The 2008 recession was one of the worst economic crises in America since the Great Depression of the 1930’s. Caused by the collapse of an 8 trillion dollar housing bubble, the recession eventually led to the closures of many large banks on Wall Street and insurance firms like AIG, and to millions of Americans losing their homes. How An Economy Grows and Why it Crashes by Peter Schiff, and the movie “Too Big to Fail”, featuring Paul Giamatti, each approach the 2008 recession from different areas: Schiff analyzes the effects of the recession on the people of Main Street (homeowners), while “Too Big to Fail” observes the effects of the recession on the businesses of Wall Street (the banks and investment firms). The two together provide the reader/viewer with multiple perspectives on the recession, and allow them to understand just how devastating it was.
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It is widely agreed that the main cause of the 2008 recession was the collapse of the housing bubble that had been created, and as result, it is important to understand the initial causes of the bubble, the first of which being the deregulation of banks by the government. This was achieved through the Depository Institutions Deregulation and Monetary Control Act, The Garn-St. Germain Depository Institutions Act, and the Gramm-Leach-Bliley Act. The Monetary Control Act was the first, allowing similar banks to merge with each other and set their own interest rates, the Depository Institutions Act later allowed homeowners to file for adjustable-rate mortgages (where the rate is periodically adjusted), and the Gramm-Leach-Bliley Act allowed commercial and investment banks to merge. This affected the housing market immensely, as investment firms began purchasing mortgages from the banks that loaned the money to homeowners (meaning the mortgage payments went to the investment firm and not the bank). In order to find more mortgages for the investment firms, the banks would offer them with increasingly risky terms, such as not requiring a down payment or not requiring a proof of income, so more people would be eligible for them. This drastically increased the amount of sub-prime, or risky mortgages, until they outnumbered the prime, or safe mortgages. Eventually, more and more people defaulted on loans they could not pay, and the investment firms collapsed due to the sudden drop in income (this was how AIG failed-they had insured too many risky mortgages).
The other main reason for the housing bubble was the belief of consumers that housing was a good investment, due to artificially low interest rates set by the banks. Schiff writes that, “Artificially low interest rates (which made the economy appear healthy) invigorated the market for adjustable-rate mortgages and gave birth to the teaser rate, which made overpriced homes seem affordable.” (Schiff, How an Economy Grows and Why it Crashes) These interest rates gave consumers incorrect expectations of the future for the housing market, leading them to purchase homes that they could not afford with risky mortgages. The effect of this collapse on the American economy was devastating: companies that had securities backed by subprime mortgages lost billions by the unexpected foreclosure rate and went under (including Bear Stearns and Lehman Brothers), 12.5 million people lost defaulted on their loans and lost their homes, and the unemployment rate rose to 8.1 percent.
In order to end the recession, the government responded with aggressive fiscal and monetary policy. They set out with two goals: to stabilize the financial system, and to restart economic growth. After Lehman brothers collapsed, a string of other major financial institutions failed, and to calm the panic, the Fed adopted a zero-rate interest policy to lower interest rates, and purchased massive amounts of Treasury bonds and Fannie Mae and Freddie Mac mortgage-backed securities. The FDIC also increased deposit insurance limits and guaranteed bank debt. On the fiscal side, Congress established the Troubled Asset Relief Program, or TARP, and injected much needed capital into the nation’s banks (over $700 billion). In addition, tax rebate checks were mailed to lower and middle income households and the American Recovery and Reinvestment Act was passed in early 2009. In total, $1 trillion, about 7 percent of GDP, was spent on the fiscal stimulus.
Some aspects of TARP were more successful than others. The most successful part was its CPP, or Capital Purchase Program, as without the capital injections, the financial system may have collapsed. However, despite the injections, the Congressional Oversight Panel (created by TARP) reported that, after 14 months, banks resisted making loans, and toxic assets still clogged balance sheets of major banks, despite efforts made by TARP to finance investors to take them. In addition, TARP failed to immediately provide relief to the residential foreclosure crisis, the panel reporting that the mitigation programs had failed to meet the standards necessary to solve the problem. Although TARP did succeed in preventing a total economic collapse, it fell short of bringing the economy all the way back from the recession.
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How an Economy Grows and Why it Crashes and “Too Big to Fail” each portray the recession from a different point of view. Schiff’s book mainly takes a stance from the perspective of the homeowners in America and how the recession affected them, while “Too Big to Fail” focuses on how it affected the major banks of Wall Street. Schiff describes in his book, how, during the initial housing “mania”, a market based solely on housing was created, providing goods and services specifically for home improvement and beautification. He then speaks of how after the bubble collapsed, not only did millions of Americans lose their homes, but millions of people employed in this market (for construction or retail) lost their jobs when demand for their products or services disappeared. On the other side, “Too Big to Fail” takes place after the initial failure of Bear Stearns, where the economy was right about to slide into recession. It explored the efforts of the Fed to save Lehman Brothers without bailing them out, their eventual collapse, and how the Fed was left with no other choice than to provide capital injections to the other banks to keep credit from freezing. The epilogue later describes how banks continued to resist giving loans, and how unemployment continued to rise as a result. This book and this film give important information on how the recession affected the two main groups of the American economy, and help the reader/viewer understand how the groups were connected during the crisis.
The 2008 recession was one of the worst economic downturns in America since the 1950’s, and required some of the most aggressive fiscal and monetary policies in American history to end it. However, even after an initial $700 billion capital injection, and an eventual $1 trillion being spent to stabilize the economy, millions of Americans were losing their jobs, and their homes to foreclosures. How An Economy Grows and Why it Crashes by Peter Schiff, and the movie “Too Big to Fail”, featuring Paul Giamatti, each approach the 2008 recession from different areas: Schiff analyzes the effects of the recession on the people of Main Street (homeowners), while “Too Big to Fail” observes the effects of the recession on the businesses of Wall Street (the banks and investment firms). The two provide different perspectives on the recession, and show the reader how the people of Main street and the banks of Wall Street were connected during the crisis.
Works Cited
- Ballew, Paul . “Ballew: Housing Bubble Burst: More Than Just Foreclosures.” CNBC.com. N.p., 4 Aug. 2011. Web. 28 Apr. 2014. http://www.cnbc.com/id/44022473
- Blinder, Alan , and Mark Zandi. “How Was the Great Recession Brought to an End.” Economy. N.p., 27 July 2010. Web. 27 Apr. 2014. https://www.economy.com/mark-zandi/documents/End-of-Great-Recession.pdf
- Calmes, Jackie. “Audit Finds TARP Program Effective.” The New York Times . N.p., 9 Dec. 2009. Web. 27 Apr. 2014. http://www.nytimes.com/2009/12/10/business/economy/10audit.html
- Montana, Sam. “What Caused the Great Recession of 2008-2009?.” All Articles RSS. N.p., n.d. Web. 28 Apr. 2014. http://economics-the-economy.knoji.com/what-caused-the-great-recession-of-20082009/
- Schiff, Peter D., and Andrew Schiff. How an economy grows and why it crashes. Collector’s ed. Hoboken, New Jersey: John Wiley & Sons, 2010. Print.
- “The Great Recession.” State of Working America. N.p., n.d. Web. 27 Apr. 2014. http://stateofworkingamerica.org/great-recession/
- Willis, Bob . “- Bloomberg.” Bloomberg.com. Bloomberg, 6 Mar. 2009. Web. 28 Apr. 2014. http://www.bloomberg.com/apps/news?pid=newsarchive&sid=acVqoYIAwBzo
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