Complete and total mismanagement of funds on an enormous scale accompanied with greed, manipulation of funds and trickery has resulted in the current economic slump. Talking about the Bush government that definitely worsened the situation and triggered it in the first place, a lack of business intelligence resulted in an alarming deficit overnight.
George W Bush’s amazing $1.3 trillion tax cut was a direct result of the unwinding of shirt-term capital gains and this worsened the situation. This bonanza offered came at a heavy price. The stock market was first affected after the tax shortfall and the sudden problems that arose with liquidity in the financial arena.
Banks began packaging debts to remove them from their records and after their sale, people who had the bad luck of borrowing from the banks and defaulting in their payments were forced to forego both the entire capital amount as well as the interest on it.
This segment of the population that had no job, no income and no assets so to speak of are more commonly referred to as the ‘sub-prime’ borrowers had absolutely no familiarity or knowledge of risk profiles.
The current situation has resulted largely due to these home loan defaults and sub-prime mortgages. Insurance companies and other hedge funds that bought these Collateralized Debt Obligations (CDOs) borrowed loans from other banks that were also selling CDOs to cover their debts.
This resulted in a very catastrophic and vicious cycle and towards the end of it, the books of the banks were actually never cleared of the pending debts, which was the sole purpose of selling the CDOs right from the very beginning.
Therefore, the ease with which these loans were borrowed with no set limit and no proper agenda also worsened the situation making it irreparable. These unpaid loans obviously proved to be completely redundant in backing up the U.S dollars that were circulating in the market.
This, in turn, lead to the rapid decline of the dollar value as the excess and unchecked supply of money into the wrong financial channels had to be accounted for to do some damage control in the process.
Just like any economy is dependent on the exquisite balance between the market forces of supply and demand, the situation resulted in increased consumption without meeting the required demands and necessities of production.
As a direct result of these occurrences, more important areas of Government focus like medical and health care and provision of college tuition funds have been badly affected. Illogical and incorrect Government policies lead to the crash of the stock market and the bond market.
Investors and stock traders became hesitant in investing in the stock market and this atmosphere of negativity, hopelessness and large-scale skepticism captured the market in its jaws and ripped it to shreds.
Deregulation spells innovation and removal of restrictions to encourage the growth of potential businesses in the world and encourage international trading by opening up new arenas of growth and development for private markets.
However, when there is no proper supervision of the kind of business deals made and lack of a governing body to control and monitor the consequences of deregulation, it is bound to result in chaos and that is precisely what is happening with the current and ongoing recession whose possible end still remains uncertain at large.
The government refused to take responsibility for the situation and a few companies started ruling the entire economic and financial trading scene, making huge profits for themselves risking the livelihood of millions of workers and salaried employees working under them and only for their company.
Well-defined and strict laws are the order of the day to prevent a reoccurrence of the financial crisis the world faces today. Deregulation is a key area on which a lot of work needs to be done to ensure safety, security and stability at least for the next few decades.
Blumberg, A., & Davidson, A. (Reporters). (May 9, 2008). 355: The Giant Pool of Money [Radio episode]. This American Life. Chicago, United States: Chicago Public Media.
Blumberg, A., & Davidson, A. (Reporters). (October 3, 2008). 355: Another frightening show about the economy [Radio episode]. This American Life. Chicago, United States: Chicago Public Media.