The economic meltdown in the US was, as a result, of the housing bubble burst that brought about a massive economic recession in the US. The film, Inside the Melt Down, depicts a series of large American corporations going bankrupt and their shares dropping down drastically due to the economic recession. For example, Bear Stearns is a one of the multinational investment company that took an economic downturn in that its shares dropped from $171 to only $57 in a single day. Given that the media aired out their concerns regarding the economic drift of the corporation, most investors withdrew from Bear Stearns. Despite the effort of Bear’s CEO, Ace Greenberg, trying to shutdown the alarming rumors of the fact that Bear’s corporation is going down, people continued to withdraw their cash reserves from the corporation. It is significant to note that the economic meltdown was also contributed to the global panic that led to many people withdrawing their investments and money from their banks. This paper will examine how the economic recession affected major corporations in the US and how the government tried to bailout some of the corporation to hinder an economic drift that would burst the economic bubble.
The economic recession impacted government’s role in the economy by making it bigger. Bear Stearns is one of the biggest corporations in the US thereby, the government wanted to save the company’s economic downturn. However, Bear Stern’s corporation had fallen off by large numbers in which the congress could not bail out the company. Thus, the government decided not to use the money in their federal reserve to bail out the company from falling into bankruptcy. The government however linked Bear Stearns to JPMorgan that would help save the company from falling into bankruptcy. It is crucial to note that JP Morgan Bank is one of the richest global corporations. Regardless of the fact that JP Morgan is one of the richest corporations, the bank could not save Bear Sterns from falling to bankruptcy. The federal government was opposed by conservative concerning the bailout programs in that bailing out a corporation does not give the company an incentive to find a way out of the economic drift.
Fannie Mae and Freddie Mac are among the biggest mortgage lenders in the US, who were greatly affected by the economic recession. During the housing bubble burst, the two mortgage companies lost more than 60% of their stock value market (Inside the Melt Down). This affected most mortgage owners around the nation such that the federal government decided to take over the two housing companies. Thus, the federal government took over the management of Fannie Mae and Freddie Mac. Also, the Lehman Brothers filed a bankruptcy claim with the government declaring that their stocks took a downtown and the company could not revive by itself.
Given that the government had expanded its service by issuing Federal Reserve loans to bail out most corporations, the Lehman Brothers investment bank expected that the Federal government would intervene. Instead, the government opted not to intervene. This indicates that the economic meltdown had become in that if the bank does not have enough money for its customers and that it could not loan out any money. This meant that all the company’s assets would be frozen because of lack of finances and that the economic recession that had hit the country. The Lehman Brothers turned to the AIG insurance company, the world’s largest insurance company, for a bail out. The lecture notes point out “that their debts (credit default swaps) were based on the idea that Lehman Brothers would never go bankrupt because AIG had bet against Lehman failing” (Lecture slide 22). Thus, Lehman Brothers were disappointed by the fact that AIG Insurance Company was also failing. Like other large corporations in the US, AIG Insurance company had filed for bankruptcy with the federal government. The deferral government used about $85million to bail out the insurance company thereby, becoming the government’s property. This shows that the economic meltdown had affected most of the largest corporations in the US. It is important to note that the Lehman Brothers failed because the CEO at that time refused to nationalize the firm. Unlike AIG, who agreed to nationalize their firm, the Lehman Brothers Corporation refused. Thus, the federal government bailed out AIG and nationalized the company thereby, leaving Lehman Brothers to fail despite having trillion of mortgages that would affect many Americans.
The Federal government is both a villain and a hero of the economic recession in 2008. The federal government had created a temporary housing, bubble prior to the burst, thereby causing a mal-investment in the economy. Also, the government took part in lowering the market interest rate below the natural interest rate in order for more investments in the country and also to support the mortgage industry. Though the market economy did well for a short period that made most Americans sign up for mortgages, the economy had to self-adjust in the long run. The 2008 economic recession in the US is almost a replica of the great depression in the 1930s that were, as a result, of immature investment by the Americans following a low market interest rate (Blumberg 2014). Thus, the federal government is a villain to most American people for forming a bubble that would burst eventually thereby, hurting the American people. Also, the federal government is also a villain because it refused to bail out the Lehman Brothers because the CEO refused to sell the firm. This shows that the government wanted to bail out major corporations that would have to agree to nationalize the company.
On the other hand, the federal government is a hero for using both the monetary and fiscal policies to control the economic recession. For example, the company took the initiative to bail out some of the biggest corporations in the world from bankruptcy that would have hurt the economy more. According to the lecture presentation, “AIG continued to give lavish parties and lavish bonuses – all as a result of a bailout paid for through the tax money of the American public – a tax which is, arguably, not fairly assessed” (Lecture slide 27). This indicates that AIG Corporation continued with its service regularly as a result of the Federal government bailing out the Insurance Company.
In conclusion, the economic meltdown in 2008 was as a result of global panic and the fact that the government created a temporal housing bubble through monetary policies. Given that the economy had to self-adjust eventually, the housing bubble had to burst in order for the market interest rate to be equal to the natural interest rate. The economic meltdown affected major corporations such as Bear Stearns, AIG Insurance Company, Fannie Mae, and Freddie Mac. Thus, the housing market took a major drift in 2008 after the economic recession.
Works Cited
Blumberg, Alex. "How Credit Default Swaps Spread Financial Rot." NPR. NPR, n.d. Web. 6 June 2014. <http://www.npr.org/templates/story/story.php?storyId=96333239>.
"Inside the Meltdown." PBS. PBS, n.d. Web. 5 June 2014. <http://www.pbs.org/wgbh/pages/frontline/meltdown/view/>.
