The Inducers of the Global Financial Crisis

Parental Guidance although always recommended is not always obtained, especially to those eagerly attempting to gain recognition and acceptance. However, without a firm hand in place to direct the current into the desired direction, detours will inevitably occur. Such was the case of the ever popular American government when it lacked to oversee the production habits of its capitalist prodigies, corporations. As an attempt to encourage creativity, the U.S government freed corporations of restraint by setting itself aside. Unfortunately, this lack of guidance led to inappropriate decision making followed by fear driven efforts to conceal reality. The sum of these actions account the sequence of events leading to one of the largest economic crises in the post-modern world.

The democratic vision of checks and balances this country’s forefathers had, failed to serve its purpose when government opt for a unregulated market system. In doing so, corporations, specifically financial institutions, wittily manipulated the market to create leverage for risky investments with no concern for the consequences. Consequences occurring from these risky investments would of not been so detrimental had it not been for two catalyzing stands from the government. First off, Steve Forbes points out in his editorial “How Capitalism Will Save Us,” that “in 2004 the Federal Reserve made a fateful miscalculation… and therefore pumped out excessive liquidity and kept interest rates artificially low”(Forbes 166). In short, the combination of excess cash along with low interest rates commenced the inflation of risky investments. For the next three years this trend took its toll as the Bush administration failed to counter the formation of a bubble by elevating the value of the dollar. Had they done so it would of restrained the leverage for investors to use and therefore the risk levels they were gambling at. All in all the Federal Government committed contemporary fallacies by allowing an overflow of money into the market continuing by purposely establishing a weak dollar.

Financial institutions lacked serenity when generating fee obtaining packages in the housing market. The low value and a minimum regulations towards the financial institutions created a high demand for commodities from which houses became emphasized. Investors, being greed driven, devised diverse strategies to invest using as little capital as possible. Structured finance became the tool from which financial investors could create a system that required minimal money to sanction themselves on to larger investments. This system, nonetheless, had its drawbacks. Some of those drawbacks included high levels of risks, risks which continued as securitizations, or the selling of debt for an according interest rate, became a popular banking enterprise. Despite this, the accounting strategy of banks remained to use a market-to-market strategy that would need a readjusting of their books every time that assets fluctuated in value. Financial expert Forbes seems to agree that this is a fine principle for when the equity of the business is very liquefiable, but when assets consist of primarily securities and derivatives, as was the case in the recent credit crisis, then it drives banks into “death spirals”(167). The reality remained that a faulty accounting system combined with
governmental weakening of the U.S dollar created a black hole for positive cash flow to gravitate towards.

The bubble took form from the injection of money into the market without the proper collection of collateral damage to keep diversification of investments. Investor’s were too engaged in their gluttonous hunt for money to slow down and consider the possible set backs. Government, on the other hand, was reluctant to oversee in detail the investments being made to impose ethical boundaries. Had they reviewed the over dosage of loan contracts, a realization of the abundance of unqualified recipients would of surely raised a series of questions. Since that was not the case the accountable assets of these institutions were lacking in their liquidity. As such, when investors attempted to cash out, stock values plummeted to the point were government intervention was their only option.

Having few alternatives, the government bailed out many of these financial institutions. Having now themselves invested in said businesses, the government will indubitably be setting ground rules to prevent futurist disasters. Now is the chance, as Ralph E. Gomory suggests, “‘…to have a tax system or a set of incentives that promote what the government wants to do’”(185).

One can only hope that the government would of realized by now that key factors to healthy investments compose of restricting excessive leverage as well as nullifying market-to-market accounting. By putting a restriction on the type of leverage Wall Street has, it should eliminate the level of risks that they will be confronted with. Furthermore, eradicating the practice of market-to-market accounting should enable a more adequate calculation of firms value. Lastly, government itself needs to focus on job creation to reduce the loss of savings and homes.