While the collapse of the financial institution can be the worst tragedy to any nations, committing the taxpayer’s money to rescue corporatism and financial markets at a time when the country is experiencing and economic slump can also be very tragic. However, in such circumstances, it becomes difficult for any government to make prudent decision. Considering the fact that the 2008/2009 economic slump was unavoidable because it was widespread and long lasting from the euro zones to America, the spillover majorly affected the Asian countries that happened to be Americas best trade partners. While the epicene of the financial crisis was in amerce due to widespread failures of the major institutions, it is interesting to note that the failure in financial regulation, and the dramatic breakdown in corporate governance and poor policies were the main causes of the unstable economic situation in the country (Hennessey, et al, 2010, pp. 22-24),
The precedence and consequences of the crisis
From the beginning of 2005, the credit bubble started to develop in the US, followed by the same scenery in the UK, and the entire euro region. However, in 2008, the credit bubble busted and the housing or real estate bubble began. While, this was inappropriately reacted to as the people reasonable for managing such crisis were ill prepared, it was such a time that everything could be forecasted and the economic climate in the country as at 2007 indicates that the economy of the country was highly unstable. While there were a number of risks that could have been avoided or better still mitigated, it was due to the overall reluctance to make appropriate decision and implemented strategic economic policies to save the country from such an economic slump. The real estate market was already showing sign of collapse considering the fact that that House Price Appreciation rate was lower in the US than the other countries such as UK, Spain, Ireland, Australia, and France. When their House Price Appreciation rate started to decline, the federal government should have taken a cue from the market and affected timely polices. The housing market showed the same trends in a number of major economics such that any decline in one economy could be reflected in the US economy.
For example, Hennessey, et al, (2010, pp. 22-24), argues that when the low interest rates started affecting the economy, the Hyosung bubble started to burst, the country should have started its selective credit control or strategic suasion. However, there was still development in other areas that the federal government could have used to mitigate the collapse of the financial and economic system without focusing on the trillions of taxpayer dollars because this would later end in the economic externalities including unemployment, inflation, weak currency and even Long-Term Debt would still be the country major problems.
While the whole document only focuses on unemployment and the financial sectors, it is also important to understand that the housing boom was not the key cause of the country’s financial woes. The country’s financial problems were primarily caused by poor fiscal policies. The country currency was already facing deregulation because the credit crisis had already built up over many years the country housing market was really growing. Such was the bubble that even the budget sequester could not solve the country’s financial crisis. While the Failures of risk management has been considered as a. hindsight narrative, it is quite wrong for the congress to consider that statement a hind sight narrative because risk management is precautionary strategy that is only adopted to mitigate risk. It is ok to argue that the financial institution management failed in their duty because had they put in place measures geared at curbing such problems, they could have forecasted the future economic situations in the country. The country’s economic situation could have been different. Therefore, the excessive advantage and risk taking on the part of the financial institution was a major factor.
A number of other practices that contributed to the near collapse of the financial and economic system of the US could have been managed properly. For example, mortgaged backed securities that were only packaged and repackaged affected the financial position of the country because the products that were actually sold did not even exist. Therefore, a lot more money was spent trying to salvage the nonexistent system that has been looted for long. Considering the argument presented by the Lehman brothers, it is quite clear that they Lehman brothers knew that the economic crisis was already in the offing when they repackaged the mortgage related security. Though those are the signs of panic, there should have been strategies in place to stop them from practicing. Both the overall negligence other people tasked with managing the financial institutions allowed the Lehman brothers and other financial institutions to continue practicing amidst chaos, panic and the impeding financial crisis. $11trillion families lost their wealth.
Considering the government’s past performance when it comes to paying back load as well as the interest on bonds, not even the taxpayers would have agreed to such a move as to risk their trillions in saving the corporation when the whole market was at the verge of collapse. Therefore, the government was suffering from two major problems- the poor credit rating and a failing financial and economic system. What the government may have forgotten was the fact that the crisis may have been avoided but the problems with the structures it has lead to general laxity.
Wall Street performance
The Wall Street was supposed to be instrumental in averting the crisis, but when the people in charge of helping the government avert crisis were responsible for fleecing the government and the public. Many on the Wall Street foresaw this and alerted the government institution. The warning signs were much clear that anybody who has been in the financial institution for more than five years could have easily seen the impending tragedy. Most of the players wanted to make more money from the ignorant government officers.
When the deal is too good, think twice
When the risky subprime lending and securitization started to shows signs of explosion, it was important for the government to issue directives. However, the government, and the private institution were already making alit of money to care about the possible future. never the less, when the housing prices maintained their steep rise, there were already telltale signs in other countries the UK market started having its own problems, the dramatic increased in household mortgage debt started affecting the economy and nothing was done. Al the predatory lending practices were intensifying and the financial firms trading activities experienced an exponential growth. Only the blind could have been very blind to note that. Even the old adage says,”: when the Deal is too good, think twice” could have helped. It is quite annoying to hear the arguments of the public about the shallow report. The report is quite clear and the conclusion is only a clear confirmation of the pretending or defensive government who does not want to own up for their mistakes.
According to Hennessey, et al, (2010, pp. 22-24), the unregulated derivatives, and the short-term “repo” lending markets were belter signs of an impending doom , yet nobody did anything. The general persuasive permissiveness of the government, and its ignorant employees. In such circumstances, they were to inform the public because such permissive instinct can lead to an irreparable damage. The taxpayer paid in the end, the American communities were affected emotionally, financially, and physically. Many lost their jobs, while others faced the worst credit crunch. The foreclosure found many ill prepared for any eventuality as they struggled to pay their mortgage.
In as much as the general feeling is that the financial meltdown was unavoidable, there were proper metrics for avoiding the meltdown lot could have been prevented and the extent of the damage could have been reduced. When the government tools are not effective in mitigating risk, then the public have to prepare for the worst. The Securities and Exchange Commission (SEC) is not to blame for failing to supervise the players because they are professionals in their areas of practice. Even the stringent regulation of the banks and S&L by the FDICIA was not adequate. In conclusion, the economic crisis could have been detected, or forecasted and proper measures put in place to avert it, but the government filled because the market was very attractive and financial institutions were making profits.
Keith Hennessey, Douglas Holtz-Eakin, Peter J. Wallison, &, Bill Thomas, (2010). Financial Crisis Inquiry Commission. Stanford University’s Rock Center for Corporate Governance and Stanford Law School. http://cybercemetery.unt.edu