other loans and moved to Wall Street. These loans were then packaged up into new financial products which were just stacks of IOUs that were bought and sold to all parts of the world with no regulations. There was a fee charged at every transaction which further inflated the value of these securities. If you were breathing, you could get a loan. This lead to subprime lending in the US housing market which ended up being financed by Wall Street. At one point, everyone was making money. There was a sense of optimism in the boom years and everyone felt invincible. Iceland started privatizing its banks, Dubai went on a real estate development spree, and London bankers were at the top of their financial game, trading without much regulation. I imagine the financial system prior to the 2008 crisis as one big jenga tower. You pull a piece out, put it on top and the tower definitely gets higher, but also gets less stable. The tower finally crashed in 2008. France’s BNP Paribas was the first to question the actual value of the securities they were holding. Lack of confidence caused investors to quickly sell their securities and this made British Northern Rock the first bank to crumble. Soon after, American bank Bear Stearns and the infamous, Lehman Brothers went bankrupt. Hank Paulson (Treasury Secretary) didn’t want the government to bailout Lehman Brothers that was $613 billion in debt as he believed that it wasn’t right to put taxpayer money on the line. Hank Paulson was criticized for letting Lehman Brothers fail. I personally think that he shouldn’t have done that. He should have arranged for a government bailout because at that time of uncertainty, someone needed to restore the investors’ faith. When Lehman Brothers failed, banks realized that no one was safe and they blocked all financing channels. There were all these securities in the market and no one to buy them. I understand that saving it would have made Wall Street even smugger but it was exactly what was needed at that moment. Paulson should have looked for another time to discipline Wall Street. However, considering the amount of stress he was under adding on to his impulsive nature, he didn’t see that far into the future; which is still not an excuse to put millions of lives jeopardy. The saddest thing that this crisis brought about was the amount of people displaced from their homes. Even though the meltdown couldn’t have been avoided, I believe its impact on everyday people could have been avoided, had the US government not sold out to Wall Street. After the Great Depression, to ensure that people don’t go hungry and homeless again, President Franklin Roosevelt introduced the Glass-Steagall Act. Its purpose was to separate commercial and investment banks. This meant that Wall Street could melt to the ground but the people would not lose their money. It lead to one of the golden ages of US economy. They won a World War, put a man on the moon and put a computer in everyone’s lap. In 1980, President Ronald Reagan was elected and the age of deregulation began and finally in 1999, President Bill Clinton signed the repeal of Glass-Steagall Act. Banks immediately started merging and Wall Street bankers finally had access to all the money the commercial banks were holding. They went to town with all the spending which is also a contributing factor towards the boom years and ultimately the crisis. Had Glass-Steagall not been repealed, the US wouldn’t have had 1 million home foreclosures 3 months after the meltdown. Even if it had reached to a point where people were being displaced, the government would have then used the money to help the people rather that bail Wall Street out because theoretically, Wall Street wouldn’t have had much significance. It is clear that the meltdown was solely due to the greed of many people working together in perfect harmony. However, the US government should have taken precautionary steps in ensuring the safety of the taxpayer money by regulating and monitoring the activities of Wall Street closely. The Federal Reserve and the Securities and Exchange Commission (SEC) were pretty much asleep during the boom years. It’s almost as if the Federal Reserve and SEC assumed that Wall Street was being run by monks. They’re called wolves for a reason. One wouldn’t expect much from the then Federal Reserve chairman Alan Greenspan as he was the one who initially started talks to repeal GlassSteagall and made sure he got his way in the end. It’s evident which side he’s on. In a nutshell, there are already a lot of statements and suggestions floating around on how the US should have dealt with the situation. However, let us learn from this painful experience and from now itself, start planning on how to counterattack the inevitable financial crisis that may very well be on its way. To summarize, I would like to quote John Maynard Keynes, “In the long run we are all dead”.