The Financial Crisis 2008 and the Legislation in Response to this Crisis - Term Paper Example

College: Financial crisis of 2008 It is said that every reaction causes an equal and opposite reaction, and the same canbe said of the financial crisis in the United States in the year 2008 which is known to be the greatest financial crisis after the Great Depression of 1930 (Marshall, 10). The effects of this occurrence can still be felt in the present despite the fact that the global financial system was but nearly brought down. The crisis was triggered by the financial crisis of the US housing market before spending to the rest on the world. US being the leader in the world’s economy this relapse severely impaired the economy of many nations in both developed and developing nations. In the course of this paper, we look into the financial crisis, the legislation that is in place in response to this crisis and two films that seek to reveal more about this topic in question. According to Marshall, the financial crisis was offset due to a huge decline in the price of housing with an interchange of policies implemented to encourage home ownership through easier processes of accessing loans (24). The offset was in 2007 but US had its worst in 2008 when the major financial companies closed down. In addition to this, there was overvaluation of properties based on the theory of continual escalation of prices that was offered to clients with poor credit histories who had struggles in repaying them. This resulted in banks failing to provide loans due to the uncertainty of payment thus shrinking the economy. It is, however, the complex network of financial innovations by financial institutions employed to reduce risks that triggered the spread of the crisis beyond the financial markets and into the real economy. This is because, in the quest to banish risks, the financiers lost track of it which resulted in a downward spiral (Marshall, 13). For example, home loan mortgage companies started withdrawing loans on high-risk mortgages with a significantly large number of mortgage firms declaring bankruptcy. The prevailing low-interest rates in the economy at the time played a role in encouraging the investors to deal in securitized products due to their safe appearance. Companies such as Federal Home Loans Mortgage Corporation decided to only deal in low-risk mortgages. These low rates also incentivized banks to deal in risky assets in the hope of receiving higher returns in the future. These dealings in high-risk assets in conjunction with the complex financial products in play may have been cited as part of the cause of the financial crisis. Moreover, the decision by the US government to pass the emergency economic stabilization act, which allowed the treasury to take part in the stock exchange stabilizing the expected rise in stock. However, a greater weight lies in the absence of supervision and regulation in the heat of these happenings. Instead, the regulators took a back seat and tolerated the recklessness. One of the largest investment banks in the world, Lehman Brothers failed in this period of financial crisis, and a counterpart is the multinational insurance corporation, AIG. Other events following this include the plummeting of the US stock market and the drying up of liquidity (Marshall, 31). Successful companies that were running in this period were also forced to lay off a large percentage of their employees. Unemployment meant reduction in purchase power which directly affected the market supply and demand forces. The carnage that resulted from the financial crisis was not only felt by the financial sector but also by the firms that rely on credit since the absence of credit causes profit making companies close down. Economies around the world were also majorly affected due to the aspect of globalization. International companies with branches across the globe were unable to sustain the operations of their sister companies abroad, thus, selling out or closing down. Countries whose businesses are majorly linked to the American nation were as well caught up in the same cycle (Polk, 101). Their export-oriented manufacturers hit a dead end owing to the fact that their main markets cut deep in their demands because of the financial crisis. Additionally, the less developed countries were not left out since their markets abroad in conjunction with the foreign investments they depended upon for development regarding capital were lost. With no or limited supply of goods and merchandises, business in this countries ended up losing businesses. Given that the United States is considered a large and key player in the greater economic system, the failure of its financial systems would translate to a meltdown of that of the world. It is in light of this that the US government put in place decisions that were crucial in the prevention of such a scenario occurring again. Some of these decisions include not bailing out on the greatest investment bank, Lehman Brothers, injection into troubled financial institutions in exchange for preferred stock and common equity stakes otherwise known as Troubled Asset Relief Program (TARP). There were also increased efforts to lower interest rates and an increase in liquidity, the implementation of a stability and affordability plan that gave a chance to struggling homeowners to refinance their mortgages in a bid to clear payments. In addition to these, the US government passed the American Recovery and Reinvestment Act that was designed to give a boost to demand in the US economy. In response to this financial crisis, HBO went ahead to produce a movie dubbed “Too Big to Fail” which is a title depicting the status of the US economy with regards to that of the rest of the world. As opposed to the 624-page book of the same title. The film is based- offers a concise view of everything that