Causes of the 2007 Financial Meltdown

[LAM]

Here are 2 reports from the CRS and the other is from a couple of OECD members from other countries, it shows another viewpoint from outside the US:

Causes of the Financial Crisis
http://assets.opencrs.com/rpts/R40173_20090129.pdf

The Global Financial Crisis: Analysis and Policy Implications
http://www.fas.org/sgp/crs/misc/RL34742.pdf

The Current Financial Crisis: Causes and Policy Issues
http://www.oecd.org/dataoecd/47/26/41942872.pdf

 

[Hench]

How strange, I've actually referenced the last link in my dissertation.

It's about operational and strategic restructuring techniques employed by an organisation within the UK Financial Sector, which were required as a results of the GFC.

What's your take on the situation?

 

[LAM]

What's your take on the situation?

taken from the OECD member report:

"The business model for banks moved towards an equity culture
with a focus on faster share price growth and earnings expansion
during the 1990s. The previous model, based on balance sheets and oldfashioned spreads on loans, was not conducive to banks becoming
???growth stocks???."

I think this paragraph pretty much sums it up in terms of what banks in the US were trying to accomplish and as most of us new, it was all about money and increasing dividends to shareholders (themselves). that being the case the US needs to re-instate legislation that will separate credit and equity markets and break up the banks that are "too big" to fail and never again allow this to happen.

the derivatives markets need to be HEAVILY regulated world wide as this is the only way reform in this market will work. as was seen here, the US and it's toxic practices on wall street have harmed persons and countries all over the world. because of this developing countries have now had to borrow monies from the loan sharks at the IMF, all thanks to American greed.

"That issue is one of understanding the business model and corporate culture that always pushes risk taking too far and results in periodic crises."

That statement appears to be true but would this culture exist with out Wall Street always having the FRB to bail them out? I highly doubt it...

 

[LAM]

What's your take on the situation?

Regarding the recovery, it's exactly as I expected the gov stopped spending to early due to politics. the savings rate has increased as consumers have started to save more even with the low return on savings accounts. unemployment is going to be high for years.

Here is the latest report from the IMF:

World Economic Outlook
Recovery, Risk, and Rebalancing
http://www.imf.org/external/pubs/ft/weo/2010/02/pdf/text.pdf

* they start talking about recovery in the US on page 68. the IMF report coincides with the latest EPI report. it's going to be a long recovery and the unemployment rate is going to remain high for many years due to an overall lack of jobs. According to the EPI if every job posting was filled today 80% of the unemployed would still be. since the private sector isn't spending and politics in DC have caused Obama to stop spending and focus on deficit reduction, GDP growth is going to slow to a crawl now since deficit reduction doesn't increase GDP under the current circumstances according to the EPI:

"Past instances of rapid fiscal contraction actually aiding overall growth have almost without exception been undertaken in very different circumstances than what the U.S. economy faces today.

Specifically, these so-called “expansionary contractions” have happened when:

(a) countries were already growing strongly in the period before the fiscal contraction took effect;

(b) interest rates were very high and deficit reductions had room to reduce them; and/or

(c) nations matched the fiscal contraction with large exchange-rate depreciations and boosted exports.

Simply put, none of these apply to or are in the offing for the U.S. economy."