Question

Regarding the 200 financial crisis (focusing on the book Too Big to Fail)

Do you believe this event could happen again? Was the Bailout the best course of action by the government? If not what is a better solution? If so, why was it the best course of action?

Answer 1

First Part

The 2008 financial crisis is the worst economic disaster since the Great Depression of 1929, and it occurred despite the Federal Reserve (Fed) and Treasury Department's efforts to prevent it. The crisis led to the Great Recession, where housing prices dropped more than the price plunge during the Great Depression. Two years after the recession ended, unemployment was still above 9%, and that's not counting discouraged workers who had given up looking for work.

How It Could Happen Again

Some legislators blame Fannie Mae and Freddie Mac for the entire crisis. To them, the solution is to close or privatize the two agencies, but if they were shut down, the housing market would collapse because they guarantee the majority of mortgages. Furthermore, securitization, or the bundling and reselling of loans, has spread to more than just housing. The government must step in to regulate.20

Congress passed the Dodd-Frank Wall Street Reform Act to prevent banks from taking on too much risk, and it allows the Fed to reduce bank size for those that become too big to fail. Meanwhile, banks keep getting bigger and are pushing to minimize or get rid of even this regulation. The financial crisis of 2008 proved that banks could not regulate themselves, and without government oversight like Dodd-Frank, they could create another global crisis.

Second Part

Better No Bailout

Bailout is a general term for extending financial support to a company or a country facing a potential bankruptcy threat. It can take the form of loans, cash, bonds, or stock purchases. A bailout may or may not require reimbursement and is often accompanied by greater government oversee and regulations. The reason for bailout is to support an industry that may be affecting millions of people internationally and could be on the verge of bankruptcy due to prolonged financial crises.

Bailouts have several advantages. First, they ensure continued survival of the entity being rescued under difficult economic circumstances. Secondly, a complete collapse of the financial system can be avoided, when industries too big to fail start to crumble. There were three ways to deal with the financial crisis facing the country in the fall of 2008: A bailout with very stringent conditions, letting the market run its course and picking up the pieces afterwards, or a bailout that largely left the financial industry intact.

The best path would have been the first, bailing out the financial institutions with special loans and guarantees from the Fed, Treasury and the Federal Deposit Insurance Corporation as long as the institutions agreed to downsize, on a set timetable, to become a boring bank. Anything is of course possible, but there is zero evidence to support such a claim. President George W. Bush signed the first stimulus package when the unemployment rate was just 4.8 percent.

The Second Great Depression myth was invented by the Wall Street crew to justify saving them from their own recklessness. As a result we got the worst of all possible outcomes.