was said and done by every involved party in the midst of the financial crisis, the movie that runs for 96 minutes narrows down to the key events that took place in the financial crisis. The producer brings out the agony and the panic that transpired among the financial giants, the second new century companies, US citizens, and the government at large. Too Big to Fail centers on the actions taken by the US Treasury Secretary, Henry Paulson, in dealing with the problems resulting during the financial crisis period. The film shows how the CEO of Lehman Brothers looks for investment from external sources but due to the firm’s exposure to housing assets termed as toxic, they face opposition from the said investors such as the Treasury (Too Big to Fail, n.p). With Paulson seeking for private solutions to the Lehman Brothers’ problem and the planned solutions not working out, he gives direction to Fuld to declare bankruptcy. The political and Wall Street reaction is favorable in response to the communiqué however, Paulson learns that it has had a ripple effect on the rest of the financial market. The other crisis that ensued was the beginning of the collapse of the multinational insurance corporation, AIG and with the realization that its fall will result in major losses in the financial industry, the Treasury takes over the firm. However, the chairman of the Federal Reserve System, Ben Bernanke argues that this move is unsustainable and that the Congress is required to pass legislation for any continued involvement by the Treasury and the Federal Reserve. The film thus reveals the fundamental role played by the Treasury and the Federal Reserve in brokering deals with firms (Marshall, 21). The apparent lack of credit forces Paulson to push for the sale of toxic assets to deter risk and increase their cash reserves. The legislation fails to pass on the first try but goes through on the second one that sets the ball rolling with the signing of the Emergency Economic Stabilization Act of 2008 into law (Marshall, 37). In both movies, the move to pass the Emergency Economic Stabilization act is portrayed as a smart move by the US government. For the purpose of getting credit to flow once again, Paulson convinces banks to receive a capital injection that is to be later repaid. Even with the agreement of the banks to receive the funding, there are restrictions laid in place to ensure that the banks use the funds in the correct ways. We see Paulson’s deputy in the Treasury lamenting about the fact that the same parties that led to the crisis are responsible for the dictation of terms to be followed. The seriousness of the crisis is clearly portrayed in this movie through the words uttered by the cast. A clear example is about not having an economy in the next few days if the concerned people fail to do anything. This is drawn from the reluctances by the concerned players to deal with the crises at early stage. The same seriousness is depicted in the use of vulgates in abandon due to the underlying pressure felt by cast members such as the chief executive of Lehman Brothers, Dick Fuld and Timothy Geithner, the president of the Federal Reserve Bank of New York. The greatest misleading omission in this film and that was crafted as a denunciation of deregulation is the failure to recognize that regulation, as in the instance that mortgage providers allowed people with a poor credit history to borrow from financial institutions played a big role in the problem. This is a clear indication that lack of policies and regulation governing the process and procedures through which mortgage loans were allocated contributed to this crisis. While “Too Big to Fail” may leave out some details, the basic story is right; that the crisis was as a result of the mistakes of many people, in Wall Street and the government. However, the portrayal of the people was not from an evil perspective, but simply that they made mistakes, and this may have been at the moment, for the right reasons (Too Big to Fail, n.p). This film gives a clear insight into the things that happened during the period of the financial crisis with a correct version of events. Equally in response to the financial crisis of 2008, a documentary by Charles Ferguson was released in 2010 which seeks to bring insight into the cause of the crisis. As opposed to Too Big to Fail, the documentary Inside Job approaches this task by assigning blame on Wall Street and the government. This documentary looks into the reckless actions of those above in the near collapse of the financial sector and how their culture resulted in the crisis of the Wall Street executives, credit agencies, and existing regulatory agencies particularly being in the limelight as a result of being included in the documentary through the interviews done on them. Inside Job is split into five parts that examine the different aspects that overall lead to a global recession (Ferguson and Damon, n.p). In comparison to Too Big to Fail, this documentary takes on a different tone as it digs deep into the alleged participants of the financial crisis through interviews to obtain their side of the story. The former on the other hand gives an account of how the proceedings took place and the strides taken by the key participants to remedy the situation at hand. The documentary offers a chance for viewers to understand in depth the issues that built up to become the crisis it was by building up the plot from the rise to the fall of deregulation in the United States. The Inside Job goes a step further in explaining how the deregulated banks borrowed money more than they had and paid themselves quite well. The banks were also responsible, according to the documentary, of swindling the homeowners and investors resulting in loss of billions. Furthermore, with the great debt, the burden was laid on the taxpayer while the