Great Recession 2008 - Essay Example

Summary and evidence of causes discussed in the texts The financial crisis of 2008 is one event that has elicited a lot of debate on what led to this massive crisis. In this paper, a summary of three texts explaining what led to this situation is shown. In additions to this, evidence of these causes of financial meltdown is also discussed. “The Giant Pool of Money” In this program, Alex Blumberg and the rest of the panelists assert that the financial crisis was caused by a global pool of money.

There is a giant pool of money where all the money goes. Instances where Insurance corporations are saving for a disaster, pension funds saving cash for the time of retirement, and the central banks saving money for their own reasons leads to a large pool of money. 70 trillion was the amount of this money which is also known as fixed-income securities. This amount had double from 36 trillion before 2000 to 70 trillion by 2006. Hence it meant that there was double as much cash to invest, but investors did not have places to invest it.

Treasury bonds were the most secure things to invest in. However, Alan Greenspan decided that since there was so much cash in the global pool, there was a need to lower the interest rate of the US treasury bonds hence making global investors panic. To beat Alan Greenspans one percent interest plan, the global pool of money invested in mortgagee loans. The global pool of money was easily taken to the idea of mortgage backed securities. The global pool of money needed many people to take mortgages because mortgages had become more profitable.

Hence Wall Street started to give out mortgages to people who did not qualify. Evidence of this is given in the case of Clarence Nathan who got a NINA Loan. NINA means No Income, No Asset, loan. Here, an institution will lend an individual a lot of money without first checking if he or she has any revenue or any properties. Because, Clarence could not service the loan, he faced foreclosure. Hence, This lead to a breakdown of the whole financial system due to rampant bogus loans. Calomiris on Credit and Fraud as cause of financial Crisis.

In this article, Calomiris reasons that it is vital to put the crisis in historical angles in the framework of other bank catastrophes. He claims that bank crunches differ expansively across time and place. He posits that some times and some places are docile, while others are vulnerable to regular crises. Calomiris contends that recurrent episodes of catastrophe are tied to government pledges such as various forms of deposit indemnification or similar enticements for risk-taking. Considering the current disaster, Calomiris indicts "too big to fail," the governments dependence on scores agencies as a degree of risk, and poor business governance as the key grounds.

He claims that rating agencies always give wrong information in trying to predict finances and hence lead to failing institutions. They try to predict banking trends using ratings based on historical data of previous failures and successes and claiming that the vulnerability of the financial institutions depends on the psychology of the people. William Black text In this article, William Black believes that the historic Credit Crisis was caused by massive fraud and that those involved were not even brought to justice.

Professor Black considers that the level of corruption and fraud was so widespread that extremely few of the guilty could never be brought to justice. Evidence of fraud as a cause of the massive financial crisis could be seen in the previous cases such as the Savings and Loans crisis where more than 1000 cases were investigated and brought to justice. He claims that because of the massive fraud of 2004 not being contained, a bigger problem emerged that led to the current financial crisis as FBI had already warned congress.

He cites such instances as liar loans, which consisted more than half of the sub-prime loans, to be an example. As much as everyone understood that liar loans were fraud, no one was ever charged hence hyper inflating the credit crisis. The Anti Fraud specialist Unit reported this to the Mortgage Bankers Association, but nothing was ever done. Officials but nothing was ever done. The strategy of liar loans was used by other financial institutions to hyper inflate the financial bubble and the collapse of this financial bubbles are what created the Financial crisis.

The choice that seems to make more sense and outweigh the others is the global pool money as discussed in the first text. With the amount of money that was extra in the world, few secure places were available for these investors to put their money at a lower risk. The mortgage market offered a ripe and better choice of investing compared to US security bonds. Hence manipulation of the mortgage financial system, lead to the collapse of financial institutions and the credit crunch as such. In Conclusion, there are many explanations to what caused the financial crisis.

However, these reasons may have combined leading to breakdown of major financial systems. Compounding fraud and corruption, global pool and the United States government approach of “too big to fail” the credit crisis was enlarged and hence the financial crisis. Works Cited Calomiris on the Financial Crisis. Retrieved on 9th March 2012 from http://www.econtalk.org/archives/2009/10/calomiris_on_th.html This American Life Episode #355: “The Giant Pool of Money” Retrieved on 9th March 2012 from http://pri.prout.org/book/export/html/61 William Black Transcript.

Retrieved on 9th March 2012 from http://www.financialsense.com/contributors/2011/09/14/william-black/transcript