In 2007, the United States of America experienced its first signs of a looming financial crisis. This was precedented by rapidly collapsing prices in the real estate, and spiking mortgage rates. What was witnessed after that can best be qualified as the worst regression post the Great Depression that happened in the 1930s. In a bid to salvage the situation, the U.S. Government and other Federal Reserves made huge financial injections into the market. In addition to that, they deliberately cut-down interest rates and gave financial aid to big-name financial institutions.
Still, in 2007, while the real estate prices were on a downward trajectory, investors began to opt-out. The billions of dollars that were to be obtained from the buy-out deals failed to materials as the market dried up financially. No one was willing to take any more risks. Several CEOs were forced out of employment. At the same time, those that retained them mainly sought financial input from hedge funds, sovereign funds, private equity funds, and other sources of risk capital.
The reduction of interest rates and the injection of money in bulk into the market by the Federal Reserve did more harm than good. This effort by the Federal Reserve took a toll on the value of the dollar vis-à-vis other currencies. While the value of the dollar declined, the prices of commodities that were initially valued in U.S. dollars rose drastically. Such commodities included oil prices, agricultural products, etc.
Further, the credit markets of interbank were wound up, as the market value of different institutions of finance collapsed. The Government's attention was particularly drawn towards Fannie Mae and Freddie Mac, as they were the most fundamental institutions in the real estate market. Their liabilities amounted to $5.5 trillion, yet their regulatory capital base was $100 billion. This disparity pushed the Treasury to request for a blank cheque from the Congress. This would give the Treasury autonomy to cash in as unlimited funds into Fannie and Freddie in an attempt to resuscitate them.
While the Treasury's motive was pure, the results were unprecedented. This move worsened global panic. Fannie and Freddie collapsed even further. This effect vibrated down to other institutions such as Lehman Brothers, AIG, and Merrill Lynch. In an attempt to salvage the situation, the Federal Government looked to Section 13(3) 0f the Federal Reserve Act. This effort was aimed at rescuing AIG and was similar to what had initially been done to Fannie and Freddie. This, too, failed to meet its purpose, as AIG collapsed as well.
The panic of 2008 was filled with "kicks of a dying horse" through and through. Nothing seemed to work. Everything the Government put forth to combat the crisis fell short. There was tremendous uncertainty that resulted from the Government's fears or the actions it took. The rate of unemployment went on an all-time high. Statistics indicate that this bracket of unemployment includes those who are actively seeking employment, as well as those that have lost hope entirely and stopped looking for a job.
Emergency Responses to End the Crisis. Various initiatives, through programs and policies, were set forth to try and combat the crisis or panic. They include; the TARP, which was initiated by the Treasury via the EESA, Federal Reserve Programs, utilization of Deposit Insurance Fund by FDIC, and the attempt by Treasury to salvage Fannie and Freddie.
Federal Reserve Programs
These programs initiated under the Federal Reserve Act amounted to the largest percentage of the interventions from the Government. Section 13(3) granted authority to liquidate Wall Street and other companies in the U.S. such as AIG and Bear Stearns. Consequently, the balance sheet of the Federal Reserve incomparable to its previous recorded values.
The first policy to be invoked under section 13(3) was the establishment of TSLF. Its purpose was to lend capital to major dealers and to provide liquidity for the MBS businesses. Implementation of TSLF took a toll on Bear Stearns, which saw its cash reserves decline from $20 billion to $2 billion in less than a week. In anticipation of filing for bankruptcy, the Federal Reserve came to its rescue.
To prevent other institutions from suffering the same fate as Bear Stearns, the Federal Reserve initiated the PDCF. It was to offer more liquidity to these institutions, albeit temporarily. It provided loans outside the usual collateral restrictions. This program experienced little success as the financial markets began to improve.
This success was short-lived. AIG began experiencing a worrying liquidity plunge, mostly as a result of the nature in which PDCF had gone about issuing its loan. It was not sustainable. Money market mutual funds began to incur major liquidity pressure. They had to resort to selling their assets.
This financial crisis greatly impacted market security. The situation went from the financial markets being valued at an all-time low to the only available and marketable securities being those with the Government's backing. TALF was created purposefully to help solve this problem. Non-consequential loans were issued out to borrowers. This particular provision gave this program the momentum it badly needed. However, just like its predecessors, it proved to be unsustainable and was eventually closed down.
The Treasury programs were set into motion when the nation's CEOs of nine major institutes of finance were asked to sign terms of agreements that bound them to accept the investment of the Government. Their companies had been earmarked as being the most essential in the Government's bid to counter the crisis. $125 billion was set aside for these companies.
Further, Treasury embraced the Government's restructuring of its financial aid to AIG. Under the AIG Investment Program, it bought out $40 billion of preferred stock that had just been issued. It then incurred extra costs in obtaining perpetual preferred securities from Citigroup and the Bank of America. These cash injections served as supplements to the previous TARP investments.