regulators watched and did nothing to that effect. Further, the documentary highlights the following two factors as major players in the crisis. First, is the lack of government inspection and its means of giving security to the account-holders and the lenders. This is seen with the government appointments of previously high-ranking private sector insiders. Second, the documentary condemns the academic fraternity that was in its way supporting these actions and failing to expose the liabilities posed by the banks and the risks to the stakeholders who are in most cases the ordinary Americans. Given the time that has passed since the happening of the financial crisis, there have been developments in dealing with the repair of the lending and banking system. The signing of the Dodd-Frank Wall Street Reform and Consumer Protection Act into law was in response to the crisis. This was in 2010, signed by Barack Obama, who has brought significant changes in the financial sector of the United States on the federal financial regulatory agencies and the financial services industry. The aim of the legislation is “to promote the financial stability of the United States by improving accountability and transparency in the financial system, to end "too big to fail", to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes” (2010). This has been made possible by making changes in the existing regulatory structure to make more efficient the process of regulation, increasing supervision of institutions that are regarded as a general risk and promoting lucidity while making amendments to the Federal Reserve Act. A succinct definition of what industrial engineering entails can be given as a profession that deals with the development, improvement and implementation of combined systems of people, information, equipment, money, analysis, and synthesis. This is achieved through engineering methods to specify, forecast and assess results obtained from the above-mentioned systems. In reference to the financial crisis of 2008 and the legislation passed, the profession mentioned above is therefore affected in the following three ways. First, given that one of the causes of the financial crisis stems from the lack of adherence to the principle of achieving the welfare of the human being in seeking self-gain, this is a learning point on the part of the profession in the discussion as related to the code of ethics. The betterment of the people results in the greater good of the people (Polk, 10). Second, with the legislation in place, the provision of better and secure financial services has a positive impact not only on the industrial engineering profession but, on the whole, economy. This will provide a fair chance to all persons owing to the aspect of transparency, and the industrial engineers will be able to finance their projects and receive credit based on fair grounds. Third, as a result of the financial crisis that affected a great part of the national and global economy, the industrial engineering profession was not left out. This means that the process of repair of the negative effects felt in that period continues to ensure a greater market for this profession. The code of ethics of industrial engineers clearly points out the values upheld by the said which include integrity, honor, and dignity of the profession and this is achieved through different principles (Polk, 77). These include enhancing the human welfare through their skill and knowledge, ensuring fidelity to the public through being honest and impartial, increasing the competence and prestige of the profession and finally showing support to societies of their discipline, be it the technical or professional kind. It is true to point out that part of the reason the financial crisis took place was due to an ethical crisis as proved by the behavior of the agents involved in the decisions leading to the crisis. This is also portrayed in “Too Big to Fail” and “Inside Job” movies where in both movies the management is directly implicated with the unethical proceedings that brings down the company. Some of the ethics put in the spotlight include personal ethics where it is proven that one of the reasons for the crisis is due to greed for more money within the financial institutions at the time. Among the financiers, regulators and government personnel, the attitude of self that was prevalent prevented them from achieving the greater good on human welfare in making the decisions. For example, the CEO of Lehman Brothers greatly contributed to the bankruptcy of this firm by deciding to invest in heavy in the housing market. Additionally, in the aspect of ethics of organizations and the personal ethics, there was the absence of increasing the prestige of the various institutions in question. This shows a lack of support as opposed to the principles stated in the code of ethics of industrial engineers. Government intervention, however, prove to be a smart move that has over the past years greatly contributed to the current economy status. The decision to allow the treasury to invest in the stock exchange market, bail out collapsing financial investment firms, increase financial liquidity, implement credit policies, Homeowner Affordability and Stability Plan, as well as, the Obama policies, come in handy in solving the financial crises across the globe. Work cited Ferguson Charles and Damon Matt. Inside Job. Sony Pictures Classics. 2010. Marshall, J. (2009). The financial crisis in the US: key events, causes and responses. House of Commons Library. Retrieved from: http://www.voltairenet.org/IMG/pdf/US_Financial_Crisis.pdf Polk, D. (2010). Dodd-Frank Wall Street Reform and Consumer Protection Act, Passed by the House of Representatives on June 30, 2010. Too Big to Fail. Dir. Curtis Hanson. Perf. William Hurt, Edward Aner, Billy Crudup, Paul Giamatti. HBO Films. 2011 Read More