Examine the Credit Crunch and Avoid Double-Dip Contraction

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            There was a classic anecdote: during the Financial Crisis, when firms and factories were shut down ubiquitously due to the sluggis­h economy, the U.S. Bureau of Engraving and Printing­ department was the only place where working schedule was 24 hours a day and 7 days a week.  All the cash printers were fueled fully waiting for the order of Washington.

            Behind the scene of this anecdote, a perfect storm had been brewing for years.  As June Johnson says, “the crash of the global financial market in fall 2008 swept up average citizens around the world, seriously disrupting jobs, the cost of living, the availability of credit, and the economic stability of countries” (138).  “In the second half of 2008, the world economy came to a halt, whose GDP growth sharply slowed from 5 percent to 2 percent according to “The World Bank” website. It also says, “The World Bank estimates that about 55 million more people will live on less than $1.25 a day (in 2005 purchasing power parity terms) in developing countries this year than expected pre-crisis.”  We had also seen many severe consequences in rich counties such as Iceland’s bankrupt and Greece’s protests and violence.  The domestic impact in the U.S. was even more destructive.  Some counties’ unemployment rates were as shockingly high as 16.1% such as in Merced County and Monterey County according to NPR. The Commerce Department just said that the economy grew just at a 1.8 percent in the first quarter in 2011, which was way far away from 3%, which is considered as the healthiest growth rate for America.  The whole economy is not as energetic as it used to be, and neither are many people.

            The deregulation of the financial markets in the late 1990s and early 2000s is to blame and deep permanent reform in federal standard should be pursued seriously before it gets worse.  Here are my arguments:

·         Some bankers who intentionally manipulated the financial system and benefited from it were the major cause of this financial crisis.  Before the recession functioned, investment bankers just simply bought risky and toxic mortgages and resold them by packaging with other subprime mortgages together as CDO as AAA investments verified by rating agencies.  They were fundamentally shuffling paper of loans and risks but not creating any value to this society.  As Greg Smithsimon, an assist professor, says, “the inevitability of privately owned banks wriggling free of regulation and engaging in dangerous speculative activity for private gain is by now clear” and “the cost is unacceptably high.”  The cost was inexcusable.  A study shows that from 2005 through 2007 “the top 25 subprime lenders were responsible for nearly a trillion dollars of subprime lending, or 72 percent of all reported high-interest loans” (Ronald D. Lankford, Jr. Detroit).  When borrowers began to fail to pay back loans, these ticking time bombs, subprime mortgages, finally exploded, which triggered the recession of the whole economy.  The banking system became a mess because of these bankers’ jeopardizing.

·         After we dig deeper, we can find that lacking of supervision in securitization market is indeed the key factors of this subprime mortgage crisis.  According to Ronald D. Lankford, Jr. Detroit, “a look at the historical record shows that Washington was warned repeatedly over the last decade—by consumer advocates and a handful of regulators and lawmakers—that these high-cost loans represented a systemic risk to the economy.”  But because many of these subprime lenders “were forced to pay billions of dollars to settle government charges of abusive or predatory lending practices,” the regulators chose to let it go with eyes wide open.  This acted as a very important factor in allowing this economic crisis happen.

·         In addition, government’s intervention in the housing market should not be ignored.  In 1999, the U.S. government erased some of the regulation of financial markets, which set the financial industry free at some point.  Holding the hope of supporting more homebuyers, regulators later on supported housing subsidies, which promoted the supply of subprime mortgages.  Some critics also believe that “the U.S government contributed to the problem by lowering interest rate too much after 9/11,” when a lot of “hot money” were held by overseas investors seeking housing investment with low interests in America (Johnson 142).  This series of government intervention made somehow bankers’ scheme possible. 

Here is what we should do:

·         Government should keep bailing out the financial institutions by buying bad debts that these institutions are holding along with implementing more restrict regulations.  It is ironic to rescue the failing financial giants that once hurt us a lot. Since the economy has been so fragile, somehow we have to do so.  As Ryan says, “this is something no one wants to see as it would ripple through our economy and into the world markets in a matter of hours, potentially causing a worldwide meltdown.”  Punishment should be implemented after settling down the whole economy. 

·         After the economy goes stable again, government should consider nationalizing banks.  In Greg Smithsimon’s article, he argues the two advantages that nationalizing banks can bring to us.  “As retail banks, they will provide consumers with healthy, stable replacements for the bankrupt zombie banks now paralyzing the economy. As democratized versions of the Federal Reserve Bank, they can oversee financial reform and fiscal policy that serve the needs of real Americans” (Smithsimon).  By nationalizing banks, the double-dip economic contraction will be effectively avoided and thus lead us clime out the recession.

I admit that the cause of this credit crunch is far more complex than sole blaming on greedy bankers and irresponsible regulators.  I also agree with other people who hold the views that the 2008 Financial Crisis might be the by-product of the dot-com bubble of the 1990s.  And overseas’ investors’ greed could contribute to this financial crisis. However, I believe what I wrote were some basic factors that triggered the beginning of this credit crunch. 

It is narrow to say that had the regulators implemented more restrictive financial laws or had people been less greedy there would not have been such a sluggish economy.  Regret and blame do not help at all.  Government should keep on working on the bad debts that trap some financial institutions. We ordinary people should be happy every day—we should keep optimistic on this country’s economy no matter how bad it goes.  We should never be depressed or fear by the current disappointing news.  Because fear cannot drive out fear, only love can do that.