In liaison with the Targeted Investment Program, the Treasury established the AGP. Here, the Government was to share any losses incurred by Citigroup. Such were the terms of the agreement. The Government, however, failed to honor this agreement, resulting in its termination by Citigroup.
The CAP and Stress Test was then initiated by Treasury. The main aims were to establish the need for additional capital input by particular institutions and a channel through which such institutions would be able to make applications for capital injections from Treasury. The PPIP was another effort that was meant to sort out illiquidity specifically and to restore the balance sheets of various financial institutions.
The Obama regime, through Congress, brought this program to a halt, as they were anti-Wall Street. This regime was particularly concerned with the companies that had been forced to receive the Government's assistance without having requested it in the first place. All the banks that had profited from the CPP initiative were suddenly out in the cold, despite their reasons for having signed up for it at first.
The effect of this was that prospective investors lost their trust in the U.S. Government, as they felt it was no longer reliable. They began to pull out of trading deals and agreements they had initially signed with the Government, to avoid any impending disappointments. This effectively spelled doom to the PPIP. Most of the programs were either postponed or halted for lack of interest from the private sector, who were the key investors.
The effort put by the Treasury to rescue Fannie and Freddie has been deemed as the largest Government-aided rescue in U.S. financial history. While these two enterprises were being placed in conservatorship, they held $5.5 trillion cumulatively. Such was the level of Treasury's investment that it is not expected that Fannie and Freddie would ever be able to repay that amount of capital injection fully.
FDIC's TLGP was initiated specifically to help stabilize the financial market of the nation. This was to be achieved through its Debt Guarantee Program and the Transaction Account Guarantee Program. The former would guarantee the issuance of unsecured debt, while the latter would offer a deposit of insurance that was not limited. This program attracted quite several investors as its access to the funding that was being offered was quite low.
Regulatory Framework Established Post-2008 Crisis
The global financial panic experienced in 2008, and how it rattled the most powerful nation in the world, resulted in the need for a new financial regulatory framework that would help steady the ship. Most notably, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) came into effect on July 21, 2010.
This Act brought forth the biggest change in financial regulation legislation in the U.S. a major chunk of the Act impacts the large and more sophisticated commercial organizations. Their smaller counterparts are also catered for by the regulations. The main aim of this Act was to decrease the probability and impact of any future financial crisis or panic. Besides, it sort of putting an end to the bailing out of taxpayers by Wall Street and to boost the protection of consumers.
However, the Act was not short of criticism. Some argued that it was not strong enough to chastise Wall Street for being the cause of panic. Others argued that it only focused on how much control the Government held on the financial market at the expense of the real causes of the crisis. Further arguments presented were that it did not offer the much-needed simplicity to the U.S. regulatory framework vis-à-vis the Treasury Blueprint of 2008. Neither did it enhance coordination at the cross-borders, nor did it decrease the risk encountered through the ineptness of regulation.
Economists made discouraging predictions on how it would decrease the GDP and cause an increase in unemployment. Further, the Act would create more uncertainty, and investors would have to make decisions in a marketplace marred with a change in its regulations. The complicated nature of the Act is affirmed by the ambiguities within it, and how hectic it would be to resolve them should the need ultimately arise.
The manner in which the Act was enacted was largely bipartisan. There was unanimous support for it by the Democrats, while the Republicans unanimously opposed it. Republicans went as far as issuing out a warning that they would repeal it as soon as they took control of both the White House and Congress as well. This does no good for its longevity and certainty.
Summary of Dodd-Frank Act
The enactment of the Act resulted in many crucial changes in the structure of financial regulation. It established the Financial Stability Oversight Council that would look to identify the existing risks and provide insight into the financial system, as well as creating harmony in the standards of the existing agencies. The Council is also mandated to enhance discipline within the market and issue the way forward with regards to any threats faced by the U.S. financial scope.
It also expands the power of the Federal Reserve to supervise both the bank-holding companies and the non-bank financial companies. The Act gives discretion to the regulators on how to go about modification of the statutory standards. Bank-holding organizations that have more than $50 billion in assets are regarded as essential by the Council. On the other hand, non-bank financial businesses are to be considered as critical as well if they are determined to be important to the system by the Council.
Cite this page
Essay Example on U.S. Financial Crisis of 2007: A Post-Great Depression Regression. (2023, Sep 08). Retrieved from https://proessays.net/essays/essay-example-on-us-financial-crisis-of-2007-a-post-great-depression-regression
If you are the original author of this essay and no longer wish to have it published on the ProEssays website, please click below to request its removal:
- Essay Example on Atomic Bombs on Hiroshima and Nagasaki
- Essay Sample on Cambridge Analytica: Judgment and Attitude Impact
- Essay Example on Colonization of North America: France, Spain & England
- Stock Analysis: Essential for Investors & Businesses - Essay Sample
- War: A Human History of Destruction and Death - Essay Sample
- GDP: Explained - Key for Economic Activity & Development - Essay Sample
- Essay Sample on The Pyramids of Giza: A Symbol of History in the World