The 2008 financial crisis rocked the world and affected nearly every country on the face of the earth. While the implications and some of the problems were global, the bulk of the focus has fallen on the United States and many politicians, businessmen and ordinary citizens have begun to seek a person or entity to blame for this disastrous event. When analyzing the event from a financial point of view, it appears that government is most at fault. The Federal Reserve’s failure to counter the “flow of toxic mortgages,” combined with the Clinton Administration’s decision to not regulate derivatives, and the lackluster and “inconsistent response” from the Bush Administration combined to create the devastating recession. (Chan 2011) The Financial Crisis Inquiry Commission, appointed by the U.S. government to understand the causes of the crisis, admitted other decisions, such as measures encouraging home ownership, contributed to the crisis, but identified these three issues as the core problems.
While it is clear that the investments were criminally mismanaged, the lack of regulation on derivative securities allowed this crisis to occur. Derivative securities are speculative investments that allow an investor to take a position in an asset without actually purchasing the asset. Due to the speculative nature, these positions can experience much wider swings in value, making them more risky due to the fully speculative nature of the commodity. (Madura 22) The inherently risky nature of derivative securities makes them a prime culprit for massive downturns, meaning that they should be regulated to prevent such an occurrence. In 2000, the Clinton Administration made a decision to exempt these financial instruments from regulation, marking “a key turning point in the march toward the financial crisis.” (Chan 2011)
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"Causes of the 2008 Financial Crisis".
As the subprime collapse crept closer, signs and indicators arose. The Federal Reserve is criticized for not only not predicting the impending disaster, but also providing insufficient tools to investigate and regulate the financial industry. The Committee determined that the crisis was preventable, and criticizes Alan Greenspan, the Federal Reserve chairman, for not acting in a more decisive manner to do so.
Finally, the Bush Administration is castigated for a poor response. The markets fluctuate drastically based on the perception of investors, and uncertainty can cause massive drops. The choice to bail out Bear Stearns, but then stand by as Lehman Brothers went into bankruptcy terrified investors and “added to the uncertainty and panic in the financial markets.” (Chan 2011)
- Chan, Sewell. “Financial Crisis Was Avoidable, Inquiry Finds.” Wall Street Journal [New York] 25 Jan. 2011: n. pag. WSJ.com. Web. 27 Oct. 2013.
- Madura, Jeff. “Overview of Financial Markets.” Financial institutions and markets. 9th ed. Mason, Ohio: South-Western Cengage Learning, 2012. 22. Print.
